Should Human Capital Be Recognized as an Asset? BFA605

This case study analyzes the contentious issue of whether human capital should be recognized as an asset in financial accounting. The document presents a well-reasoned opinion letter from a Senior Accountant at RP & Associates, addressing the question of whether "Should Human Capital be Recognized as an Asset or not." The letter explores the definition of human capital as a pivotal capital to an organization, its composition of labor, skills, experience, and knowledge. It then delves into the arguments against recognizing human capital as an asset, including the difficulty of measuring its value, the lack of consistency in valuation, and the potential for manipulation. Conversely, the case study presents arguments for recognizing human capital, emphasizing its importance in the information era and its impact on an organization's financial performance. The conclusion asserts that while human capital valuation is important, its inclusion on the balance sheet is inappropriate, suggesting a separate report detailing human capital statistics instead. The case study references several academic sources to support its claims, providing a comprehensive overview of the topic.

Financial and corporate accounting 1
<University>
Financial and corporate accounting
By
<Your Name>
<Date>
<Lecturer’s Name and Course Number>

Financial and corporate accounting 2
August 16,2019
Senior Accountant
RP & Associates
ACT Spade Street, Dawes point ACT 2010
Tony Mount
The Australian
2 Holt Street
Surry Hills, NSW 2010
Dear Sir/Madam
Re: Should Human Capital be Recognised as an Asset?
In reference to the discussion we had earlier, the following is my well thought opinion on
whether " Should Human Capital be Recognized as an Asset or not." Human capital is
considered as a pivotal capital to an organization given that it directly contributes towards the
achievement of set goals and objectives over some time. Several individuals such as consultants,
human resource managers plus other stakeholders have always viewed humans as capital to an
organization but they do not always reflect them in its balance sheets. The aforementioned
individuals’ claim that costs incurred on employees is always reflected in exploitation accounts
of the organization due to the fact human capital is considered as a cost element to organizations.
Moreover, human capital is a composition of labourers, their skills, experience and knowledge
which is generally treated as an asset to an organization (Passard, McKenna & Krishnan 2012
p.61).
According to international financial reporting standards, human capital is considered as a
resource that is under the control of an organization because of its past events that act as a basis

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for deriving expectations of long term economic gains(Yuan, 2012). However, existing
traditional practices of accounting have failed to consider human capital as an asset in an
organization financial balance sheet. Even though society has experienced transitions from the
industrial era to an information era, accounting activities have not been able to adjust to such
transitions. More so, several accounting professionals have had distinct views on whether human
capital should be accounted for as an asset or not given that it offers a significant contribution
towards financial strengths of an organization (Passard, McKenna & Krishnan 2012 p.61).
Therefore, the following letter will explore views on whether human capital should be accounted
for as an asset in balance sheets of organizations or not.
Views on why human capital should not be accounted for as an asset on balance sheets
Human capital is an intangible asset that is generally considered as difficult to measure in
real money terms (Subrahmanyam, 2012 pp.80). As such, a company can only be able to identify
the number of employees but may not be able to physically measure the monetary value of
humans to reflect it as an asset in its balance sheet. Moreover, balance sheets deal with figures
that are represented in real money terms and not the total number of individuals. It is from the
above point of view that human capital should not be accounted for as an asset in the balance
sheet of organizations (Subrahmanyam, 2012 pp.81). Additionally, there existing difficulty in
maintaining consistency whilst valuing human capital which makes it inappropriate to account
for it as an asset on balance sheets. Moreover, consistency is one of the main prerequisites for
preparing balance sheets as specified by financial reporting standards (Subrahmanyam, 2012
pp.79). The above is attributed to the fact that the valuation of human capital cannot be
consistently done due to the occurrence of demographic changes particularly the age of
employees which greatly impacts their performance and output. For example, a youthful

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organization team may be valued highly at initial periods but its value may consistently decline
as they grow older. As a result, it may be difficult for an organization to consistently determine
the value of its human capital which makes it appropriate to ignore inclusion of human capital as
an asset in the balance sheet (Passard, McKenna & Krishnan 2012 p.62) Therefore, the above
practice will help to ensure that an organization is able to maintain consistency whilst compiling
and presenting its financial reports.
Additionally, the valuation of human capital is considered to be too subjective which can
make an organization to present unreliable and inaccurate financial reports. This is because there
are no standard measures for valuing human capital in real money terms as several organizations
consider various elements for executing the above practice. For example, some organization may
consider returns on investment or return on equity as a way of valuing its human capital. On the
contrary, other organizations may consider experience, knowledge and skills as a way of valuing
its human capital. As such, the valuation of human capital is based on the varying perceptions of
accounting professionals and the management of an organization that makes the whole process
subjective(Douglas, 2014). Moreover, the information represented on the balance sheet is
supposed to be objective in nature as all organizations are required to follow the specified
standard accounting practices. To ensure that organizations do not violate the standard
accounting practices, all elements whose valuation is subjective such as human capital are
supposed to be excluded from financial reports(Douglas, 2014). Besides, it may be also too hard
to achieve conformity among organizations when all valuation of financial elements like human
capital is subjectively done. As such, it may be challenging to make comparisons among
organizations because available financial reports may be inaccurate and unreliable due to the
subjective valuation of assets (Passard, McKenna & Krishnan 2012 p.62). Therefore, avoiding

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the inclusion of human capital as assets in the balance sheet helps to ensure that only accurate
and reliable financial reports are presented by organizations for comparison purposes.
Furthermore, human capital can be easily manipulated by some accounting professionals
who may have an objective of fulfilling their selfish interests at the expense of an organization's
interests(Dittmar, Palomino and Yang, 2016 pp.92). In such a case, the above individuals can
adjust figures concerning human capital as a line element in a balance sheet which may directly
affect the accuracy and reliability of financial reports. Also, there exist high levels of mobility
among humans given that they can easily change from one job to another(Dittmar, Palomino and
Yang, 2016 pp.93). As such, it may be challenging to establish an accurate monetary value of
humans who keep changing their jobs as their contributions and performances are often
dynamics. Moreover, information that is supposed to be represented on balance sheet is supposed
to be static to achieve the accuracy and consistency criteria during financial reporting practices
by organizations (Passard, McKenna & Krishnan 2012 p.63).
Additionally, an organization's financial performance is an indicator of the value that
human capital holds as an intangible asset. Evidentially, it is appropriate to claim that an
organization that realized high levels of financial performance has the best employees for its
various positions. For example, some individuals may have necessary academic qualifications
but may not be effective employees. Others may not have academic qualifications but are great
employees(Dittmar, Palomino and Yang, 2016 pp.93). Also, others may have a relevant
qualification and are great employees. As a result, it becomes more challenging to determine the
value of human capital due to the above significant differences associated with humans. More
so, wages and salaries that salary payable and wage expenses account balance is a direct

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reflection of the value of an organization's human capital (Passard, McKenna & Krishnan 2012
p.63).
Views on why human capital should be accounted for as an asset on balance sheets
In spite of the views discussed in the previous section, some accounting professionals also have
views on why human capital should be accounted for as an asset in an organization's balance
sheets(Berkman, 2012 pp.33). Advocates for inclusion of human capital in financial reporting
acknowledge that balance sheets and income statements have been prevalently used for a long
period. Because the world has experienced the transition from the industrial era to the
information era, balance sheets and income statements per say should also be transformed as a
way of incorporating some pivotal elements like human capital. More so, it is the performance
and quality of human capital that plays a pivotal role in ensuring that an organization can attain a
desirable financial position(Berkman, 2012 pp.34). During the process of making amendments to
financial reporting tools like balance sheets, the value of human capital can as well be reflected
without affecting the overall degree of reliability and accuracy of financial reports. However,
there should be no direct integration of human capital into financial tools of organizations
(Passard, McKenna & Krishnan 2012 p.64). This is because integrating human capital into
financial tools may not depict their importance and as well maybe lost during focused financial
discussions of documents relating an organization's balance sheets.
Conclusion
The above-discussed views indicate that most of the accounting professionals believe that
human capital should not be accounted for as assets in the balance sheets of organizations. Views
of individuals are concerned with the difficulty associated with measuring the value of human

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capital that would be included in the financial reporting tools. The above is attributed to the fact
that there is no standard measure of measuring the value of human capital which reduces the
prospects of accurate and reliable reporting among organizations. Besides, accounting
professionals tend to be too subjective in their efforts to measure the value of human capital. As
such, comparisons between two or more organizations basing on their financial statements may
be distorted as company assets may be inflated through the inclusion of human capital value.
Most significantly, if at all organizations would consistently measure the value of their human
capital; there would be a great shift in the views of accounting professionals. However, there are
no current consistent criteria for measuring the value of human capital that make accounting
professionals think that its value should be ignored as a way of maintaining consistency in
financial reporting practices. However, proposers believe that there should be the valuation of
human capital but it is still inappropriate to include the value on the balance sheet. As such, a
distinct report on human capital that indicates statistics about the human capital stock of an
organization should be formulated. Therefore, human capital should not be accounted for as an
asset in balance sheets of organizations as a way of maintaining accurate and reliable financial
reporting practices.
Yours faithfully
Senior Accountant
RP & Associates

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Reference
Berkman, H. (2012). The Capital Asset Pricing Model: A Revolutionary Idea in
Finance!. Abacus, 49, pp.32-35.
Dittmar, R., Palomino, F. and Yang, W. (2016). Leisure Preferences, Long-Run Risks, and
Human Capital Returns. Review of Asset Pricing Studies, 6(1), pp.88-134.
Douglas, B. (2014). Human Capital as a Right-of-Use Asset. SSRN Electronic
Passard, C., McKenna, K., & Krishnan, V., (2012).Accounting for Human Capital: Is the
Balance Sheet Missing Something?: International Journal of Business and Social Science, Vol. 3
No. 12, p.61-64Yuan, J. (2012). Human Capital and Asset Pricing. SSRN Electronic Journal.
Subrahmanyam, A. (2012). Comments and Perspectives on ‘The Capital Asset Pricing
Model’. Abacus, 49, pp.79-81.