Human Capital: Should Human Capital be Recognized as an Asset?

This report examines the contentious issue of whether human capital should be recognized as a strategic asset within financial statements. It explores the core arguments, both for and against such recognition, considering the evolving nature of modern business and the increasing importance of intellectual and relational capital. The report delves into the challenges of quantifying and valuing human skills, knowledge, and experience, while also highlighting the potential benefits, such as improved financial ratios and a more comprehensive understanding of a company's true value. It addresses the limitations of traditional accounting practices, which often treat human capital as an expense, and contrasts this with the perspectives of industries where individual skills are demonstrably treated as assets. The report considers the impact of human capital on economic growth, the challenges of incorporating human capital in financial reports, and the potential for competitors to exploit sensitive information. Overall, the report provides a balanced analysis, drawing on various sources to offer a detailed overview of the debate and its implications for financial reporting and business strategy.

Human Capital: Strategic Asset
Running Head: HUMAN CAPITAL 0

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Student name
Student Address
Phone number
August 10, 2019
Mr. Tony Mount
Journalist
Newspaper name
Re: Response to Human Capital to be recognized as an asset.
Dear Mr. Mount
Almost 7.7 billion people reside in the world, but among them, only a few percent’s are the on
topmost position. Why some people are paid higher than others, do they possess some skills and
attributes, which can be called as an asset? The objective of this letter is to provide a more
practical assessment procedure by which the raised question can be answered. Every person has
some worth, some skills and talent within them. First understanding the real meaning of human
capital is necessary. The human capital is the capital intangible in nature not listed in the
financial statement. Human capital represents the skills and expertise of an individual employee
that he possesses and adds value to the organization he works with. Humans are propelled by the
brainpower that needs to be recognized in the financial balance sheet. A financial statement
mostly takes the quantitative aspect of the organization leaving out the qualitative aspect like
human skill, talent, faithful representation, satisfaction. Human is capable of manipulation and

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can be manipulative sometimes, with time and experience they contribute to the growth and get
advanced in own personal attributes of human capital. An individual’s capital represents one’s
economic productivity, the competence of producing goods and services, generation of ideas. To
survive individual ‘lease’ their human capital to an employer who will further convert it into
economic benefit for the organization. For an organization, human capital is a sum of all present
and future economic value of employee’s skills and talent that they possess that makeup the total
workforce of the organization. Human capital represents a tripartite framework consisting of
Intellectual, Relational and organizational capital.
The financial statement reports provide information to potential investors, stakeholders about the
future cash inflows and outflows of organizations (FLAMHOLTZ, 2004). To help these
stakeholders in assessing the generation of cash inflows, financial reporting provides information
about the assets, liabilities, and equity (Igbalajobi, 2015). The ability to create, covert and
capitalize on human skills and expertise is the basis of competitive advantage. The International
Federation of Accountants summarized that knowledge is the basic source of getting an edge
over competitors (O'REGAN & O'DONNELL, 2001). The asset is defined as an economic
resource, tangible or intangible competent of being controlled to produce money worth and held
to have reasonable economic value and a trained employee meets this definition. Human capital
investment means investing the funds for educating and providing on-the-job training to the
workforce.
Now the real question comes in the frame, whether recognition of human capital as an asset in
the financial statement is to be made or ignored. Dealing the question systematically, looking at
the positive aspect first, of recognizing human capital in the balance sheet of the company. There
is a shift in a society working from an industrial society where machinery was the primary source

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of wealth, to a knowledge-based society where the primary source of wealth is human capital
(Igbalajobi, 2015). These people innovate new things just like Apple Company I phones, develop
new software and products. These workers have value. Even in this 21st-century era, it has not
been worked out how to value their work (Kaye, 2012). Besides, human capital in its multiple
aspects deals with the creation and application of skills and knowledge that are the focal point of
the economic growth process (Banks, 2010). Due to the transition in the thinking pattern of
people, employees are now considered as an investment instead of cost, continuing it into the
accounting of human capital investment as assets that generate a return in the upcoming period.
Human capital is important as it is observed that it increases productivity and thus profitability of
the organization. The key point in favor of reporting human capital as an asset in the balance
sheet is as follows:
 The value created by human capital will suggest a new set of financial ratios. This can be
explained with an example; the degree of labor intensiveness can be calculated by the
ratio of human to nonhuman capital factor. It is believed that the proportionate degree of
labor and capital intensity inside countries affects world trade. The above ratio assigns
different weights to different employees according to their income variation. Thus, labor
intensity calculation will reflect the quality as well as the quantity of the labor force (Lev
& Schwartz, 2014).
 Human capital presented in a financial statement provides information about any change
in the structure of the labor force. Age distribution among the workforce also plays an
important role. The age distribution would affect the value of human capital. The aging
firm is the phenomenon concept described in the organization theory. The aging firm of
an organization affects the growth rate and proportionate share in the industry.

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 The concept of human capital recognizes that not all labor is equal. General and specific
values difference of human capital is determinant of information for management and the
analyst. Firm's actual wage scale is the basis of the general value of human capital and
similarly, for the specific value of human capital, industry-wide wage averages are the
basis. The difference between the two indicates the level of the firm's wage scale
proportionate to the industry average. Reporting the values of human capital will thus
enable users to investigate the effects of specific wage and hiring policies. To increase
profits in short-term management might attempt to hire low-quality employees. Such a
policy can produce damaging effects that will be actualized only in the subsequent
period. However, if human capital values are reported they will currently reflect the
change in hiring policy and thereby deter management.
 The economy to function and thrive the production of goods and services is required
which is done only by the hard work of individuals (Cobb & Wallace, 2013). A strong
relationship between human capital and economic growth exists. As people come with a
diverse set of skills and knowledge, human capital can certainly help in boosting the
economy. This relationship can be measured by how much investment goes into people’s
education.
 Financial report constraint is materiality, and information is material in nature if omitted
can influence the resource allocation decision of users on entity financial report.
 Placing a high tech system in the organization, very good infrastructure will mean
nothing in the absence of employees to execute the work. Hence, it is the expertise of
humans, which will result in value creation. For example, it is the skill of David Beckham
which makes them win not just the type of shoes they wear or the clothes they wear.

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 It is the result of creativity, innovations, and experiences by the human capital, which
makes it easy in finding a different and effective way to complete a task.
 In a machine, if fixed the production level is fixed it would produce exactly that number
of products without keeping the factor of dynamic environment. Under human resources,
all factors are kept in mind from the initiation to execution level of production.
Valuing human capital is important for a financial statement as the stock of these human capital
incorporated in individuals produces value for the organization’s ultimate produce like goods ns
services and also it strengthens the organization’s net worth (Dean, et al., 2012). Hence, all the
above points show the need to recognize human capital assets in the financial statement. Let us
now discuss why recognition of human capital as assets is not affiliated by the public and along
with understanding a few economist points for opposing the recognition.
As mentioned in the above paragraph humans are manipulative, as a result, they aim at changing
social behavior creating asymmetry in power and exploiting the other to serve their motive (Ni,
2014). Meaning this that human can easily deceive the balance sheet being a line item on a
financial statement for own benefit. Many also believe that it is not easy to calculate the value of
human skills, knowledge or experience. Spending huge amount and efforts in educating and
training process for employees as in the name of human capital investment and valuing it in that
manner but still at the end there is no surety that they will stay there for a long time as they are
too mobile and switch jobs anytime they fine benefit with other organization. Calculation of
human capital value is still a huge problem saying human capita as assets since a long time can
be seen, still, when from many economist questions were asked of recognizing as an asset no
clear methods were devised.

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Another hurdle is the universal recognition of human capital as an asset. There are no standards
on accounting made or any measurement criteria are fixed which helps in determining the value
of human capital. For considering human capital, an asset means valuing it and simultaneously
incorporating it in the balance sheet whose value is difficult to calculate. Even though value if in
any way can be calculated but it is not guaranteed that every organization will follow the same
valuation method. The consistency concept of accounting among other organizations or within
the organization every year cannot be controlled or maintained with surety. There is no assurance
that there will be any kind of uniformity concerning recognition and valuation will be followed
in different companies.
Another important factor to note is that the amount spent on the employees for their development
or training is a hidden cost in overhead costs. This makes it difficult to obtain. Reporting human
capital in financial statements means providing information about employee’s policy of the
organization and sometimes the names of the employees even. Providing such vital information
in the external environment can be harmful for the organization as competitors can take
advantage of such sensitive information (Rahaman, et al., 2013). In the present era, many new
technologies are made and as a result, human intervention is limited to nil, resulting in the
replacement of employees hence recording those in the asset would be difficult. For the decision-
making process, various information systems like the use of MIS, DSS, and others are in
existence now, which thinks like a human. When we say something as an asset, the contribution
level in the organization is certain while in human capital asset there is uncertainty with regards
to a contribution level of employees as their level is difficult to make a probabilistic approach
hence the concept of conservatism cannot be applied (Bragg, 2019). When calculating the value
of human capital asset employee’s salary, benefits, wage comes into force. Their values can

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change by the changing government policy or by any union, which leads to continuously
revaluing the asset. Human resource is not capable of owing, retaining, and utilizing like any
other physical asset which turns out to be difficult to treat as an asset by the management.
Despite all efforts placed on the valuation of human capital Tax laws and many other laws do not
recognize human beings as assets. Humans can have a lethargic attitude toward work; weather
condition easily affects them, probable of taking leaves in such cases human capital can be
charged as expense to the organization instead of an asset. Spending a huge amount of human
capital investment would turn to go in vain when a situation like a brain drain arise, which is
why the company’s resist recognizing their employees as an asset.
Accounting of human capital means the expenditure done concerning the development and
training of employees, this shall be done by following the standards (Apelian, 2009). In recent
times, US GAAPS has embraced the complex valuation methods, including valuing time value
of money, present valuation. Followed by IAS 38 (International Standard) Intangible Asset and
IFRS 38 which now recognizes the intangible asset goodwill showing the consent to allow
valuing of the assets beyond what traditionally recognized (Danaei & Abd, 2014). From the
above discussions if someone has to conclude then, clearly pointing out the merits and demerits
of recognizing human capital as employees, can say that something vital is missing in the
balance sheet i.e. human capital whose measurement is difficult to obtain and value of human
capital is very subjective. If there would be any consistent way to measure or value such capital
it would have been as a part of assets in the balance sheet. Studies have shown that investments
in human capital are essential for sustaining economic growth over time. Although human capital
can be valued, perhaps the financial statements are not the proper place for such a number. It
might be a good idea to have a separate human capital report that would provide statistics and

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other facts about a company’s stock of human capital (Leddy, 2017). Human skills are the factor
with which organization can create value and earn economic profits in the future. Since human
capital is based on the investment of employee skills and knowledge by providing training and
through education, these investments in the human resource can be easily calculated. The
Materiality of Human Capital to Corporate Financial Performance was measured by studies that
examined the link between human capital as an asset and aftermath financial statements like
return on investment, equity, and profit growth. More than half of the results of those studies
found a conclusive interrelation between expenditure on employee training and human capital
policies and their returns. Studies were concluded by the fact that there exists enough evidence of
materiality human capital to financial performance to become the basis to include in standards
and their analysis. However, it was also found that doing so numbers of the challenge were there
for a reason like brain-drain, mobility, negative attitude of employees and others (Broughton,
2017).
Hence, in my opinion, human capital should be considered as assets which consist of knowledge,
skills embodied in an employee that is used by the organization to advance their goals.
Investments made in updating employees, providing them training will reap returns to the
individual as well as to the economy as a whole. This can be understood by an employee getting
higher incomes or benefits and economy by higher productivity. Government policies, taxation
laws, and financial reporting frameworks need to get revised to recognize human capital as a
proper asset and placing it in the asset side of the balance sheet. People should become optimistic
about recognition as an asset and look on the bright side instead of favoring the negative points
and understand that a few bucks of expenditure on human capital can generate millions of returns
in the future. It shall also be noted that ventures with good human capital practices can earn up to

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40% for the required stakeholders over a period than those who do not recognize human capital
as an asset.
Sincerely,
Student Name

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