The Significance of Human Capital

Date: 16/08/2018

To,

The Editor,

XYZ Times,

Australia

Subject: Should Human Capital be recognised as an Asset?

Dear Sir,

Through your esteemed and reputed newspaper, we are honoured to express our views regarding the need for recognising human capital as an asset of any company. There has been lot a conjecture and debate regarding the recognition and treatment of human capital as an asset of the company. For decades, it has been debated whether accountants would recognise the human capital as an asset of the company. Till now, accountants have treated and categorised the employees as a liability of the company in the form of the payments of the salaries, bonuses and future pension amounts. Although, as we have stepped into the one of the most technologically advanced era in the form of the 21^st century, the need for recognising the human capital as an asset of the company has considerably increased.  In this era, it has been seen that there has been an upsurge in the call for recognising humans as assets.. In this letter, various arguments both for and against the current topic of recognising the human capital as the asset in the balance sheet of a company.

Humans are indeed an asset of each and every company, ultimately they are the ones, which make the machine works and executes the processes. However, they have mostly been seen and referred to as one of the most important components of any organisation. According to the basics of Financial Accounting, an asset are referred to as those kinds of economic resources, which are used for producing useful goods and are capable of being owned and controlled by the organisation. However, the ownership part cannot be explained in the case of the human capital. The assets of a company are purchased from the market, such kind of purchase is not possible for human beings, who are employed in the company.  In this case, they are not owned by the business entity, which results in the failure of reporting them in the balance sheet of the company. One of the most important aspects, which has been debarring the accountants from recognising humans as assets of the company, is because the employees of the company cannot be owned by the organisation, however there are contracts of employment which are undertaken by the employees, but these employees cannot be treated as owned assets of the company (Cipd.co.uk 2018). Another important point which needs to be taken into account, while performing the act of recognising the asset in the balance sheet of the company is the fact that the assets of a company are expected to provide future economic benefits to the company, and are bought with this assumption. However, in the case of the employees of the company, their remuneration is not paid for the future economic benefits but rather for the past services delivered by them to the organisation concerned.

Human Capital: Liability or Asset

Human beings are one of the most complex beings, in the ecosystem, where any organisation operates. They have a range of issues and complexities, such as social, cultural, biological and psychological which form an important part of themselves. As a result, of which, converting these features, and uses of complexities into a numerical figures, which can be expressed in the form of some kind of economic assets of the company is very difficult (Augustine et al. 2013). Another important aspect of recognition is the fact that the assets, which are recorded and shown in the balance sheet of any organisation consists of the current value of those assets, which might be depreciated and would thus be accounted for, for the same. This kind of depreciation is an impossible task, in the case of human capital. Their value cannot be diminished in the form of the machinery, or plants and factory buildings or any other kind of equipment’s used by the organisation.  In the era of  It has also been pointed out by the HIP Investor CEO, Mr Paul Herman that assigning a numerical or monetary value to the human beings is a very difficult task, moreover there also remains the risk of manipulation of these figures by the financial analyst (Qualitydigest.com 2018). In such cases, recognition of the employees of the company becomes a difficult affair. Thus, in these kind of circumstances, recognition of the employees of the company, no matter how important they are to the organisation, becomes very difficult.

Human beings are the most important assets of any business organisation. They act as the glue, which helps in uniting each and every elements and components of the business organisation. People invent new kind of products in Apple, they also create new kind of leather and fabric in Nike for sportswear and people also greet their customers in Walmart. All these services are creating a value and this value occupies one of the most important aspects of any business organisation (Oseni and Igbinosa 2015, pp.108-114).  Till now accounting and finance have not worked out any kind of concrete way of assigning any monetary value to this value created by the employees of the organisation, just like it assigns to the other products and expenses.  It drives the company forward (Fulmer and Ployhart 2014, pp.161-192). Thus, it becomes very important to take a note of this value and recognise it as a kind of an asset in the balance sheet of the company.  Faithful presentation is one of the key factors, which must be taken into account, while preparing the financial statements of the company or the organisation concerned (Forbes.com 2018). To ensure that the financial statements reflect a true and fair view of the state of affairs of the company’s resources, credit, investment and other decisions, it becomes very important for the organisation, faithful representation of the real world factors and phenomenon. In this way, the true and fair view is required, where the involvement of the employees and the recognition of the value created by them must be recognised.

Challenges in Recognising Human Capital as an Asset

In football and other kind of games, the contribution of the players are valued and are duly recognised. In the case of football, many clubs have duly recognised the contribution and the value created by its human capital. Manchester United has set the bar high, by letting its players be a part of the balance sheet of the company (Ir.manutd.com 2018). Under the head, ‘intangible assets’, in the notes to accounts, the club ensures that the players are considered, with a total net value of £204,572,000 (Oprean and Oprisor 2014, pp.1647-1654).  Continuing with the example of football, many top flight footballers have ensured their prized possessions, in the case of any accident, starting with Cristiano Ronaldo, who has insured his legs for $144 million, David Beckham had insured his legs and body, with a whopping 100 million in the year 2006, Lionel Messi has also insured both his legs for a staggering 500 million (Allianz-jobs.com 2018). In such cases, it must be noted that the players have insured the legs, with the intention of the saving their sporting careers. This showcases the essence of the recognition of the individuals as an asset. Human capital is the most important quality which is continuously downplayed by the monetary impact of the balance sheet of the company. Such is the importance of the human capital, in these cases, the accounting for human capital becomes all the more necessary (Gamayuni 2015, pp.202-212). The inclusion of the human capital accounting and recognising as an asset of the company helps the company in quiet a number of ways such as, it helps in causes and understanding of the high rate of turnover, causes of attrition rates, it also helps in identifying the causes of the underutilization of the other physical assets of the company (Morrissey 2018). Thus, recognition of the human capital is very important for the company, and it would help in recognising the true state of affairs of the company, as it is the need of the hour at this point of time where the value creation is regarded as the highest form of service provided by the human assets of the company.

However, the recognition of the employees and humans as the assets of the company in the balance sheet of the company has its own stet of complications. As explained above, there is a logical fallacy in the definition of humans as assets, as they are not purchase or owned by the organisation. There is the absence of any clear and specific procedures or guidelines for finding costs of the value of the human capital of the organization, and the present systems which have been adopted have a series of drawbacks. There is an uncertainty attached to the admission of a human as an asset of the company. Thus, it is recommended that the recognition of employees of a concern, is a futile affair, with a host of problems, which makes it entirely a futile affair.

Yours sincerely,

Mr ABC,

ABC Company Ltd.

Australia

References:

Allianz-jobs.com. 2018 Allianz Careers Blog.. The top 10 of body insurances | Allianz Career. [online] Available at: https://www.allianz-jobs.com/2016/05/18/top-10-body-insurances/ [Accessed 16 Aug. 2018].

Augustine, O.E., Mgbame, C., Otuya, S. and Ovie, C., 2013. Human Resources Accounting Disclosures in Nigeria Quoted Firms. Human Resources, 4(11).

Cipd.co.uk. 2018. [online] Available at: https://www.cipd.co.uk/Images/reporting-human-capital_tcm18-19956.pdf [Accessed 16 Aug. 2018].

Forbes.com. 2018. [online] Available at: https://www.forbes.com/sites/adp/2017/11/15/the-value-of-human-capital-measuring-your-most-important-assets/#2713e9815a32 [Accessed 16 Aug. 2018].

Fulmer, I.S. and Ployhart, R.E., 2014. “Our most important asset” a multidisciplinary/multilevel review of human capital valuation for research and practice. Journal of Management, 40(1), pp.161-192.

Gamayuni, R.R., 2015. The effect of intangible asset, financial performance and financial policies on the firm value. International journal of scientific & technology research, 4(1), pp.202-212.

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Kaye, L. 2018. Time to start valuing human capital as an asset on the balance sheet. [online] the Guardian. Available at: https://www.theguardian.com/sustainable-business/valuing-human-capital-asset-balance-sheet [Accessed 16 Aug. 2018].

Morrissey, H. 2018. Human capital is the ultimate intangible asset. [online] Telegraph.co.uk. Available at: https://www.telegraph.co.uk/finance/comment/11413191/Human-capital-is-the-ultimate-intangible-asset.html [Accessed 16 Aug. 2018].

Oprean, V.B. and Oprisor, T., 2014. Accounting for soccer players: capitalization paradigm vs. Expenditure. Procedia Economics and Finance, 15, pp.1647-1654.

Oseni, A.I. and Igbinosa, P.E., 2015. Accounting for Human Capital: Is the Statement of Financial Position Missing Something?. JOURNAL OF EDUCATIONAL POLICY AND ENTREPRENEURIAL RESEARCH, 2(5), pp.108-114.

Qualitydigest.com. 2018. Why Employees Are NOT Your Most Important Asset | Quality Digest. [online] Available at: https://www.qualitydigest.com/inside/twitter-ed/why-employees-are-not-your-most-important-asset.html [Accessed 16 Aug. 2018].