Should Human Capital Be Recognised As An Asset

Collins Danbury,

GPO Box 4245,

Sydney NSW 2001,

Australia,

Dear Mr. Tony Mount,

1. Introduction

• I feel honoured that you have chosen me to write on an issue that is often notably missing from balance sheets and other important financial statements. Human capital is the most significant resource an organization can wish to acquire and continually retain towards meeting its objectives (Wyatt & Frick, 2010, p. 201).
• Look at it from this perspective; our local newspaper needs you to come up with new and qualified information that can motivate its readers to transform their own lives and by extension, the society in a truly progressive manner. Essentially, this implies that you are one of the resources that enable your organisation to intimately reach out to its consumer base by building and transforming their lives at a personal as well as collective perspective.
• As an accountant who prides in upholding strict professional work ethics, I believe that it is imperative that I discuss your chosen topic, “should human capital be recognised as an asset” in accordance to the interpretations provided in the Accounting Standards and Conceptual Framework. Therefore, I will discuss this topic by focusing on the Australian Accounting Standards Board (AASB).

2. Characteristics of Financial Statements

• Going Concern

The case study presented on this topic is succinct and candid. As mentioned earlier, human capital is a critical resource and determinant of a company’s performance. As the AASB (2016, p. 11) documents, a firm will always make necessary attempts to continue operating in a consistently profitable manner in the foreseeable future. The formulation of financial statements is under normal circumstances relies on the assumption that an organization is not about to wind up any time soon. Where such a possibility exists, then financial statements are to be primed using a different format, and it has to be transparently disclosed.

• Financial Position

For a company to continue with its operations into the foreseeable future, it must bear elements who performance truly indicate that it is a going concern. Notably, this implies that its financial position is a key determinant for such an attribute. Some elements such as assets, equity, and liabilities measure the suitability of a firm’s financial position.

• Liabilities

Liability arises from an organization understanding, and it is portrayed in its financial statements that it is obligated to settle commitments as a result of some past events (AASB 2016 p. 11, para. 49(b)). Essentially, this is common where an operating entity deemed it necessary to acquire services or goods that bring it to the desired level of economic benefits. For this reason, it has to pay for such goods or services. In some instances, as highlighted in the case study, human capital is often highlighted as a liability (Wyatt & Frick 2010, p. 201). Where a company’s operations are not profitable, then human capital is perceived as an liability  and often the first casualties in cost-cutting measures. As the AASB (2016 p. 11, para. 49) provides, expenses are a major element of any firm’s financial statements given that they serve as a reflection of its financial position. Within a balance sheet, they are termed as liabilities. Therefore, in relation to the financial statements provided by Victoria University, it is evident that its weakened financial position compelled it to perceive its qualified educational staff as a liability to its going concern. It is for this reason that its financial managers opted to dismiss academic staff as a means of trimming down its expenses and liabilities in an attempt to boost their financial performance.

• Assets

According to the AASB (2016 p. 12, para. 53), these are resources that a company may have under its control that were acquired from its past efforts. Though it may have cost the organization a lot of resource outflows, it serves to confidently place it in a position to attract benefits to the company in the foreseeable future continually. Assets, therefore, work to improve an entity’s financial position and its sustainability as a going concern.

The case study exhibits that there are firms have not understood why human capital is not listed as an asset. These firms think that human capital should be categorised as organisational assets. Dean, McKenna, and Krishnan (2012, p. 63) engaged in a research study where 87% of respondents agreed that human capital should not be accounted for as assets within balance sheets. Thus, there is a cross-section of the society that tends to consider the risks associated with the dynamic capacities inherently borne by staff. For instance, they have the capabilities to acquire training, expertise, and experience while working with a firm only to leave it behind and join another. In this regard, human capital cannot be owned by any organization and must not be considered as an asset. In this regard, the professional skills, attained talents, and knowledge are often lost to competitors (Dean et al. 2012, p. 63). In light of such occurrences, many companies are compelled to consider human capital as a highly risky resource. Although it bears the promise of ensuring a company remains a going concern, the associated risk encourages financial managers to classify them as liabilities in their financial reporting instruments. Significantly, this is despite the fact that human resource embodies dynamic resources that can radically appraise a company’s earning power (Igbalajobi 2015, p. 3). An example is the contributions new football players have in transforming the financial performance of the club that acquires them as assets. These firms perception that its staff are asset bearing self-motivated attributes like skills, talent, as well as knowledge of the industry is not in accordance to the definition provided by the (AASB 2016 p. 13 para, 55). Notably, this implies that they are simply a resource that may or may not present a firm with a competitive advantage and increasing its value to stakeholders. There are two types of assets, tangible and tangible assets. Tangible assets can be quantified physically such as with building and equipment. Intangible assets do not bear any physical form but contribute to generating more cash flows for a company or otherwise limiting on expenditures. Examples of an intangible asset include a company’s brand name or patented trademark.

Sollosy et al. (2016, p. 22) appropriately consider human capital as value addition to a chosen work practice. Essentially, this implies that if an organisation has through its vision and mission opted to follow a distinctive route towards meeting its objectives, then acquiring and retaining the appropriate staff serves to exemplifies the manner with which it meets its forecasted goals. Notably, this implies that human capital as a tangible asset. Human capital has the potential to appraise a company’s ability to appraise the percentage on intangible assets in a manner that improves its financial position and capacity to consistently progress as a going concern (Igbalajobi 2015, p. 3). More importantly, human resource is not only a factor that ensures it fully exploits other tangible assets through critical decision making for purposeful allocation, but it also bears unsurpassed strategic value (Sollosy et al. 2016, p. 22). As an resource but not an asset, human capital can improve the financial position of a firm by boosting its profitability and balance sheet through innovation. As technology transforms markets, human resource is the only factor that an organization can rely on to renew its strategic goals towards maintaining its relevance to consumers and thus ascertaining its position as a going concern.

3. Conclusion

Human capital should not be listed in financial reporting as an asset. A company owns assets with which it determines whether to keep or sell. The fact that each worker bears free will, an attribute that is not consistent with other assets, it is often considered as highly risky to control. As an accountant, I believe that it is against accounting standards to consider human capital as an asset and it should therefore always be regarded as a liability.

Sincerely,

Collins Danbury.

Reference List

AASB, 2016, Framework for the preparation and presentation of financial statements, Australian Accounting Standards Board.

Dean, PC, Mckenna, K and Krishnan, V 2012, “Accounting for human capital: Is the balance sheet missing something?” International Journal of Business and social science, vol. 3, no. 12.

Igbalajobi, T 2015,” Human capital as an asset and financial reporting,” International Journal of Economics, Commerce, and Management United Kingdom, vol. 3, no 1.

Sollosy, M, McInerney, M & Braun, CK 2016, “Human capital: A strategic asset whose time has come to be recognized on organizations’ financial statements,” Journal of Corporate Accounting & Finance, vol. 27, no. 6, pp.19-27.

Wyatt, A & Frick, H 2010, “Accounting for investments in human capital: A review,” Australian Accounting Review, vol. 20, no. 3, pp.199-220.

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