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Should Human Capital Be Included in The Financial Balance Sheet?

Introduction and Human Capital Overview

Human capital refers to the asset that is intangible and is not listed anywhere in the company's financial statements. Human capital can be referred to as the value which is economic for the experience of workers and also their skills. In this type of capital, everything like education, training, intelligence, skills, health, etc are concerned (Ketchen et al. 2017). Here the loyalty and punctuality of the employees are also considered. According to the concept of human capital, all the employees are not equal but the quality of this capital can be improved by investing in education and training of the employees. This is turn helps in more productive and profitable output for the company. This assessment is aimed to shed some light on this concept with the help of credible sources. The reasons will be given for not adding human capital in the balance sheet as that will increase the chances of fraud, manipulation, etc.

Should be Included?

Human capital is one of the greatest assets in the business and it is of important value to the investors and shareholders. All the countries in their company law require affair representation of business value and not representing human capital would not depict the appropriate value of the business (Sollosy, Mclnerney and Braun 2016). The industries have undergone a massive transformation where they are now considered as information and knowledge-intensive industries. The industries have seen a change from producing goods in bulk to the growing power of knowledge and ideas which have intensified the role of human capital in the industry. Employees are now required to adjust the assumptions or practices based on models rather than manipulating materials that require skills and talent. The more the company has an appropriate talent; the better will be its results. This makes human capital more valuable in the companies and industries thereof. When this is not reported on the balance sheet then investors cannot make a decision that is well informed as human capital serves as an important point in making a decision (Sollosy et al. 2016). 

Also, human capital is important for the product's value. As said human capital comprises the talents of the workforce. This unique knowledge and talents provide an edge to the product of the company and differentiate it from others. In this manner, human capital serves as a significant influence in generating value for the product (Paasard, Kaitlin and Vyas 2012). In the same manner, if all the human capital is deployed from the company overnight, then the value of the company will reduce significantly. There might be assets with the company like plants, tools, etc. but they would not generate value or create the product(Paasard, Kaitlin and Vyas 2012). So, if human assets are gone, the company will not survive. Thus, it is required that human capital should be treated as an asset on the balance sheet of the company.

Another requirement for mentioning the human capital in the balance sheet is that it will assist the senior-level executive to plan out various expenditures that would include making the decision that is for investment purpose. Human capital needs to be trained and also monitored and measured. Certain programs are to be created to enhance the working potential and also train the skill sets of the human capital. Showing the value of human capital will help in making the appropriate decision for the expenditure. This will make sure that no unnecessary expense or investment is carried out by the company. Also, the value of programs for employees or the human capital will be enhanced (Mccoy, Phillips and Stewart 2019).

Thus, these are the various reasons for which the company should show the human capital on the balance sheet as they are the major assets and the value of products is dependent on them. Shareholders will not be able to make appropriate decisions if accurate information is not available to them and human capital on the balance sheet will help in getting accurate information.

Should Not Be Included?

There are various opposing views that state that human capital should not be included in the balance sheet of the company. The basic reason for that is human capital is not owned by the business. They serve as an important part but the skills and talent of humans cannot be brought in. A person is paid for the work they put in but once an employee gets a better opportunity they like to take it and leave the organization. So, the exact capital cannot be measured by the company (Paasard, Kaitlin and Vyas 2012).

Also, human capital involves skills, talent, and knowledge of the person which cannot be measured. When this cannot be measured, it will become hard to quantify it and then mention it on the balance sheet of the company. Some people are at times possessed various degrees and certificates but are not capable enough to do the practical work. So degrees and certificates cannot serve as measurement criteria for the same (Janshanlo et al. 2019). Skills are something that cannot be measured as a different person will be able to do different work and dividing them into a quantity is not possible.

This will lead to the occurrence of another issue and that is to maintain consistency among the organizations. Human capital is very subjective while calculating. This will lead to inconsistencies among various organizations. Comparisons will not be made as every organization will calculate its capital according to their understanding and no defined pattern can be set (Ketchen et al. 2017). This will bring inconsistencies in the calculation among different organizations and industries.

Also, showing human capital on the balance sheet will provide scope for manipulation. It will become easier to manipulate the value of the assets for the organization as human capital will not have any stringent or quantifiable value (Hendricks and Schoellman 2018). Everyone will measure it according to their understanding. This will increase the manipulation of balance sheet values and increase the chances of fraud. Thus, due to these reasons, it is better to not show human capital in the balance sheet of the firms as it cannot be calculated, and also manipulation can be done easily through their depiction in the balance sheet.

Conclusion and Recommendation on Human Capital and Development Accounting

Human capital forms a major part of the company which is the most important asset that the company possesses but it should not be mentioned in the balance sheet. The very first reason being the same that assets are possessed by the company while human capital is not something that can be possessed by the company. The skillset, talent, and knowledge of the person are owned by them, not by the company. A person might have that skill set yet they might not apply it in the company. Also, measuring people's ability in monetary terms is not possible. Degree and certificate do not provide the surety of the skillset and knowledge. Some people might not have a degree but better sets of skills. So, the measurement is not possible for the skills set of human capital.

Also, assets are required to be depreciated over time and once human capital is considered as an asset it is required to be depreciated. But with time and experience skill sets improve and values won't depict the real position. At times a certain person might bring a lot of value to the company like for soccer companies hiring Ronaldo Messi will increase the value while hiring any other player with the same set of skills won't bring that value. So, at times goodwill also affects the value and an accurate measure cannot be provided to a skill set. This makes human capital in calculative and increases the chances for fraud (Hilorme et al. 2019).

Adding human capital to the balance sheet will increase the chances of fraud. Manipulations with the values can be done easily. It will increase the accounting frauds that prevail in the industries. Since the values are not identifiable, it will solely depend on the person’s calculation that will create misappropriations.

Comparisons among the companies in the same industry will be hampered. Every company will have its criteria for providing the values to various skills set or a talent or knowledge of the person that in turn will eliminate the chances of comparison in the industry. So, it is better than human capital is not recorded in the books as outputs from the human capital are already measured with the returns that the company is making. The production level and the differentiation of products of different companies show the talent or knowledge that the human capital of the company has. The returns show how effective the employees are working in the company. Thus, the efficiency or skill set is measured through that. Hence, it is not required to show human capital alone for the company.

References for Human Capital and Development Accounting

Hendricks, L., and Schoellman, T. 2018. Human capital and development accounting: New evidence from wage gains at migration. The Quarterly Journal of Economics133(2), pp.665-700.

Hilorme, T., Perevozova, I., Shpak, L., Mokhnenko, A. and Korovchuk, Y. 2019. Human capital cost accounting in the company management system. Academy of Accounting and Financial Studies Journal23, pp.1-6.

Janshanlo, R., Baidildina, A., Kogut, O., Sultanova, B., and Akimbaeva, k. 2019. Human Capital Accounting: Problem Status and Suggestions. Journal of Advanced Research in Law and Economics10(4), pp.1032-1045.

Ketchen Jr, D. J., Crook, T. R., Todd, S. Y., Combs, J. G., and Woehr, D. J. 2017. Managing human capital. The Oxford Handbook of Strategy Implementation, p. 283.

McCoy, N.R., Phillips, B. and Stewart, A.C. 2019. Accounting for human capital: Implications of automation and operational performance. Journal of Corporate Accounting & Finance30(4), pp.111-115.

Passard C., Kaitlin Mckenna, and Vyas Krishnan. 2012. Accounting for human capital: Is the balance sheet missing something. International Journal of Business and Social Science, 3, p. 12.

Sollosy, M., McInerney, M., and Braun, C. K. 2016. Human capital: A strategic asset whose time has come to be recognized on organizations' financial statements. Journal of Corporate Accounting & Finance27(6), pp.19-27.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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