Financial statements of business show the value of organization for a particular accounting period by considering its assets, obligations, expenses and revenues. Generally, traditional approach is followed in the preparation of financial statement in which intellectual assets are not considered in the process of valuation (Atrill and McLaney, 2013). However, with the rise of knowledge economy, organizations are required to consider intellectual assets in order to show their fair value of business. The present finance dissertation report is focused on the consideration of human capital in the financial statements of business. For this purpose, relevant aspects will be discussed in order to determine that human capital should be included in financial statements or not.
Human capital can be defined as a measure of economic value of the skill set of employees working in an organization. In accordance with the concept of human capital, all employees are not equivalent and quality of workers can be improved by making investment on them.
Facing Problem Writing dissertation
- Premium Quality Papers
- Plagiarism Free Content.
- 100% Money-back Guarantee
- Certified and Experienced Writers
- 24/7 Customer Support
Importance of human capital
In the present era, there is continuous increase in the knowledge and value of human capital in the global economy. It is because, human capital enhances the value of business by making optimum utilization of the available resources. The Best example of this aspect can be considered in IT sector as human capital has made revolution in this industry through their innovation and competitiveness (Flamholtz, 2012). By considering this aspect, it can be said that management cannot achieve their goals and objectives without effective and efficient human capital.
Reasons for the measurement of human capital
With the changing economy, it is required to include the value of human capital in the financial statements. In accordance with the viewpoint of OECD, human capital (i.e. internal staff resources and external suppliers) is the intellectual asset of business. Further, traditional financial reporting system is failed to recognize their fair value. As a consequence, it is essential to measure human capital in an appropriate manner (Atrill and McLaney, 2013). Other reasons for the measurement of human capital are as follows:
- For the determination of ROI on human capital.
- For the identification of gaps in human capital.
- To bridge the gap in order to achieve aims and objectives.
Controversies regarding inclusion of human capital in the financial statements
Inclusion of human capital in the financial statements is not an easy task because it is qualitative in nature. In accordance with the study of Sydler, determination of actual value of intellectual assets is a difficult nut to crack. Herman had offered three basic reasons due to which value of human capital is not added in the financial statements (Sydler, Haefliger and Pruksa, 2014). Firstly, there is not requirement for recording human capital by GAAP and FASB, second there is no proper base for people based accounting and last this provision will enhance risk for the manipulation (Herman, 2012). Another, argument given in this aspect is that people are not owned by company so they are not in position to do accounting for them.
Quantification of human capital in financial statements
Conventional standard for the measure of human capital stock is mainly categorized into three parts i.e. output, cost and income based approach. Description of these approaches is enumerated below:
- Output based approach: In this approach, human capital is measured by considering output derived by them.
- Cost based approach: According to this approach, human capital can be measured by summing up the cost of investment occurred by the business entity (Convergence between IFRS and US GAAP, 2014).
- Income based approach: This approach is based on the returns which are obtained by individuals from the labour market throughout their education investment.
In accordance with the present study, it can be concluded that human capital is a crucial asset for the business. Further, value of the same can be increased by proper investment and management strategies. By considering this aspect, it is essential to include the value of human capital in the financial statement in order to determine true and fair value of business.
Books and journals
- Atrill, P. and McLaney, E., 2013. Accounting and finance for non-specialists. 8th Ed. Harlow, UK: Pearson Publishing.
- Flamholtz, E.G., 2012. Human resource accounting: Advances in concepts, methods and applications. Springer Science & Business Media.
- Sydler, R., Haefliger, S. and Pruksa, R., 2014. Measuring intellectual capital with financial figures: Can we predict firm profitability?. European Management Journal.
- Convergence between IFRS and US GAAP. 2014. [Online]. Available through < http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx>.
- Herman, P. R., 2012. Let's Value People as an Asset, and Bring Financial Statements into the 21st Century. [Online]. Available through < http://www.huffingtonpost.com/entry/lets-value-people-as-an-a_b_1063698.html?section=india>.