Accounting for Human Capital

Question: Writing Letter To One Financial Analyst. Answer: To Mr. Tony Trainer, It is a universal fact that Human Resource is one of the major factors for the success of any business organization; and for this reason, they human resources have been regarded as a valuable asset for the business organizations. In spite of this fact, human resources are not considered as an asset for the business organizations in the balance sheets of the companies (Nyberg et al. 2014). A massive transformation can be seen in the society as the industrial age has become information age; but surprisingly, the principles and procedures have not been changed along with this transformation. It can be seen that the businesses consider human resources as one of their greatest assets, but they decline to value the human resources of the company in the balance sheet as the accounting principles do not allow them to do so. It can be said that twenty-first centuries is the era of technological as well as industrial development. Todays businesses have gone so far towards development with the help of technology. In this kind of situation, it is a fact the accounting system is holding the mindset of the old days. In todays era of high pace progress, it is the responsibility of the business organizations to change their various operations. Thus, there is a fare scope for accounting to change their various rules, regulations and principles. The business organizations need to understand that the human resources are one of the most crucial assets in the organization (Eisfeldt and Papanikolaou 2013). Employees or workers are responsible for the completion of the various jobs of the business organizations. In this process, they have to perform various kinds of jobs that need skills; on the other hand, they have to manipulate to achieve the goals and objective of the organizations (Kianto et al. 2014). Thus, it can be said that the human resources are the mean for the business organizations to achieve the organizational goals and objectives and they can be considered as the greatest assets of the organization. As per the recent development in the accounting knowledge and awareness, it has been considered that most of the assets in the business organizations are intangible. On the other hand, as per the traditional accounting principles, there is not any treatment of human resources of the organization in the balance sheet of the companies. In this situation, serious concerns have raised over the decision making process of the organization. How a business can take effective decision s by not considering the most important assets of the organization? The value of the human capital of an organization is an important aspect of the financial statement of the company; in addition, human resources help the organizations to increase the earning power and value of the businesses. In this regard, the human resources or the human capital of a business must be valued in the financial statements of the businesses. It has been seen that many people and organizations around the world is against the inclusion of human capital in the financial statements. On the contrary, many people and organizations want the inclusion of human capital min the financial statements (Khanna, Jones and Boivie 2014). Many reasons have been shown for the purpose of not inclusion of human capital in the balance sheet of the organization. Some variations in these reasons have been seen, but among all the reasons, some general reasons have been spotted. The main reason is the difficulty in the measurement of the value of human capital (Fulmer and Ployhart 2014). The reason is that in case of inconsistency in the performance of human capital, the value would be different and would affect the balance sheets of the organizations. Apart from these, the process of valuing the human capital is less practical as there cannot be any certain procedures to measure the value of human capital of any business organization. Apart from this, the lack of uniform laws and principles for the companies is another difficulty in the valuation of human capital. In case a way can be determined to value the information provided by the human capital of the organization, the mobility of human nature is a hurdle in this way (G amerschlag 2013). Switching off the jobs by the employees or workers is another reason for not including human capital in the balance sheet of the organizations. In this case, the change in jobs of the employees affects the valuation of human capital in the organization and this leads to the error in the balance sheet of the companies (Flamholtz 2012). Some people and institutions around the world consider human capital as a line item that needs a completely separate process of identification. The inclusion of line items in the balance sheet has an inverse effect on the balance sheet as they can be easily manipulated. It can be seen that many problems involve in the process of valuing the human capital of the organizations. There are employees are not certified but they are great workers. There are employees who are certified but they are not good workers. There are neither employees that are certified nor good workers. Hence, it is a tough process to value the human capital based on case by case (Gre en and Haines 2015). From the above discussion, it can be seen that there are many concrete and logical reasons behind not recognizing human capital as the assets of the organizations. These are some major reason that cannot be ignored by the companies. It has been a practice over the decades to consider human resources as the liability of the organization. The reason is that the employees have to be paid with salaries, future pensions and other benefits. However, the point of view has been changed drastically as most of the CEOs of the large corporations are considering the employees as the greatest assets of the organizations. There are many people and institutions all over the world that believes that human resources need to be treated as the assets of a business organization. There are many reasons behind considering human resources as the assets of the organizations. It can be seen that the companies that invest in the human resources of the organization creates a positive image in the business market (O'MAHONY 2012). Apart from this, these companies can get the necessary competitive advantage by performing better financially. These achievements can only be possible by the efforts of the employees of the organizations. Hence, i t is the right of the investors of the organizations to know all the facts about the employees. The only way to do this is to treat human capital as the assets of the organizations and to include them in the balance sheet of the companies. Human capital has a major significance in the process of managerial reporting and decision-making process of the organizations. There are instances where the organizational managers use human capital for making effective business decision for the long run development of the business organizations. The recognition of human capital as an asset of the organization helps to prove the fact the human resources are paramount in the development of any business organization (Dawson 2012). At the time of managing the human resources of the organizations, the human resource managers have to focus on the various factors of the development of the human resources. From the whole discussion, it can be observed that valid reasons are there for both recognizing human capital as assets and for not recognizing human capital as assets of the businesses. All the logics have strong points. The various traits of human nature make it difficult for the accountants to measure the value of the human capital of the organization. The lack of consistency in performance is one of those traits that make it almost impossible to measure the value of human capital (Bapna et al. 2013). There are many other reasons that support this fact. However, there are still many positive sides that are enough to support the argument that human capital of the business organizations must be recognized as the assets. The human resources of the organization are the most important factor form the success of the organizations. In addition, the human resources help the management in the decision making process. The human capital of the organizations can be measured by two methods; th ey are in terms of human resource cost and human resource value (jeper.org 2017). There are many subcategories in these two methods of valuation of human capital. However, Generally Accepted Accounting Principles do not approve these methods. This is the major reason in the valuation of human resources as there is not any approved uniform method for all the companies. Hence, it can be concluded that there are both negatives and positives in recognizing human capital as the assets. Right now, it is not possible to include human capital in balance sheet as the assets of the organization. However, there are sufficient future scopes to recognize this as assets. In this regard, GAAP and other accounting boards need to set up and they have to implement accounting policies and principles to support the recognition of human capital as the assets. Hence, there is a future scope for the companies to recognize the human capital as the assets of the organization. References Bapna, R., Langer, N., Mehra, A., Gopal, R. and Gupta, A., 2013. 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