Human Capital and Financial Statements

Should human capital be included in financial statements?

The global economy has over time shifted from an industrial economy to an economy that is based on information and knowledge (Monday, 2017). As a result, human capital has more than ever before become of greater benefit to organisations. Many human resource and business experts agree that the human capital is an organisation’s most important asset (Dean, et al. 2012 ; Cobb and Wallace, 2016). Although this is the case, employees are often considered to be liabilities in financial statements given that they are paid wages and add to business expenses such is the case with their pension contributions. People play an important role in creating intangible such as research and development, brands, patents and intellectual property. In turn, these intangible assets greatly contribute to the creation of tangible assets such as land, equipment, vehicles and plants. Human capital, therefore, emerges as a core contributor to company profits and shareholder value (Dean et al. 2012). While this is the case, human capital often does not feature in balance sheets as assets in spite of its direct and indirect contribution to business profitability and shareholder value. 

Washer and Nippani (2004) hold the opinion that the importance of human capital in financial decisions can be appreciated by including human capital in the statement of financial position. Given that financial statements are mainly aimed at trying to portray as accurately as possible a company’s economic reality as well as providing users with relevant information to enable them make sound investment decisions, it is relevant and logical that human capital is featured as an asset in such statements. This is more so the case given that human capital is a key contributor to the organisation’s profits and shareholder value.

Human Capital and Financial Statements

Definition of Human Capital

Human capital is the skills, training, education, competencies, experiences, and innovation of a person that enables the transformation of raw materials into more valuable products (Micah et al., 2012; Dean et al. 2012; Oseni and Igbinosa, 2015). Cobb and Wallace (2016) define human capital as the productive capacity of an individual including their talent, innate ability, skills, and learned knowledge among other attributes. Essentially, the human capital of an individual determines their ability to generate ideas and produce goods and services, as well as their economic productivity (Cobb and Wallace, 2016). An organisation’s human capital can be said to be sum of the current and future economic valuation of the capabilities and skills embodied within all the persons that together make the organisation’s entire work workforce at a given date (Cobb and Wallace, 2016). In essence, human capital contributes to a business’ market value as it contributes to intellectual value. Intellectual value on its part contributes to organisational reputation and brand value.  Continue reading “Human Capital and Financial Statements”