Times are changing, so do the financial and accountability standards. I remember the time (being in Russia) when human resources, not to mention human capital, was not considered something significant for the business development. There was always this ‘light tension’ between the financial director and human resource department. Nowadays the most valuable assets are not properties or machines anymore. The most valuable asset for any type and size of the company became its human resources, human capital.

Human capital is ‘the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country’ (Oxford English Dictionary). In spite of being perceived as a relatively new concept in business management, the term was actively discussed in the middle of the last century. At that time it was argued that ‘human capital’ shouldn’t be a part of financial statements of the company as it may be offensive to people, equalizing them to tangible or marketable assets, or even creating associations with slavery (Schultz, 1961 cited in Goldin, 2016). This being said, the concept goes back as far as Adam Smith’s theories of business management. The acquisition of… talents during… education, study, or apprenticeship, costs a real expense, which is a capital in [a] person. Those talents [are] part of his fortune [and] likewise that of society’ (Smith, 1776 cited in Goldin, 2016).

Do I believe that human capital should be included in financial statements? From the pragmatic standpoint, yes. I do think that being the most important asset (and with the development of information/data society this importance will be only augmenting) human capital should be accountable. If there is an investment in real estate with a hope of getting profits, or in R&D development, why isn’t it possible to treat ‘human resources’ the same way, considering that in many cases humans with their skills represent the asset that brings the most financial benefits to the organization? ‘The most valuable capital is that invested in human beings’(Marshall, cited in Baruch, Schwarts, 2001). Unquestionable plus of considering human capital as an accountable asset and including it into financial statements is an objective reflexion of a company’s net worth, which helps make better decisions about outside of the company investment plans and assets allocations (Washer, Nippani, 2004).

From another hand, this is a very different, ‘intangible’, difficult to measure asset and the arguments about what to include into ‘capital’ and what to leave for ‘resources’ are still as vivid as they were over 50 years ago (Meriman, 2017). Some of the arguments provided by opponents of including human capital into the balance sheet are (Baruch, Schwartz,1971):

1.  Human capital cannot be purchased;
2. Human capital cannot be amortized;
3. Human capital doesn’t equal the profits contributed by the labour force;
4. Price of physical assets is determined by market value, unlike in the case of human capital when the price might be calculated based on the ‘asset’s contribution’ to the business;
5. Human capital doesn’t have service potential; and
6. Human capital cannot be objectively measured.

Needful to say that some of these statements can be argued. For example, human capital is one of the main assets discussed (and evaluated) during acquisitions/mergers.

I think that one of the reasons why there is no common opinion about whether or not to add human capital measurements in financial statements is their instability which may differ not only by positions for analysis which may come and go but by industry, size company or country.

References:

Baruch, L., Schwartz, A. (1971) ‘On the use of the economic concept of human capital in financial statements’. The Accounting Review. American Accounting Association, 1971 46(1):103-112;