The development of financial statements has for a long time concentrated on the aspect of money. They describe where the money comes from and where the money goes. The effort of the people who make sure that this money circulates in the system is not part of the statement. It is critical that the human contribution towards the growth of the organization becomes part of the positive inflow in the financial statements.
Human Capital Definition
Human capital is the input of the workers in an organization. For many years, the accountants have categorized employees as a liability because of the salaries and pensions (Sollosy, M, McInerney, M & Braun, C. 2016). From the time people started keeping financial records to date, many changes have been implemented. They have led to many improvements. Human capital includes skills, knowledge, and expert opinion. Today business has changed. A majority of the companies are offering services and not just products.
Human Capital Inclusion in Financial Statements
It is essential for businesses to start including the human capital in the financial statements. Some organizations are including the environmental concerns in their Profit and Loss statements. Human capital is essential and deserving recognition as well. When businesses think about assigning a value to nature, there is the need to assign a better value to the people who build these organizations (Atrill, P & McLaney, E. 2013).
Measuring Human Capital
In fact, human capital should appear on the left side of the balance sheet. Workers are knowledgeable; they have skills and provide labor to these organizations. Hence, they represent a valuable resource to the firms they work for as employees. The accounting practices of the 1960’s need to be updated as modern society is more enlightened. Revolution in the industry must involve the people who bring about these successes (Atrill, P & McLaney, E. 2013).
For instance, today’s assets comprise of intangible objects such as the brand and even intellectual property. An additional one should be human capital. All the great inventions that propel companies to success come from the people who work for them. As value is attached to the brand, it should also become critical to the inventors.
There is a need for an overhaul of the accounting standards. Over the years, there have been discussions about their improvement (Ifrs.org 2016). International bodies such as the International Accounting Standards Boards, International Financial Reporting Standards, and Financial Accounting Standards Boards have weighed in on new matters (Ifrs.org 2016). The US Generally Accepted Accounting Principles has also come on board with new measures for accounting. As they merge their theories and come up with world governing rules, they need to develop a package for human capital.
Challenges and Solution
The reason for not having the human capital in financial statements may not have been essential. Human capital is not one of the requirements in the current regulations. The former analysts thought that including human capital in the financial statements would be a great risk to the organizations due to the exposure. The thinking could be that companies do not own people. However, the people working for them are the main contributors to the company’s success (Sollosy, M, McInerney, M & Braun, C. 2016). Including human capital in the statements would increase an organization’s value. The asset base would improve.
Companies thrive on the benefits that people bring to them. Therefore, they should include this effort in the financial reports. As the organizations maximize the shareholder value, they should also maximize the human capital value.
References
Atrill, P & McLaney, E 2013. Accounting and finance for non-specialists, Harlow, UK: Pearson Publishing.
Ifrs.org. (2016). Convergence between IFRS Standards and US GAAP. Web.
Sollosy, M, McInerney, M & Braun, C 2016, Human capital: a strategic asset whose time has come to be recognized on organizations’ financial statements. Journal of Corporate Accounting & Finance, 27(6): pp.19-27.