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Human Capital and Financial Statements Case Study

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Updated: Apr 19th, 2022

Human Capital: Definition and Importance

Human capital (HC) is a part of intellectual capital (IC) that can be described as a complex of the properties of the employees that are relevant for the company. For instance, Maaloul and Zéghal (2015) follow the example of Li et al. in naming 22 categories that describe the number of employees, their age, education, knowledge, and skills (work-related and other), productivity, beliefs, commitment, motivation, relationships, and diversity (p. 89). This list is not inclusive; in fact, it can be suggested that all the characteristics of employees that are capable of influencing the company’s performance are included in HC. As a result, the investment in HC (and other ICs) has been acknowledged as one of the main ways of creating value (Maaloul & Zéghal, 2015, p. 66).

Financial Statements: Quantifying and Recording HC

There are many limitations to the information presented by financial statements (FSs) and their analysis (Atrill & McLaney 2013a). Technically, FS cannot express HC properly since only a few of its categories may be quantified (for example, the number of people, their age, the quantifiable output). Also, omitting the unquantifiable information is expected to create a distorted picture. Finally, most of the mentioned properties are likely to change with time. All of these aspects pose difficulties in recording HC with the help of FS and in general.

However, HC components are of vital importance to the health and success of the company, and these aspects are supposed to be assessed with the help of the information from FSs and their analysis (Atrill & McLaney 2013). Consequently, the attempts at quantifying HC are being made, and one of them is the international accounting standard 38 (IAS 38). There is evidence to the standard improving the integration of intangibles in reporting in France, Portugal, and Canada (Ledoux & Cormier 2013, pp. 286-287). Ledoux and Cormier (2013) praise the specific and detailed requirements of IAS 38 (p. 287). However, they also point out that IAS 38 is not without limitations: in particular, it is incapable of reflecting all the information about intangibles (Ledoux & Cormier 2013, p. 286).

Similarly, Maaloul and Zéghal (2015) describe non-FS HC disclosure (found in annual reports) and explain that the latter can complement FS and improve the information capacity of the data provided to stakeholders. Also, they noticed that companies chose to present a varied amount of information on their HC and other IC. In my opinion, the latter aspect explains why a standard in the area is necessary: while it is ethical to avoid the distortion of information, it cannot be guaranteed without specific requirements. It appears, therefore, that it is logical to work out means of incorporating the information on HC in FS, even though it is likely to be deficient. In order to improve it, complementary (non-FS) instruments may be used for reporting the value of HC. Still, such an approach is likely to increase accounting efforts and expenditures, which means that it should be applied when appropriate: for example, in the case of sports where HC is literally the key capital.

Reference List

Atrill, P & McLaney, E 2013, Accounting and finance for non-specialists, 8th edn, Pearson Learning Solutions, New York.

Atrill, P & McLaney, E 2013a, Accounting and finance for non-Specialists PowerPoints on the Web: Chapter 6.

Ledoux, M & Cormier, D 2013, ‘Market assessment of intangibles and voluntary disclosure about innovation: the incidence of IFRS,’ Review of Accounting and Finance, vol. 12, no. 3, pp.286-304.

Maaloul, A & Zéghal D 2015, ‘Financial statement informativeness and intellectual capital disclosure,’ Journal Of Financial Reporting And Accounting, vol. 13, no. 1, pp. 66-90.

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IvyPanda. 2022. "Human Capital and Financial Statements." April 19, 2022. https://ivypanda.com/essays/human-capital-and-financial-statements/.

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