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Human Capital and the Financial Statements Research Paper


The role of intangible assets is recognized as an important component of the company’s performance. Of these intangible assets, the intellectual capital (IC) is the most recognizable one. However, the concept of intellectual capital is vague, and thus difficult to assess, which is a common problem with all intangible values (Calabrese, Costa, and Menichini 3748). As an attempt to address this, the concept of IC is broken down into three categories: human capital, relational capital, and intellectual capital (Andreeva 126).

Human capital commonly includes the relevant properties of the company employees, such as expertise, experience, creativity, teamwork capacity, problem-solving skills, and motivation (Sydler, Haefliger, Pruksa 3). Unlike other categories, human capital does not remain in the company when the staff leaves. Such categorization introduces some clarity to the question but does not positively resolve it. According to popular perception, the human capital, along with other components of IC, is primarily responsible for the performance of the company.

However, for a long time, this perception remained within the intuitive domain since the managerial practices did not have a well-defined tool for its evaluation. This led to a controversial situation where the gap between the book value and market value of many business entities was explained by the vague concept of the intellectual capital rather than hard data supporting the notion. Naturally, this introduced the unpredictability and undermined the reliability of the financial analysis, including the value of the financial statements (PWC 10).

In fact, according to some scholars, the severity of the latest financial crisis is explained for the most part by the inaccuracies in the financial statements resulting from the absence of the IC as a component of the evaluation, and the incorrect risk assessment (Iazzolino, Migliano, and Gregorace 44).

Thus, several evaluation methods have been suggested to address the discrepancy. One approach suggests the use of the multi-discriminant analysis (MDA) to develop an appropriate scoring model with the inclusion of the IC as one of the determinants and calculating its weight relative to tangible financial factors. Such an approach still has its limitations since there is no universal method of conversion of intangible values into quantifiable data.

Nevertheless, a study by Iazzolino, Migliano, and Gregorace shows that such a method produces a more meaningful and relevant data (52). When compared to a model that deliberately excludes the human capital data from the list, it creates results of higher consistency and eliminates type I and II errors. Aside from the analytical value, human capital presents a viable asset to invest in. A regression analysis of 69 pharmaceutical and biotechnology companies shows that higher investment into IC is associated with higher returns and better interaction between its components (Sydler, Haefliger, Pruksa 9). Essentially, this means that human capital can be managed using the established approach and, more importantly, meaningfully measured and included in financial statements to confirm its importance.

To conclude, human capital has an obvious impact on the financial performance of the companies. However, the methods of its analysis are currently underdeveloped and do not provide consistency on the necessary level. For instance, a study by Maditinos, Chatzoudes, Tsairidis, and There pointed to the fact that while the overall impact of human capital on financial performance is evident, it becomes less meaningful when analyzed in relation to specific variables (142). Thus, it requires the development of a more reliable framework before its full potential as a financial statement component can be fully utilized.

Works Cited

Andreeva, Olga. “Modern Financial Strategy of Large Industrial Corporations.” World Applied Sciences Journal 29.1 (2014): 125-129. Print.

Calabrese, Armando, Roberta Costa, and Tamara Menichini. “Using Fuzzy AHP to manage Intellectual Capital assets: An application to the ICT service industry.” Expert Systems with Applications 40.9 (2013): 3747-3755. Print.

Iazzolino, Gianpaolo, Giuseppe Migliano, and Emmanuele Gregorace. “Evaluating Intellectual Capital for Supporting Credit Risk Assessment: An Empirical Study.” Investment Management and Financial Innovations 10.2 (2013): 44-54. Print.

Maditinos, Dimitrios, Dimitrios Chatzoudes, Charalampos Tsairidis, and Georgios There. “The Impact of Intellectual Capital on Firms’ Market Value and Financial Performance.” Journal of Intellectual Capital 12.1 (2011): 132-151. Print.

PWC. . 2013. Web.

Sadler, Renato, Stefan Haefliger, and Robert Pruksa. “Measuring Intellectual Capital with Financial Figures: Can We Predict Firm Profitability?.” European Management Journal 32.2 (2014): 244-259. Print.

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IvyPanda. (2020, October 11). Human Capital and the Financial Statements. Retrieved from https://ivypanda.com/essays/human-capital-and-the-financial-statements/

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"Human Capital and the Financial Statements." IvyPanda, 11 Oct. 2020, ivypanda.com/essays/human-capital-and-the-financial-statements/.

1. IvyPanda. "Human Capital and the Financial Statements." October 11, 2020. https://ivypanda.com/essays/human-capital-and-the-financial-statements/.


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IvyPanda. 2020. "Human Capital and the Financial Statements." October 11, 2020. https://ivypanda.com/essays/human-capital-and-the-financial-statements/.

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IvyPanda. (2020) 'Human Capital and the Financial Statements'. 11 October.

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