Human capital in accounting for intangible assets


In this age of change, the balance sheet likes a reflection to express the situation of company's financial statements (Washer and Nippani,2004). In addition, human capital is also play a crucial role in company activity (Bodie, Merton and Samuelson,1992). Because of that, the overall financial information cannot be disclosed completely if the human capital does not measure properly. In some company, human capital recognized as a kind of intangible assets showed in the financial statements. This essay aims to research the significant of human capital and critically discuss whether human capital should disclose in balance sheet.

Critical discuss of intangible assets

Definition of intangible assets

As the rule of accounting IFR3, intangible assets include goodwill, trademarks, licenses and contact lists, etc. In addition, intangible assets of some firms are not disclosed appropriately under the Financial Reporting Review Panel (FRRP) when the economy spread. (Mario, 2009) Intangible assets are not only the most significant assets of enterprises but also the base of market dominance. Besides, it plays an important role in company merger and acquisitions (Lin and Tang,2008).

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Intangible assets defined by IAS 38 as a kind of goods or services.

"an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes" (IASC,1998,IAS38,para.7).

Actually, the definition has used but it caused some questions such as how does it regarded and how does it integrate with goodwill and brand valuation (Tozer and Hawkes, 2001).

Intangible assets and relevant accounting standards

The value of intangible assets is aim to describe the financial statements by accounting standard. Actually, there are some limitations in the balance sheet to relate the real value, but with the developments of intangible assets, accountants and investors know the limitation and analyze that independent. (Lin and Tang,2008)

Under IAS38, it is necessary for enterprises to capitalize expenditure during the products life cycle. Besides, amortizing the costs is also a measure under the new accounting standard. But David Brocksom who is the director of Micro Technology Finance illustrated that some risk arisen in the balance sheet under the new accounting standard. In addition, the change of accounting standard can improve the ability of predicting because of that the developed trend can be found by financial statements. (Waugh,2006)

Main differences between IAS 38 - Intangible assets and existing UK requirements

2.3.1 Identifiable

Intangible assets have played an important role in entities recently. It includes many entity assets and goodwill. Based on IASB, if accountants and investors take apart

intangible assets from goodwill, the financial statements can be more worthless. Even though the IAS38 does not clarify the characteristic of intangible assets, but depend on its intrinsic quality, it is identifiable. Besides, IAS 38 has some new regulations such as if the intangible assets confirm as intangible assets, it has only or probable

anticipated benefit of future economy and measured dependable. Moreover, intangible assets is acknowledged distributed from goodwill which they mentioned that intangible assets have restricted value can bring risk to goodwill. (Accounting Standards Board, 2005)

2.3.2Development of IAS 38

IAS 38 has developed in accounting research while the accounting standard in UK based on SSAP 13. Actually, SSAP 13 does not appraise the cost but intangible assets which bring from inner should be confirm. The criteria of confirm conduct as assets which compared by SSAP 13. (Accounting standard Board, 2005)

Intangible financial statements

Intangible assets are required to describe as capital assets with the primary cost. In financial statement, the data should be identifiable or they cannot transfer. Referring to amortization, there is no regulation to stipulate that intangible assets should be amortized as capital assets. On the contrary, intangible assets should be amortized as depreciable capital assets. (Yardimcioglu and Karasioglu, 2008)

In addition, the main intangible assets refer to goodwill. But in some large companies, accountants always separate the intangible assets of goodwill, they assets that goodwill should recognize as a kind of different assets in the financial statements. (Yardimcioglu and Karasioglu, 2008) Moreover, Sveiby(2001) asserted that market price of some companies cannot demonstrate tangible assets but demonstrate intangible assets which illustrate in the balance sheet (Sveiby,2001). In contemporary society, there is an argument whether intangible assets should reflect in financial statements. Some individuals asserts that if it reflected in financial statements, the company can be better to control while some others argue that some risks can be generated by intangible assets in financial statements. For example, the risk of intangible assets are reflected in financial statements is significant in Nokia Corporation (Sveiby, 2001). By the end of 1999, the total assets of Nokia in financial statements reached 11 billion USD while the liabilities arrived at 5.3 billion USD. At the end of 2000, the market value achieved 190 billion USD. Besides, there is a difference of 183 billion USD between market value and book value which mainly produced from intangible assets. If the intangible assets reflect in financial statements, it means the extra 183 billion USD is needed to show on company's assets. But after 1 year, the market value has reduced to 97 billion USD. Because of that, if the intangible assets reflected in financial statements the former year, the company would lose 86 billion USD. (Kaya,2006) Because of that, it is a risk of reflect intangible assets in financial statements. Just like Rolls-Royce Company whose R&D expenses have not earned profits, in order to get profits, the company reflected R&D expenses in the assets in1967. As a result, it looked successful but actually its behavior brought about debt. (Yardimcioglu and Karasioglu, 2008) The risk is caused by lacking supply among market value and book value after reflect intangible assets in financial statements. When the market value is thought as cash flow while the book value is thought as non-qualify cost value of company's assets and then the distinctions are exhibited in financial statements. (Yardimcioglu and Karasioglu, 2008)

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To sum up, there is some restrictions of reflecting intangible assets into financial statements such as some important influences of the company cannot reflect. It is inadequate and not responsibility for the company. Since recent years, on one hand, it is positive that the criterion and evaluation have come out to the public. On the other hand, excluding the subjective factors, putting intangible assets into financial statements is useful to reflect the overall condition of the whole financial statements (Yardimcioglu and Karasioglu, 2008).

Critical discuss of human capital in accounting

Definition of human capital

Human capital reflects the increased in production and earning which has important influence to a company. Specifically, staff who adapt the new technologies or have wide knowledge can be the positive capital to financial statements. Actually, the conditions which good workforce have includes required education, ability of learning new skill and innovation. (OECD Economic Surveys: Denmark,2009) Consequently, human capital is a kind of employee investment. Excellent human capital can make staff happy and efficiency when they work for the company. By contrast, failure human capital only made labors faster and faster on their work but it cause ineffective and invalid performance. (Baker,2008) As Milevsky, M (2009) concerned that "Human capital is the most valuable asset." The value of human capital counts from employee's salary to their retirement. In the crisis, the value of human capital was increased because everyone link with each others. In addition, as the value has increased, the amount of salary has increased as well. (Schulaka,2009) Becker (1964) argued that human capital is a single increasing knowledge, capacity and talent which include education and training. In addition, human capital has positive influence to the production and vocation development. Furthermore, it is useful for employee to obtain the new technological skill and improve their working ability. (Becker,1964; Wright et al,2001)

Value of human capital

In contemporary society, the human capital has changed with the variation of new technology, competition and globalization. Besides, the human capital market is changed in shareholder who paid more attention to human capital resource and broaden the capital share in market. Human capital demand employee have specialized skill and knowledge. (Beer, 1997) As human capital is a kind of human assets which include employee product valuation per unit of time and the amount of valuation which is the entire human capital of the company (Morse, 1973). Even though, the human capital value supply useful information to user of financial statements but there is some changed information with organization employee. In fact, there is no relationship between human capital value and value of company staff. (Morse,1973) On one hand, if the company gains the profit, the employees' knowledge and skill is benefit and positive to the organization which is recognized as value assets. On the other hand, if the company cannot obtain profit, it means not value got from human capital. (Morse, 1973)

Function and process of human capital

The function of human capital is used the employee's knowledge and skill and help investors and managers to organize the company's financial statements. Specifically, there are some measures to achieve the goal. For instant, it included plan, do, check and act cycle originated processes.

Plan: This stage is made sure the employee comprehend the aim and procedure of the company. In addition, the reason which brought about the problems should be recognized and confirmed. This is the first stage of company to propose the outline of company which is essential to the objectives of company.

Do: When the process is proceeded, the data is collected as the indication of requirement. When the process is collected all the data, the task is preliminary accomplished.

Check: After the process completed, the checking process is started. On the other side, if it meets the aim of project, the arrangement is begun.

Act: It is the last stage of the whole process which comprised discussion about the new technology. (Carter, 1994)

Practice of human capital

In practice, there are many challenges for human capital. For instance, the change of competition, effect of financial and innovation. Back to 1991, there are nine features to the practice of human capital which is communication, interdependence, strategy and planning, commitment, customer-focused, never satisfied, risking taking, culture consciousness, relationships. Specifically, communication is a kind of connection to the employee and company. The point of human capital is make effective communication to the whole staff. Interdependence is the second characteristic of human capital. The best practice of human capital is to understand the essential of work and work by others, and then comprehend the internal relation between them. Thirdly, if the human capital operation well, it need a good strategy and planning by organization. In addition, the internal human capital in organization need careful consideration and the role of human capital is related to the company. Strategy and plan contain the role and relationship of the company. The fourth one is commitment which is related to develop potential ability of employees. The fifth practice is customer-focused which means pay attention to customers. In addition, the objective is estimated the problems and opportunities, and then reply the feedback to the company. The sixth practice is culture-consciousness. Culture can change action, it is common that culture is significant and the role of human capital advocated the variation of culture. The last practice is relationships which mean the interaction between employee and company. If the manager of company can conduct the relationship well, the company can earn more profit and operate healthy. (Carter, 1994)

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The human capital includes both of the individual and organizational resource and focus on the training of employees. In fact human capital is a kind of assets which is more focus on individual workforce. (Spender, 1996) In addition, to improve human capital need to advance the interaction between employees and managers. The interaction is helpful for every employee understand the level of knowledge and skill they should grasp. (Weick & Roberts, 1993) In spite of some complicated ability is hard to acquire from others. Because of that, excellence interaction provides an opportunity to obtain comprehension and consciousness which can enhance the relationship as well (Polanyi, 1966).

4.Human capital and financial development

In contemporary society, human capital and financial development have influence to the economic growth. The objective of the research is connect and appraisal the differences of finance and development. Specifically, the change of technology, internal growth and growth of financial market are the three factors improve the economic growth. Actually, the theory of development have examined by the practice, and then the approach used in accounting development. As mentioned above, the aspect of development exhibited in physical capital, human capital, labor and monetary factor. The factors which effect the economic growth are money and credit. (Evans et al, 2002) It is obvious that companies which have development in profit also have raise in practice in human capital such as education and training. In addition, some Asian countries' economy are increased which reflect the development of human capital. For instance, the Japan companies begin to expand since the World Warâ…¡, and then they not only renovate their technology but also enhance the training of workforces. Because of that, the human capital in Japanese enterprises has high quality and the staff in Japan companies almost loyalty. To sum up, it is helpful for employees got education and training which is benefit for improving technologies and promote production in service and manufacture. (Becker, 1993)

Investment in human capital

Effects of earning

In recently years, the economics model provides an illustration which has interpretations to the investors. The effects of human capital are significant which have some appearances. For example, when the rate of age is fall, the earning is raised. In fact, not matter the rate is raised or fall which have benefit to the capability. Moreover, the rate of unemployment have inverse ratio of capability. Thirdly, if the young people often change their job, they will obtain more opportunities and training than people who always stay the same job. Lastly, the allotment of workforce is restricted of the market expanse. In summary, the effect of human capital is definitely explained in earning and economics behavior which is also significant to the financial statement. (Becker, 1993)

Effects of human capital

In fact, human capital has significant effects to investment which is not only illustrate the dissimilarity of income but also refer to the employees and community (Becker, 1993). Referring to the contribution of human capital in investment, it interprets the production increased and the important effect to financial

statements (Frantzen, 2000).

Human capital and financial statements

Financial statements are useful for managers and investors to make decision and control the company. Regardless, today's financial statements can not reveal, appraise and describe human capital which is decreased the usefulness (Wintermantel and Mattimore,1997). In fact, human capital is playing an increasing role in financial statements which recognized as capital investments (Chen and Lin,2003).

In contemporary society, intangible knowledge changed mainly depends on human capital in accounting which has become the dominant way to product value. In traditional accounting, it is lack of human capital measured in the balance sheets while human capital in modern accounting as a kind of expense. (Ulrich,1998) Human capital is replaced by traditional assets and meets the need of investors and creditors (Hermanson et al, 1992). In addition, human capital reflected in financial statements has advantage to enterprise improve their performance and production (Acemoglu and Pischke,1999). Human capital in accounting is compared the other intangible assets and provide information to the investors and mangers. The objective of human capital in accounting is expressing the diversity of itself by the financial report. When the traditional accounting is replaced, the value of workforce is become more and more important because modern accounting focuses on human capital. (Flamholtz, 1985)

In present day, conclusions from human capital are followed. Firstly, human capital is always disclosed in corporation annual financial report. Secondly, inadequate human capital disclosed in the notes of financial statements, as a result, they do not have numeral description. Thirdly, human capital recognize in high technological firm as a kind of intangible assets such as goodwill, copyright and franchise compared to it regards as hard assets in traditional firm. (Chen and Lin,2003)

Kieso and Weygandt (1992) believed that whether confirm human capital as a kind of assets because assets have possessed by the company, have prospect profit and evaluated in economic component. In fact, the company emphasize the employees' knowledge and skill, not the body (Schultz,1961). With the improvement of the human capital, it can bring profit to the corporation. Moreover, intangible assets do not recognized as assets but evaluated its economic component. (Chen and Lin,2003)

Account of human capital

In accounting, human capital can be accounted as expenses and costs. To be more precise, some movements such as recruit new staff, advertisement of the image of the company and rewarding to the employees contributed to the expenses. On the sides, training costs of recruit new staff, costs of empty position and cost of inefficient working are contributed to the cost account. The expense of recruiting and training new employees classified to income statements which recognized them as a worth assets. The costs of empty position and inefficient working are contributed to opportunity costs and needn't to reflect in financial statement because it is difficult to adjust them. (Chen and Lin,2003) According to these measurement, human capital have reflected the situation to the whole company and effect the goal and strategies of company because employees are the important element effect the development and improvement (Ruchala,1997).

Balance sheet of human capital

In practice, human capital confirm as "contingent assets" in balance sheets which is different from traditional assets. Because of that, accountants should consider the different accounting method and value methods. For example, the Chris' s balance sheet is as followed. From the table, human capital is confirmed as assets. In addition, net worth is not includes contingent assets. According to the character of human capital, there is a decrease in balance sheet because of the declined in employee insurance. The decreasing amount is showed in the contingent assets while the employee insurance recognized as non contingent assets. (Washer and Nippani,2004)

From the table 1, the decreasing human capital is $348638 while the employees insurance is $400,000 (Washer and Nippani,2004).


In summary, human capital should disclose in balance sheet as a kind of intangible assets. Even though there is some risk for the company to reflect human capital independently such as the value of human capital is not easy to confirm and there is no identify regulation for human capital, accountants should try their hard to measure and reveal the available data to show the overall situation of the company' s financial statements.

In addition, the pension and insurance should be identical to human capital. If the accounting method is not equal, some opportunity costs and margin expenditure can be generated. As a result, the value is not integrated with human capital which caused the differences. To sum up, new special regulations of human capital and intangible assets should be produced in order to control the adjust performance.