Putting Humans on the Balance Sheet

The concept of measuring the value of an individual worker and recognising such a value on the balance sheet may appear to be inconceivable. Accounting standards appear to be unreceptive to the concept of human capital. If human capital is accepted as a resource of a firm, it should be required to be measured and put on the balance sheet. However the limiting factor appears to be the concept of control. One cannot control humans, they can leave when they want is the reason for not being able to put humans on the balance sheet. I say this approach is wrong. An essential characteristic of an asset is that the entity must have control over the future economic benefits such that it is able to enjoy these benefits and deny or regulate the access of others to those benefits. The capacity of an entity to control the future economic benefits normally would stem from legal rights, possession or ownership. However, it is the substance of the event that matters most. For example, an entity might not possess legal ownership of the item but has what amounts to realistic, probable and enforceable expectations that it will enjoy those benefits stemming from the item, then the item in question can be seen as an asset.

This factor in the definition of an asset would appear, at first glance, to defeat any attempt to recognise human capital as an asset, Slavery aside, a firm does not own their workers or their entire future output. These workers cannot be stopped from resigning and working elsewhere. Control, therefore, over this ‘asset’, staff, would not appear to exist. Yet, a firm cannot claim with absolute accuracy and certainty that it will always control and own the output of any piece of machinery it purchases: the possibility of resale always exists. Thus, recognizing an asset on a balance sheet cannot mean that the relevant entity is thereby declaring that it will own that asset for perpetuity. Nor can it mean that the entity is claiming it has the right to any revenue generated by that asset after its sale, though it may have improved the asset and capitalized those expenditures into the rand figure on the balance sheet. The main difference here is the question of volition: a worker almost always has the right to cease employment, a machine makes no decision on such matters.

However, to focus on control of and ownership over each individual worker and their output into perpetuity is misleading. The conceptual justification for capitalizing human capital is not based on ownership of workers. Instead, the focus is on the firm’s legal right to the current and future revenue streams and economic benefits generated by the product made or service performed by those workers while in a contractual relationship with the firm. Examples of future economic benefits generated for a firm by human capital might include enhanced reputation and market penetration, both contributing to increases in share price or sale value. It can be argued that accounting recognition for human capital would be no different than where manufacturing costs of inventory essentially are recognised as a cost of inventory which is included on the balance sheet until that product is sold, which may be several years later. Where the future economic benefit can be distinguished from its source, and the term asset refers to this benefit not its source.

By concentrating on the control over the benefit flowing from the expenditure, not on the workers on whom the expenditure was conferred, human capital may meet the control factor.