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Current Issues in Finance

Table of Contents


1.1 Intangible assets

1.2 intellectual property

1.3human capital/human assets

2. Recognition of human assets

3. Evaluation of Human Assets

3.1 Human Resource Accounting (HRA)

3.1.1 Goals of HRA

3.1.2 Restrictions of HRA

3.2 HRA Measurement Models (Measuring the Immeasurable)

3.2.1 Historical Cost Model

3.2.2. Restrictions of Historical Cost Model

3.2.3 Present Value of Future Earnings (Lav and Schwartz Model)

3.2.4 Restrictions of Present Value of Future Earnings

3.2.5 Opportunity cost model (Hekimian and Jones model).

3.2.6 Restrictions of Opportunity cost model

3.2.7 Hermanson's Unpurchased Goodwill Model

3.2.8 Restrictions of Hermanson's Unpurchased Goodwill Model

3.3 International Developments in Human Resource Accounting

4. Bibliography

1. Definitions

1.1 Intangible asset:

Intangible asset is an identifiable non-fiscal asset without physical substance. An asset is a resource that is controlled by the entity because of past events (for instance, purchase or self-creation) and from which future financial advantages (inflows of money or other assets) are expected. [IAS 38.8] Thus, the three basic traits of an intangible asset are:

1) Identifiability control (capacity to get profits from the asset)

2) Future economic benefits, (for example, incomes or lessened future expenses)

3) Identifiability: an intangible asset is identifiable when it: [IAS 38.12] is distinguishable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or emerges from authoritative or other legal rights, regardless of whether those rights are transferable or divisible from the entity or from different rights and obligations (Deloitte Global Services Limited, 2017)

Examples of Intangible assets:

Computer software, patented technology, databases and competitive advantages trademark, trade dress, newspaper mastheads, internet domains video and varying media material, (e.g. films, TV programs) customer lists, mortgage servicing rights authorizing, royalty and standstill agreements, import quotas, franchise agreements, customer and supplier relationships (including customer lists) marketing rights.

1.2 Intellectual Property

Intellectual property is a general absolute depiction for the set of intangibles possessed and legally protected by an organization from outside use or usage without assent. Intellectual property can comprise licenses, trade secrets, copyrights, and trademarks or just ideas.

The idea of the intellectual property identifies with the way that specific products of human intellect ought to be managed the same protective rights that apply to physical property. Most developed economies have legal measures in place to ensure the two types of property. (Investopedia LLC, 2018)

1.3 Human Capital or Human Assets

Human capital is defined in the Oxford English Dictionary as “the skills the labor force possesses and is regarded as a resource or asset.” It incorporates the thought that there are interests in individuals (e.g., instruction, health, training) and that these speculations increment a person's efficiency.

Human Capital Accounting (HCA) involves accounting for the company's management and employees as human capital that provides future benefits. In the HCA approach, expenditures related to human capital are reported as assets on the statement of financial position as opposed to the traditional accounting approach which treats costs related to a company's human capital as expenses on the income statement that reduce profit. The purpose of this paper is to determine if people who are currently in the accounting field believe that human capital should be valued on the statement of financial position and if so, to examine where on the statement of financial position they feel it should be classified. (Bragg, 2018)

Human capital is the information, skills, capacities, and ability to create and advance controlled by individuals in an association. It is a part of intellectual capital—the stocks and streams of information accessible to an association—and is related with the ideas of social capital—the learning got from connections inside and outside organization—organizational capital, the systematized learning controlled by an organization which is stored in databases, manuals, and so on. It henceforth adds to the market estimation of an organization through its commitment to intellectual value, which additionally represents the estimation of brand and notoriety. Human capital is learning that changes raw materials and makes them more significant. Intellectual capital incorporates the ability of staff, the estimation of exclusive information and processes, and the estimation of relationships with clients and suppliers. Conventional accounting neglects to measure the estimation of intellectual capital, however markets compensate it. (Passard C.Kaitlin & Vyas, 2012)

Human capital comprises of the aptitudes, skills, and capacities of people and team. These range from particular specialized technical skills to "soft" skills, similar to charismatic skill or the capacity to work efficiently in a group. A person's human capital can't, in a legitimate sense, be claimed by an organization; the term in this way alludes to singular ability as well as to the aggregate aptitudes and aptitudes of a workforce. Society, alongside the economy, has experienced an enormous change from an industrial age, overwhelmed by the rationale of manufacturing and typified by the mechanical production system to a period of data and learning concentrated administrations that are moved by mental aptitude and the steady interest for development. (Felin, 2009)

2. Recognition of Human Assets

Nowadays, the accounting theories and professionals have been strictly censored for non-involvement of the human resources of the firm in the balance sheet. It has led to controversy among the accountants and professionals from other industries. According to Wood and Sangster (1999), one of the most remarkable limitations of financial accounting is the non-existence of the value of the employees in the organization. Recognition of assets is the process of assimilating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition. It is probable that any future economic benefit associated with the item will flow to or from the entity; and items cost, or value can be measured with reliability” (IASB, 2013, F 4.37 and F 4.38). For instance, by applying this accounting rule to the workforce of the firm, we can admit that the future economic benefits inflow to the entity is achieved, however, the fact that reliability measures of the future benefits rise cannot be measured in its fairest rate leads to derealization of human resource as an asset. (Jaarat, 2013) Another reason for not realizing the HR as asset is due to the fact the employees cannot be owned by an enterprise within the legal boundaries. On the other hand, the plot is different, and football players are considered as an asset of the country. The reason for such a contrasting accounting application difference is that the once transfer fees have been paid and contracts are signed, until the contract period expiry date player is being controlled by the club. If we dive deeper, the club can even sell/transfer/rent a player before the expiration of the contract in order to generate a revenue, which accepts  both factors of recognition rule which were discussed previously.

How the HR can be recognized

• It meets the definition of intangible assets

• It is likely that future economic benefits attribute to the asset will flow the entity

• The cost of assets can be measured reliably

3. Evaluation of Human Assets

3.1 Human Resource Accounting (HRA)

Human Resource Accounting (HRA) includes representing costs identified with HR as assets instead of traditional accounting. Since the start of the globalization of business and administrations, human components are winding up more critical contribution for the accomplishment of the organization. The solid development of International Financial Reporting Standards (IFRS) empowers the thought of elective estimation and announcing guidelines and lends support to the likelihood that future financial reports will incorporate non-customary estimations, for example, the estimation of HR utilizing HRA techniques (Berkowitz, 2001). It encourages the management to outline approaches for HR of their organizations. HRA is a procedure for distinguishing and estimating information about HR. It will charge human asset venture over some time frame. It is not a new concept in the arena of the business world. Economists consider human capital as a production factor, and they investigate distinctive methods for estimating its investment. (Abdel-khalik, 2003)

3.1.1 Goals of Human Resource Accounting:

1) To give quantitative data on human asset for managerial decision with respect to procuring, creating, assigning, and keeping up HR in order to accomplish practical hierarchical destinations.

2) To decide the return on investment (ROI) on HR.

3) To give information for deciding the status of human asset whether it is preserved legitimately; regardless of whether it is

4) Acknowledging or draining.

5) To assist in the improvement of viable human asset management practices by grouping the financial sequences of these practices.

6) To convey the value of HR to the organization and the society. (BANERJEE, 2012)

3.1.2 Restrictions of Human Resource Accountings

1) Human being is mobile. They can't be possessed or held like other physical assets. Subsequently esteeming human asset is by all accounts doubtful.

2) There isn't generally accepted principle which makes it compulsory for organizations to disclose its human asset in a balance sheet. Even IASB has failed in delivering a sound international standard in this regard.

3) There is no accord among the experts as to the valuation of HR as the valuation relies upon an expansive number of unique variables not quantifiable in precise monetary terms. Consequently, the valuation needs objectivity and exactness.

4) In spite of all its criticalness and necessity, tax laws don't perceive human beings as an asset. Subsequently, human resource accounting remains only as a theoretical concept.

3.2 HRA Measurement Models (Measuring the Immeasurable)

Disregarding an extensive variety of inconsistencies among the specialists in the field of human resource and accounting with respect to the valuation of human asset and recording the same in the financial statements, there has been a significant commitment by researchers over the world for building up the different models so as to gauge the estimation of human asset.  Human Resource Accounting can be extensively classified as monetary and non-monetary value-based methodologies. The monetary methodologies are additionally delegated Cost Based Approaches, which fuse historical cost approaches, replacement cost approach, opportunity cost model, standard cost strategy, current cost purchasing power technique, and Value-Based Models grasp Hermanson's balanced marked down future earnings model, Lev and Schwartz display estimation of future earnings model, rewards valuation model, etc.

3.2.1 Historical Cost Model

This approach is also called as acquisition cost model. This strategy measures the association's investment in workers by utilizing the five parameters: recruiting, obtaining; formal preparing and, acclimation; informal training, Informal acquaintance; experience; and advancement. This model recommends as opposed to charging the expenses to profit and loss accounting it ought to be capitalized in balance sheet. The process of giving a status of asset to the expenditure item is called capitalization. In case of human resource, it is important to amortize the capitalized amount over a period of time, so here one will take the age of the worker at the season of enrollment and at the season of retirement. This method is the only method for human resource accounting which depends on sound accounting standards and arrangements (Arkan, 2016).

3.2.2 Restrictions of Historical Cost Model

1)The valuation technique depends on false suspicion that the naira is steady.

2) Since the assets can't be sold there is no autonomous check of valuation.

3) This technique measures just the expenses to the organization yet overlooks totally any measure of the estimation of the representative to the organization (Cascio, 1991)

4) It is excessively dreary, making it impossible to accumulate the related data with respect to the human values.

3.2.3 Present Value of Future Earnings (Lav and Schwartz Model)

This is the economic valuation of employees in view of the present estimation of future earnings, balanced for the likelihood of workers' death, separation, retirement. This method helps in figuring out what a representative's future commitment is worth today.

As indicated by this model, the estimation of HR is found out as takes after:

1) All representatives are classified into particular groups as indicated by their age and expertise.

2) Average yearly income is resolved for different age ranges.

3) The total earnings which each group will get up to retirement age are calculated.

4) The total earnings ascertained as above are discounted at the rate of cost of capital. The accompanying equation has been proposed for figuring the estimation of a representative cording to this model:


E(Vy) - the expected value for the human asset for a person his/her age Y and benefits age T,

Py(t) – probability of death,

T – time,

II – expected earnings for a person in period I,

Y – specified discount rate for a person.

3.2.4 Restrictions of Present Value of Future Earnings (Lav and Schwartz Model)

1) The measure is a target one since it utilizes broadly based statistic, for example, statistics of income return and mortality tables.

2) The measure doles out more weight to averages than to the estimation of a particular group or person (Cascio, 1991)

3) This strategy does not give the right estimation of human resources as it doesn't quantify their commitments to accomplishing organizational effectiveness. (Scarpello & Ledvinka, 1988)

3.2.5 Opportunity cost model (Hekimian and Jones model).

This model is otherwise called the "Market Value Method". This is a strategy for estimating the estimation of HR in light of the economist's concept of 'opportunity cost', where opportunity cost is the estimation of an asset when there is an alternative opportunity of utilizing it. In this method, centers there is no opportunity cost for those workers who are not rare. In that capacity just, rare individuals should shape some portion of the estimation of HR. Opportunity costs are considered as an asset value when the objective is for alternative utilization. Only scarce HR would have an incentive at a specific purpose of time. Opportunity cost is computed based on endeavors made by a few authoritative units, centers or departments (Heckiman, Jones 1990).

3.2.6 Restrictions of Opportunity cost model

The aggregate valuation of human asset on the competitive bid price might be misdirected and wrong. A person might be a significant individual for the division in which he/she is working and may have a lower cost in the offer when seen by different departments.

1) Just rare workers are incorporated into this method and thus different representatives may lose their spirit, as they are never considered.

2) It is hard to recognize the elective utilization of a representative in an association.

3.2.7 Hermanson's Unpurchased Goodwill Model

"In summary, at that point, there are two noteworthy purposes behind regarding interests in individuals as resources incorporate budgetary reports: First, present and potential financial specialists need such data to help evaluate the estimation of a business venture, and, second, interests in individuals fulfill the criteria for treatment as a benefit." (FLAMHOLTZ, 1982)

The goodwill method could be one way to take into consideration the human capital in the financial statements.

As per Hermanson (Roger H.), the estimation of human asset of an organization might be surveyed by capitalizing earnings in excess of ordinary earnings for the business or group of organizations of which the firm is a part. For instance, if the average return for owned assets in a specific industry is 10 percent and the firm has appreciated an 18 for each cent return in the course of the most recent five years on its owned assets of 20,00,000. At that point, its un-owned assets(HR) are thought to be esteemed at 16,00,000 since the benefit of 3 60 000 (i.e., 20,00,000 x 18%) is expected to be 10% of total owned and un-owned assets of 36,00,000. {This gives the estimation of un-owned assets of 16,00,000, i.e., 36,00,000 minus20,00,000). (Chand, 2017)

Essential impact factors which affect this goodwill are the management and leader aptitudes, social and individual attributes of workers, the information, inspiration and abilities of representatives, and additionally the relationship to clients and the (internal/external) reputation of the organization.

3.28 Restrictions of Hermanson's Unpurchased Goodwill Model

1) It is historically based and along these lines of restricted use as an indicator

2) Regardless of whether it depended on projected earning rates it would be no superior to the predicted earnings themselves

3) It assumes HR to be the total of all un-owned assets' making no allowance for un-owned assets other than HR or for the different bases utilized for expressing owned-assets on the organization's books

4) It certainly expects a zero an incentive for every single human asset in competitive circumstances since a positive esteem requires above average earnings.

3.29 International Developments in Human Resource Accounting

The resurgence of International Accounting Standards Board(IASB) since the most recent decade has encouraged a large number of international standards and in this manner, the IASB has been effective in meeting more than 130 countries to the new international standards famously known as International Financial Reporting Standards(IFRSs). The powerlessness of the IASB to outline a sound standard on HRA itself shows the complexities and decent varieties to perceive and report human assets in the balance sheet. The international standard IAS 38(Intangible Assets) and IFRS 3 (Business Combinations) perceive the significance of valuation for intangible assets yet don't particularly specify anything about the human capital. (Zülch & Hendler, 2017)

4. Bibliography

Abdel-khalik. (2003). Incentive Compensation and Human-capital assets. European Accounting Review.

Arkan. (2016). Human Resource Accounting.

BANERJEE, A. (2012). PreserveArticles. Retrieved from

Berkowitz, S. J. (2001). Measuring and Reporting Human Capital. Journal of Government Financial Management.

Bragg, S. (2018, may 13). Accounting Tools. Retrieved from

Cascio, W. (1991). Costing Human Resources.

Chand, S. (2017). Yourarticlelibrary. Retrieved from

Deloitte Global Services Limited. (2017). DTTL. Retrieved from

Felin, T. T. (2009). Journal of Human Resource Management.

FLAMHOLTZ, E. G. (1982). Rechnungslegung über Kosten und Wert des Humankapitals.

Investopedia LLC. (2018). Investopedia. Retrieved from

Jaarat, K. J. (2013). Human Resources Accounting Between Recognition and Measurement: An Empirical Study. Journal of Business Studies Quarterly.

Passard C.Kaitlin, M., & Vyas. (2012). Accounting for Human Capital. International Journal of Business and Social Science.

Scarpello, V., & Ledvinka, J. (1988). Personnel/Human Resource Management.

Zülch, & Hendler. (2017). IFRS 2017. Wiley.

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