Introduction
Human capital is the sum of a company’s workers’ valuably transferable skills, knowledge, and experience. Since a company’s human capital is an irreplaceable resource, that capital must be developed via various educational and training programs to be used effectively (Caucutt & Lochner, 2020). Notwithstanding this, there is a lack of agreement in the accounting literature about the appropriate manner to record human capital.
The current paper uses the accounting viewpoint on human capital to study how investment management in employee training is represented in financial statements. The focus of this investigation is on how these investments may be managed. In addition to this, the research examines the question of whether or not workers who have received enough training are assets, as well as the question of how the worth of such people should be reflected in the books.
Accounting Treatment of Investment in Human Capital
Human resource management requires the company to invest resources and effort, which should be reflected in accounting. At the same time, investments such as employee training can be represented in various ways, which depend on the organization’s preferences and context. According to Vithana et al. (2021), human resource expenditure, which includes employee benefits and training, is generally considered and designated as an expense in the income statement. However, this approach emphasizes investment in training as a short-term cost, although it can bring long-term benefits to the company and its employees.
Another approach to the accounting treatment for investment in human resource management, including training, is capitalization. Vithana et al. (2021) indicate that although people are seen as critical assets, their investments are almost not capitalized. However, a study of technology companies conducted by Tadić and Barać (2022) showed that organizations capitalizing on human resource expenditure have an advantage, treating them as intangible assets.
Therefore, when this approach is chosen, investments in employee training are considered more from the point of view of the company’s assets. The organization’s preference for one of the approaches is determined from the context – for example, expectations of the training results and the significance of the benefits it will give. Fairly displaying the company’s expenses is necessary to inform investors and other stakeholders.
Definition of an Asset and Trained Employees
An asset is everything a corporation owns, has a quantifiable economic worth, and is anticipated to bring future economic advantages. According to Karim et al. (2019), employees who have received training and satisfy the requirements of this definition because they may be valued economically and possess the knowledge and skills necessary to contribute to a business’s success are considered valued employees. It is possible to measure the worth of a firm’s trained workforce by comparing the amount of money spent on training individuals to the profit the company anticipates making.
The value of workers who have received training may be recognized as an intangible asset on the balance sheet. The value of employees who have received training may be considered an asset. However, the definition of an asset also indicates the characteristics of the company’s ownership. Since employees and their knowledge are not owned by the company, they are not an asset from an accounting perspective.
Accounting Treatment of the Value of Trained Employees
If the value of trained employees can be reliably determined, it can be recorded as an intangible asset on the balance sheet. Such assets correspond to characteristics such as identifiability and the possibility of profit or benefit (“IAS 38,” n.d.). They are measured at cost, and then companies can apply revaluation models. Intangible assets are also “amortised on a systematic basis over their useful lives” (“IAS 38,” n.d., para. 1).
If trained employees meet the criteria established in the standards, they can be considered intangible assets. However, this practice is uncommon and requires significant justification to be presented to management and potential investors. Moreover, employees are controlled by the company only within working relationships. Assessing the duration of their knowledge’s relevance is challenging, making it difficult to consider them an asset.
Conclusion
In conclusion, the paper considers the idea of human capital and how its potential may be expanded by pursuing various forms of education and training. On the other hand, the academic literature does not agree on how human capital should be reflected in an organization’s financial accounts; hence, there is no universally accepted method. The accounting treatment of human capital and employee training costs in an organization’s financial statements is the primary topic of the investigation that is presented in this article.
The research suggests that even properly trained employees should not be considered assets whose worth can be measured and represented in financial statements. Nevertheless, investing in the training and development of people is one of the most effective strategies for growing a company’s human capital. Investing in people is one of the most productive ways for a business to grow. How investment in employee training is recorded in the books relies on the nature and goal of the training if training expenses are related to production costs.
References
Caucutt, E. M., & Lochner, L. (2020). Early and late human capital investments, borrowing constraints, and the family. Journal of Political Economy, 128(3), 1065–1147. Web.
IAS 38 — Intangible assets. (n.d.). Deloitte. Web.
Karim, M., Choudhury, M., & Latif, W. (2019). The impact of training and development on employees’ performance: An analysis of quantitative data. Noble International Journal of Business and Management Research ISSN, 3(2), 25–33. Web.
Tadić, I., & Barać, Ž. A. (2022). The role of human capital investments in business excellence of Croatian companies. Economic and Business Review, 24(3), 161-170. Web.
Vithana, K., Jayasekera, R., Choudhry, T., & Baruch, Y. (2021). Human Capital resource as cost or investment: A market-based analysis. The International Journal of Human Resource Management, 34(6), 1-33. Web.
