Introduction

A common claim or statement made by many organisations is, “ Our greatest and most valuable asset is our people. “ Organisations always need people and their efforts in order to operate. This statement however could fall under the category of marketing or public relations. When viewed from a purely financial reporting or accounting perspective however, the statement would be considered as incorrect or misleading. When organisations produce their financial reports, people are not generally recognised as an asset, but rather as an expense. In order to understand this aspect of reporting people as an expense in financial reporting, defining the purpose and usage of the Statement of Financial Position needs to be understood. It will also be necessary to define what an asset and an expense is in terms of financial reporting. A major reason for defining a person as an expense rather than an asset is as a result of the difficulties involved in the measurability or estimating a value of human capital. This issue will also be discussed. There are however some possible exceptions when defining a person as an expense as a result of the evolving nature of accounting practices and the changing nature of the type of information being reported which will also be examined.

The Nature of the Statement of Financial Position

An important and critical report in relation to producing useful financial information to users is The Statement of Financial Position. The purpose of a statement of financial position as defined in SAC 2 (AASB 2002) is:

To disclose information in regards to resources an entity has control over, that is its assets, relevant to users in order that they may make informed financial and economic decisions as to the allocation of scarce resources.

The purpose of this financial report is to communicate information regarding the financial position of an entity at a particular point in time in an understandable format. The users of this information need to be able to recognise the relative liquidity of its assets.

From the above definition and usage of the statement of financial position, a comprehensive list of the entities assets are to be produced. People or personnel are not listed in this financial statement as an asset. The reason this is so lies in the ability to obtain and value the relative liquidity of assets in this information. Liquidity may be defined as:

The ability if an entity to satisfy short-term obligations as they arise.

In simple terms, the ability to convert assets into cash in order to pay any obligations the entity may encounter as they arise. How then is it possible to convert personnel (if they are to be considered as an asset) into cash in order to meet obligations? It is not possible for an entity to place a cash value on personnel in order that this person may be converted onto ready cash at short notice. For this reason, people are not listed as an asset in the statement of financial position.

What is an Asset

An asset as stated in SAC 4 is:

Future economic benefits controlled by an entity as a result of a past transaction or event.

The three crucial elements of an asset therefore are future economic benefit, controllability by the entity and having a past transaction or event occurring. It could be argued that a person employed in an organisation meets with these three criteria. A person has been employed under certain conditions, past event, a person must meet certain conditions of employment as layed out by the organisation, controllability, and through effort and expertise assist in profit generation for the entity, future economic benefit. Although all the criteria for the definition of an asset are met, people are not recognised as assets in financial statements. The reason for this is that, using professional judgement; a reasonable estimate cannot be made as to the amount involved. Measurability thus becomes a governing factor for an accountant in deciding on the issue.

A new CEO employed by an organisation may cause that organisation share price to rise as a result. This could be used as a guide as to the measurement on the value to place on the new CEO as an asset. The organisation then would need to recognise the value as an asset of other management in luring the new CEO, and then the problem arises as to how to value in terms of an asset non management personnel. It becomes clear as to the problems associated with placing a monetary value on human capital. It is for this reason people are not recognised as an asset in financial reports.

What is an Expense

An expense as defined in SAC 4 is:

Consumptions or losses in future economic benefits in the form of reductions in assets or increases in liabilities of the entity.

A crucial element in the above definition is consumption or loss in future economic benefits. The cost of employing a person by an organisation is seen in the form of as salaries, insurance, sick leave pay, superannuation, bonuses etc. These out goings are all measurable or quantifiable to the accountant and can be offset against the profit line of the entity. It is reasonable for an accountant to make a more realistic estimate on the value of human capital once personnel are recognised as an asset.

What is Measurability

It is necessary to examine the term “measurable”, as it is a crucial element in recognising human capital as an expense rather than an asset. Measurability, as stated in SAC 4 is:

Assets will have a cost or value that can be measured reliably in accordance with the accounting model used.

It is also necessary in understanding measurability to examine the term reliable. Reliability when used in measurement, as stated in SAC 3 is:

It is important that financial information be reliable. Information may be of a type, which bears upon user decision making, that is be relevant, but also be so unreliable in nature as to be useless or misleading.

From these key concepts of measurability, it can be seen that reliably measuring the value of an asset in the form of human capital poses great difficulties for the preparer of financial reports. However reporting personnel as an expense in the form of a reduction in asset can more readily be reliably measured.

Possible Exceptions to the Rule

In the vast majority of cases, people are recognised as expenses rather than assets in financial reports. It is worth noting however that accounting practices undergoes continual improvements and evolution. As societies move rapidly toward a more information-based economy, accountants will be faced with the challenges of providing reliable means of measuring the value of human resources for financial reporting purposes.

Let us say for example, an accountant today was requested to produce a statement of financial position for a slave-trading organisation that operated in history when this practise was accepted and legal. The entity buys people at a price, past transaction, then transports them for sale in the Americas, control by the entity, and sells them for profit, future economic benefit. It would be reasonable under these circumstances to expect the accountant to reliably measure the value of people as an asset in the financial report.

Another case would be the financial reporting of a professional sporting entity such as Manchester United Football Club. Players are bought via transfer fees and sold via the same process. The three criteria for recognition of an asset being future economic benefit, controllability and past transaction would all clearly be satisfied. Being able to reliably measure the value of the players or in this case asset would also be possible on the basis of transfer fees. Under these conditions, it would be reasonable to expect the accountant to reliably measure the value of the players or personnel for financial reporting purposes.

Conclusion

Many organisations state that their greatest and most valuable asset is their people. This statement should possibly fall under the category of public relations. When viewing personnel from a financial reporting perspective, they are recognised as expenses rather than assets.

A key component of a statement of financial position is the disclosure of liquid assets that may be converted to meet short-term obligations of the entity. It creates great difficulties in valuing people in terms of liquid assets and is one of the reasons people are listed as an expense on a statement of financial position report.

An asset must meet with three main criteria, an event or transaction that has occurred in the past, controllability by the entity and the producing a future economic benefit. Although it could be argued that human capital meet with all three criteria, it is not an easy task to reliably measure the value of personnel. This is another reason for recognising personnel as expenses.

An expense is a consumption of future economic benefit in the form of a reduction in asset or an increase in liability. With respect to personnel, it is possible and more reasonable to measure the consumption of economic benefit in terms of salaries, bonuses, superannuation etc in the form of reduced assets.

Although the majority of organisations recognise people as an expense in financial reports, exceptions to this practice may be possible. One such example is the reporting of a football player in a professional team bought and sold via transfer fees. Such a player could be listed in a statement of financial position as an asset because the three criteria of an asset could be satisfied and reliably measured.