Should Investments in Human Capital Appear on the Balance Sheet?
Often we hear that people or employees are claimed as the greatest company assets, even though they don't appear on the balance sheet, unlike other capital investments that are present there.
Under US accounting conventions (US GAAP), human capital is considered as costs rather than benefits. Human capital has no asset value and does not appear in the balance sheet. Improvements in human capital such as by training is recorded as expenses. Such is not the case with machinery, where improvement costs can be capitalized as future benefit.
Rouen (2019) argues that we should find a universally accepted way to track the management of human capital. We need a new way to account for labor so that we can track and reward companies for how they actually treat their employees and invest in them.
The lack of reporting on human capital actually discourages investing in workers. Improvement is needed.
We need improved disclosures to know the effects of such investments. Companies should report their investment in training just like they do their investment in capital.
Detailed information on how much is spent and which types of employees get training provide shareholders with a sense of how the company sees the future while further disaggregating operating costs. A disclosure like this would also encourage firms to invest in their workers and communicate to shareholders that, while the accountants require that training be reported as an expense, managers see it as a long-term bet on their most valuable assets.
Source: Rouen E. 2019. "The Problem with Accounting for Employees as Costs Instead of Assets", HBR, October 2019.