Human Capital Expenditures
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Do you think that expenditures on human capital should be treated as an asset or an expense? Why or why not? Explain. And what expenses would you include, if any? Is this consistent with the matching principle? If you feel they should be an asset, how would you recommend expensing them, i.e. depreciation/amortization method? Do you feel that allowing companies to capitalize human capital expenses could have a potential negative effect?
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Solution Summary
The solution discusses one's opinion on how expenditures on whether human capital should be treated as an asset or as an expense and what expenses would be included if any. Its consistency with the matching principle is explained and if they should be treated as an asset, in what method should they be expensed (e.g., depreciation, amortization method). An opinion on whether or not a potential negative effect if companies are allowed to capitalize human capital expenses is also explained. References included.
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Do you think that expenditures on human capital should be treated as an asset or an expense? Why or why not? Explain.
Human capital includes the know-how, capabilities, skills and expertise of organization members. It is an intangible and e3lusive resource owned by the people and not by the organization. If valued employees leave an organization, they take their human capital asset with them, including any investment made by the company in training and developing the people who left.
Human capital should be treated as an asset since it benefits to organization performance and increase the productivity. It is a critical element of modern businesses and its importance can be equated to physical assets. Ignoring the proper disclosure and sound measurement of human capital will mislead the manager to make improper decisions and will reduce the usefulness and reliability of the statements. However, financial statements lack proper reporting, measurement and disclosure on human capital. When human capital has replaced the function of traditional assets, the financial statements will not be able to satisfy the demand of creditors, investors and the researchers. Since the accounting system believes that over estimating will distort the reality of the accounting reports, it treats the human capital cost as an expense and not an asset.
And what expenses would you include, if any?
Some of the expenses that can go with it can be expenses related to company's training programs in order to add value of employees in the future which is like a human investment. Others ...
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