Human capital valuation in modern organizational accounting practices

Value of Human Capital

It has been said: "Whilst accountants around the world continue to ignore the value of human capital in measuring business assets and the management of resources, ratio analysis and the interpretation of financial statements is bound to be fraught with difficulties and has little real meaning." The objective of this work is to state either an agreement or disagreement with this statement based on research, readings and the experience of the writer of this work.

HUMAN CAPITAL

Human capital is defined in the work of Navin Bhutoria entitled: "Valuation of Human Capital" as "the knowledge that individuals acquire during their life and use to produce goods, services, or ideas in market or non-market circumstances." (nd) Bhutoria points out that the "fundamental source of wealth creation - human capital - is seriously under managed in most organizations. That is because most organizations' systems of measurement, shaped in part by accounting and reporting requirements, are still unduly influenced by measurement concepts dating back to the industrial era when physical capital was the primary source of wealth creation." (Bhutoria, nd) Bhutoria states that these methods and their use as systems of measurement are."..roughly analogous to steering a car with the rear view mirror." (nd)

II. THREE ERAS of ECONOMIC HISTORY

Bhutoria states that three eras of economic history have existed which include: (1) the agrarian era; (2) the industrial era; and (3) the knowledge era. (nd) the industrial era was defined by the primary source of wealth being machinery and natural resources however, the knowledge era has as its' primary source of wealth that of human capital termed to be "the embodiment of productive capacity within people." (Bhutoria, nd)

III. SUMMARY & CONCLUSION

It is certain that the valuation of human capital in the majority of organizations has fallen short. Management strategies are all too often focused on accounting strategies instead of the proper investment and facilitation of employing that which is highest value in their strategies and that being the proper management, training, and long-term investment into the organization's human capital. Human capital is quite clearly noted in this brief review as the company's 'potential' for profit and incidentally one that has received very little in the way of thought, consideration or strategic focus traditionally and historically in today's organizations. While some fields and professions such as the medical and specifically the nursing profession has already come face-to-face with in terms of its failings to strategically invest in its human capital other fields and professions are only beginning to come to the realization that they too have been responsible for failing to properly consider the value of human capital in their organization.