· 2 min read · News

Human value is too intangible for the balance sheet


How do you assess the value of your workforce? Is it possible, or even practicable, to use conventional accounting techniques to measure human capital? Its a debate that looks likely to continue for some time, Stefan Stern discovers

Nigel Sleigh-Johnson, head of financial reporting, Institute of Chartered Accountants

There is a lot of interest at the moment in valuing so-called intangible assets, including people, particularly in the US and internationally. In the UK it is recognised that staff are a major asset but it is very difficult to consider them like any other asset. At the moment our reporting requirements wouldnt permit it.

When you make an acquisition, that cost can be put down on a balance sheet. In rare cases, for example with footballers, there is a ready market in people as assets, and there are frequent enough transactions to look at to establish values. The problem is that businesses dont really control their employees in the same way. And there is no readily available market for people in the way there is for patent rights, for example, where clear costs are involved.

It is recognised as a shortcoming of accounts that many intangible assets cannot be measured satisfactorily there is a gap between the market capitalisation and the true value of all their assets. So far, more progress has been made measuring intangibles other than human capital.

Deborah Doane, head of corporate accountability programme, New Economics Foundation

We need smarter measurement of human capital, and we really need to try and make the intangible tangible. Today up to 70% of the value of an organisation could be human capital. We should acknowledge this principle.

Measuring human and social capital is extremely difficult. Establishing a methodology is going to take a long time. One thing we could usefully do is measure the financial value of trust, and lots of different organisations are looking at this. The problem is that it is proprietary KPMG and other big firms are developing their methodologies, but they remain their own confidential product. We really need transparency so that the methodology can be shared.

It will take years of experimentation to achieve a robust method. Human capital is made up of so many elements: trust, how people are valued, how much they are invested in, the quality of their relationships with other stakeholders, training and development, equal opportunities, chances for promotion and so on. But if we are getting closer to an understanding that says people are not just an expendable component, then that is progress.

Stathis Gould, head of technical issues, Chartered Institute of Management Accountants

There is no robust way of quantifying people as assets on a balance sheet. But best practice reporting can include lots of different types of measurement: levels of education, competencies, expenditure on training, employee turnover, length of job tenure.

In modern knowledge-based organisations most of the asset base is the staff. It is in your own interest as an employer to let the market know what your capabilities are, and the qualities of your staff, particularly at a senior level.

Swedish company Skandia publishes an intellectual capital statement which includes information on its human capital. Post-Enron this sort of transparency is vital. The problem is that this is very subjective. It is not audited like financial accounts. But it is better than nothing. Good companies are beginning to do this and they have nothing to fear from being more open, although there may be commercial sensitivities involved in being too open.