Putting a Dollar Value on Human Assets

Abstract

EVERY YEAR industry spends billions of dollars acquiring and developing longterm human capabilities. However, accountants treat all such outlays as operating expenses that assume their benefits are confined to the short term. Because of this practice, the management of human resources is impeded in the following ways: 0 Human resources are not reflected in the firm's capital budget. In contrast to physical plant and equipment, it is therefore more difficult for the manager to justify funds for building human assets since these expenditures are currently charged against revenue in one year. When an organization is, in effect, investing more heavily in creating new human capabilities than they are being consumed, conventional accounting practice actually overstates operating expenses and understates profitability. 0 Conversely, improper maintenance of human capabilities before the projected replacement date may not be detected. If unmeasured human assets expire prematurely, write-offs are not recorded; when human capabilities are being liquidated more rapidly than they are being created, conventional accounting practice understates operating expenses and overstates net income. 0 It is also difficult to determine how well human assets are being utilized in various projects. One of the most commonly employed measures of overall efficiency is the return generated on invested capital (ROI). However, investments in human resources are not included in ROI calculations for evaluating current or future projects.