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Discuss whether "human capital" is an asset of a business or an expense. Use the definitions and the recognition criteria of assets and expenses according to SAC 4, to show which of these elements "human capital" could be classified under.

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Introduction

(a) Discuss whether "human capital" is an asset of a business or an expense. Use the definitions and the recognition criteria of assets and expenses according to SAC 4, to show which of these elements "human capital" could be classified under. Provide examples to support your discussion. The increased importance of "human capital" in the business world is undeniable. With more and more companies recognizing "human capital" as part of their intangible assets to gain higher market value. It only seems logical to better understand the definition of the term. So what is "human capital"? Can a value be put on humans? If so, can this value be measured and included in the balance sheet of a company? Is this recognized as an asset, or is it otherwise an expense? Are there expenditures on "human capital?" If so, do we debit the asset account or the expense account? To better equip us in the search, the Statement of Accounting Concepts SAC 4, 'Definition and Recognition of the Elements of Financial Statements', provides the essential information regarding the characteristics of Assets and Expenses. ...read more.

Middle

As "human capital" has qualified as an asset, it can now be tested to see whether it is recognized as one under these regulations: * It is probable that the service potential or future economic benefits embodied in the asset will eventuate. - Probable is now generally recognized as a greater than 50% chance of the event occurring. As a result, it can be assumed that the training and knowledge of the employee would be at a greater then 50% capability of contributing any type of economic benefit to the business. * The asset possesses a cost or other value that can be measured reliably. -The "human capital" is providing economic benefits and the price the entity will pay usually is the expectations of their future economic benefits. This price would take in for granted any directly acquired attributable costs. Such as, professional fees in training the employee up to its working condition. Human capital has been proven to be eligible to be classified as an asset. However, there is an expenditure on "human capital which makes it eligible of being an expense. ...read more.

Conclusion

Mr. Salter's view on downsizing is that he feels the cut will result in a loss of knowledge, motivation and productivity. The downsize will result in a sudden increase in profits, but as a result it will indirectly affect the company's status. By cutting staff it might mean they are cutting their sales. Employees of experience which once drew in customers and more importantly sales are now replaced by inexperienced and cheaper ones. The staff could end up losing motivation by the cut, or in contrast it could eventuate in new unwanted pressures. As Mr. Salter commented, "its not a cash cost" but rather a psychological cost deriving from the employees with which the entity will be made to endure the expense. Although it is seen as an expense to the company, it does not pass the definition of an expense from which flows in actual decreases or increases can be accurately measured. Therefore, it cannot be included directly in the financial statements as a non-cash cost, but indirectly the entity can still measure the cost in the loss in sales leading to a drop in profit. ?? ?? ?? ?? 1 ...read more.

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