Financial and tangible capital has always been focal point around accounting regulations, business models and accountants/finance daily routines. With the changes in the successful business models, a new emerging wave of service sector firms on the top of world's list, human and other intangible capital is now seen as a key driver of organisation success as their business models are centered on employees, intellectual capital and technology.
Below is the list of world top 20 public limited companies. Mostly are related to service sector and their success is based on intellectual capital, technology and employees.
Source: https://www.forbes.com/global2000/list/#tab:overall
People’s talent, skills, personal attributes and creativity affect current organizational performance and shape its future. Human capital is therefore an essential building block for creating value. How an organization uses or affects human capital is a key part of its strategy and business model. Human capital plays an essential part in a range of business activities. It is vital for all forms of innovation, whether in process improvement, the design and manufacture of products, or the development of new or improved services. The way that people within an organization think or act differentiates that entity from another.
There are various trends that drive the importance of human capital to business. As our economy is becoming increasingly more knowledge-intensive, research shows that a more significant share of economic growth is attributable to intangible capital rather than fixed assets. For this reason, the UK Government and organizations like the OECD and World Economic Forum have already developed methodologies to assess the ‘stock’ and quality of human capital countries have access to.
Alan McGill, Partner, PwC, forward to Pensions and Lifetime Savings Association (formerly National Association of Pension Funds Ltd) report, Where is the workforce in corporate reporting? PLSA (formerly NAPF), June 2015
Reporting Issue
The importance of human capital is increasing day by day and so is the need for its effective reporting. The intangibles are discussed in IAS 36, IAS 38 and IFRS 3 (Goodwill), where it narrates the related measurement, accounting and disclosure requirement. IASB describes the eligibility criteria for intangibles in IAS 38 as below.
- Identifiable
This is capable of being separated from other assets, may be sold, leased, transferred, rented either individually or in combination with a related contract; or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or other rights or obligations.
- Controllable
- Future Economic Benefit
In nutshell, Reporting as per the IASB or FASB are much more transaction oriented when comes to human capital i.e. employee benefits, retirement benefit plans and compensation. Reporting of human capital on broader terms has been voluntarily so far, except with some regional regulatory requirements.
NEW DEVELOPMENT IN US. SECURITIES AND EXCHANGE COMMISSION
The US. Securities and Exchange Commission recently published its proposal for the "Modernization of regulations" in August 2019. From many other recommendation, it also proposes extended disclosures for the Human Capital Reporting.
You may find a copy of this proposal on below link,
https://www.sec.gov/rules/proposed/2019/33-10668.pdf
The proposal is of 116 pages but you can find the related part from page 44-54.
The aim of the SEC proposal is to make such explicit disclosures that enable the shareholders on how the recourse is being managed by the company.
Currently SEC asks registrants to disclose the number of employees only but with this proposal it shall include many other factors as well which the company shall consider material to their business. SEC shall apply the principle based approach here instead of rule based when it comes to materiality of this matter..
Below is the reason which SEC described in the proposal for this change which is very much the same which we have already described above.
The proposed changes would require registrants to describe
their human capital resources, including any human capital measures or
objectives that management focuses on in managing the business, to the extent
such disclosures are material to an understanding of the business. The list of
further disclosures for consideration may include, but is not limited to, the
following;
- Measures or objectives that address the attraction, development, and retention of personnel;
- The number and types of employees, including the number of full-time, part-time, seasonal, and temporary workers;
- Measures with respect to the stability of the workforce, such as voluntary and involuntary turnover rates;
- Measures regarding average hours of training per employee per year;
- Information regarding human capital trends, such as competitive conditions and internal rates of hiring and promotion;
- Measures regarding worker productivity;
- The progress that management has made with respect to any objectives it set regarding its human capital resources; and
- The same disclosure requirements for registered issuers based outside the U.S.
The above reason which SEC mentioned for this change and the required disclosure is surely a game changer once it is finalized.
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