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JHRCA
14,1 Exploring the HRM/accounting
interface on human assets
The case for artefact-based asset
28 recognition criteria
Tony Tollington and Nevine El-Tawy
Brunel University, Uxbridge, UK
Abstract
Purpose – This paper seeks is to enhance our understanding of intangible recognition by embracing
an artefact-based approach.
Design/methodology/approach – The paper presents an artefact-based approach to intangible
asset recognition, an artefact being a physical and visual representation (typically, documentary) of
expended human intellectual and physical creativity. This output orientation (what people create:
artefact-based outputs) is compared to an input orientation (the investment inputs in human “assets”)
using artefact-based asset recognition criteria that have already received some exposure in the
marketing literature in respect of brands.
Findings – Emphasis is placed on outputs, i.e. what people create, rather than on the more familiar
input orientation, which focuses on investments in human assets. When compared to an output
orientation, the more familiar input orientation is an unsatisfactory basis on which to recognise human
assets.
Practical implications – The asset recognition criteria provide a useful checklist by which to
delineate an intangible asset from an expense.
Originality/value – The criteria have already been applied to brand assets in the marketing domain.
It is now being applied for the first time to human assets.
Keywords Human capital, Intangible assets, Human resource management, Accounting
Paper type Conceptual paper
Introduction
We start from the premise that it is what people create (human resource (HR) outputs),
rather than the investment in people themselves (HR inputs), that constitutes a
human asset for financial reporting purposes. For many in the HR management (HRM)
domain this premise would be unacceptable, since “Our employees are our most
important asset” is a common refrain amongst senior business executives, even if some
people disbelieve them (Lancaster, 1995). Others will point to the obvious
chicken-and-egg-type argument: that an investment in a human asset is a priori to
what they subsequently create. However, whilst an HR input focus continues to flourish
in the HRM literature (investments in training, recruitment, retention, etc.), in the HR
accounting (HRA) literature it has produced no discernible outcome in terms of the
Journal of Human Resource Costing & increased disclosure of human assets on the balance sheet (with the possible exception
Accounting of footballers’ transfer fees). In the paper, we compare the above HR input and
Vol. 14 No. 1, 2010
pp. 28-47 HR output approaches and present the case, instead, for the capitalisation of separable
q Emerald Group Publishing Limited HR outputs based upon the accounting recognition of artefacts. In this latter regard
1401-338X
DOI 10.1108/14013381011039780 (and to quote one reviewer), we are not so much concerned with the level of stringency
in the suggested model but rather of the possibility to contribute to new ideas – how HRM/accounting
to recognise assets. interface on
human assets
Locating the paper in the literature and establishing a motive for it
It is well known that the legalistic, stewardship-centred, historical foundation of
financial reporting (Paton and Littleton, 1940) has evolved over recent decades to
embrace more of an economic decision-usefulness stance (IASB, 2001). The marriage of 29
these two disciplines is, for example, represented in a definition of an asset as
“transactions or events” and “future economic benefits”, respectively, (ASB, 1999).
However, it is an uneasy marriage and one that has previously been critiqued in respect
of asset recognition (Schuetze, 1993; Samuelson, 1996). We now add to that critique
from a human “asset” perspective for two important reasons.
First, HR inputs into, for example, a successful advertising campaign could be said
to comply with the above two definitional requirements, as reinforced by the
value-relevance literature in respect of “future economic benefits” (Hirschey and
Weygandt, 1985; Holthausen and Watts, 2001). And so to negate this apparent asset
status one can turn instead to the “separability” requirements of IAS38 (IASB, 2004) to
perhaps argue that, despite this definitional compliance, advertising is an expense, not
an asset, because it is inseparable from its related product or service. However, even
here it is possible to argue to the contrary: that advertising can be made separable by
being copyrighted (the legal, physical and separable HR output) and that it can produce
economic benefits beyond the expiration of the advertising campaign, for example,
as training material (another HR output) or even as film rights (for example, www.
comparethemarket.com, and its current meerkat advert). We can surmise from this
example and others (Aboody and Lev, 1998 on software “assets”) that a definition and
rule approach to asset recognition is too flexible a tool for the purpose of accurately
delineating the boundary between an intangible asset and an expense. We look
critically at that boundary when applied to separable HR outputs. In this regard, we
draw upon both the HRA and HRM literatures.
Second, as will be evident in the next section of the paper, it is relatively easy to
critique the definition of asset in all its variations over time, but harder to be
constructive in terms of an alternative approach. So, we try to be constructive through
the use of artefact-based asset recognition criteria that have already received some
exposure in the marketing literature in respect of brand assets (El-Tawy and
Tollington, 2008). We use those same criteria here but this time as applied, in general, to
the recognition of separable HR outputs, notably, those outputs that sit on the boundary
between an asset and an expense. We are particularly interested in those intangible
assets that are the result of intellectual creativity, as physically and separably
represented by an identifiable artefact, preferably where this is legally supported for
the purpose of establishing who has control over it. These two observations provide a
brief pointer to the next two sections of the paper before presenting a summary in the
final section.
Before we continue to he first of these sections, however, we need to explain what is
meant by the recognition of assets based on a legally supported artefact because this
simple idea does not currently appear as asset recognition criteria in either the HRA or
HRM domains – a contribution of this paper. A further contribution is that any
application of the proposed artefact-based asset recognition criteria would be common
JHRCA to all assets. Therefore, an inconsistency would be removed between the definition
14,1 basis for the recognition of all assets, which is one that currently excludes separability
from the asset definitions, and the IAS38 rule basis for the recognition of intangible
assets, which is one that currently includes separability in those rules. From our
viewpoint, to repeat, there is just one basis for all assets, that is, asset recognition
criteria centred upon legally supported artefacts, as explained next. An artefact is a
30 physical and visual representation, typically documentary, of expended human
intellectual and physical creativity.
In the accounting domain, artefacts already exist in terms of invoices, bank
statements, stock issue notes, payroll slips and similar physical records relating to
millions of disparate transactions. These artefacts are often standardised and
pre-numbered for audit verification purposes. In addition to these artefacts, accountants
will occasionally rely on non-standardised artefacts, such as a county court judgement
(order). What we argue here is that there could be a greater use of non-standardised
artefacts for intangible asset recognition purposes, for example, a brand that possesses a
physical and legally recognisable trademark registration document (the artefact). That
said, the accounting regulators would need to be very careful about what constituted an
acceptable artefact as well as the “acceptable” person creating it. For example,
accountants already accept valuations of pension fund assets for accounting disclosure
purposes but, generally, only from a professionally qualified actuary.
HRA literature
HRA (Brummet et al., 1968, 1969a, b) is based on the capacity of human beings to create
economic benefits and therefore being seen to possess a value (Hermansson, 1964)
similar to most of the other assets of a business, except perhaps in terms of sentence.
The problem with this approach is that even if one accepts a measurement of value as
the basis for asset recognition, determining a value for a human asset it is a construct
for which there are, at best, weak empirical measures (Scarpello and Theeke, 1989,
p. 267). Therefore, research approaches have often utilised surrogate HR output
measures instead, for example, composite non-financial measures (Likert and Pyle,
1971; Catasús and Gröjer, 2006; Pedrini, 2007) that included job satisfaction indices and
labour turnover rates (Bassett, 1972), often directed towards decision making also
(Harrel and Klick, 1980). Good science, though, requires that any surrogate measures
proposed for a construct should be tested to demonstrate that they are proper
substitutes and that they can be reliably measured. Generally, this was not the case
historically and as such most attempts to model HRA conceptual frameworks simply
deteriorated into mathematical exercises (Gambling, 1974; Friedman and Lev, 1974;
Jaggi and Lau, 1974). As a consequence, there were calls for more empirical research
with better experimental controls (Sackmann et al., 1989; Johanson, 1999) as well as
calls for HRA research to be abandoned (Scarpello and Theeke, 1989). However, whilst
HRA research perhaps progressed at something less than a snail’s pace in the 1980s
and 1990s (Turner, 1996), and continues to be “not a subject that will willingly
disappear” (Roslender and Dyson, 1992, p. 312). Gröjer and Johanson (1998), for
example, point again at the link to “decision making” as well as “book-to-market
values” (Lev, 2001, 2003) as two areas for research. More recently, HRA has attracted
renewed attention, for example, from the UK Government in the Accounting for People
report (DTI, 2003; Roslender and Stevenson, 2009).
Even with an HR input approach there is little attempt to justify the asset status of a
human related “asset” because the HR related expenditures are usually expensed or
subsumed within an asset, as with constructed assets (exceptions being, for example,
JHRCA capitalised footballer transfer fees). Consider, for example, an architect’s building plan:
14,1 an HR output and a legally protected artefact, where copyrighted. The related HR inputs
may be expensed (mostly, salaries) whether something or nothing is done with the plan,
or, it could be capitalised instead where the building is built, both options being at
the discretion of accounting practitioners. The point to note though is that, as with the
previous paragraph, the approach here is still measurement centred: the measurement of
32 HR inputs whereas the principal focus of this paper is, to repeat, towards the separable
recognition of HR outputs on a selective basis using legally supported artefacts,
particularly where the separable HR output results in an asset that is intangible in
nature. So, on this alternative HR output basis, the intellectual and aesthetic creativity
(the separable HR output) is manifest in the architect’s drawing (the separable artefact,
preferably with copyright) and is recognised separately from the building, even though
it may obviously be used to build the building. The architect’s plan, though, also
possesses many of the asset recognition characteristics raised in the next section of the
paper; for example, it is capable of transference, it may create income where sold to
another builder or where it is franchised, it is a store capital that can be utilised at a later
date, that capital may not expire for a long period of time or it may alienated immediately
by being discarded and so on. And it is these characteristics or criteria that the paper
seeks to advance instead of the definition of an asset in the next section of the paper.
The underpinning logic is very simple: asset recognition, even where the asset is
intangible, is a priori to asset measurement and the latter should not substitute for the
former, otherwise, one cannot be too sure of what one is measuring. In recognising a
separable HR output in terms of a legally supported artefact-based intangible asset,
one is complying with this logic. Now, let us apply the above logic to the above
literature on an HR input basis, first, and then an HR output basis, second, in the next
two paragraphs, in order to support it.
The use of an artefact is only there as a physical and legalistic basis on which to verify
the recognition of an asset’s rights, notably where the asset is an intangible asset. We
need to emphasise that these are asset “recognition” criteria, however. Thus, the reader
may tick “yes” to all the criteria in this paper and decide that they have recognised an
asset but they are still left with the problem of measuring it, which, in the case of some
HR outputs, would be an inherently subjective and problematic task. This cannot be
denied and, as a result, one can see, for example, the attraction of recognising purchased
goodwill on the basis of a mixed measured residual figure rather than recognition of its
rather dubious nature as an asset using the recognition criteria. We would argue that
the longstanding mixed measurement conundrum at the heart of accounting should not
be used to override the a priori recognition of the rights-based substance of an asset
because, otherwise, one cannot be too sure of what one is measuring. We think the use
of artefact-based asset recognition is better in that regard than the current definitional
basis for the reasons advanced in this paper but it is ultimately up to the reader to
decide as to whether one social construction is better than another one on the basis of a
political policy choice.
Notes
1. The implications for future-based valuations methods such as discounted cash flow (DCF),
all forecasts, some allocations and even some accounting standards (for example, cash
generating units as part of impairment reviews) are extensive. Also, an asset only has a
value when that value is completely independent of what it is earning in the activity under
analysis (David Damant in ASB (1995)) – the opposite of DCF approaches. In other words,
there should be a clear separation between the right to capital (criterion (2l)) and the right to
income (criterion (2k)) in terms of the latter determining the value of the former.
It is also interesting to note that the latest IASB (2006b) working definition of an asset
provides some tentative support for this point: “An asset of an entity is a present right, or
other access, to an existing economic resource with the ability to generate economic benefits
to the entity.”
Reference is made in this quote to “present” and “existing” and no mention is made to
“future” economic benefits, as in previous definitions. However, those “economic benefits”
are still not articulated in terms of a single measurement method. So, for example, if a net
realisable value method to accounting is chosen by standard setters (IASB, 2006a), then,
in implicitly referring to a future sale (unless actually realised today), the mix of time frames
(present and future) would still apply even though this future is not explicitly contained
in the above definition. Also note that the element of “control” is now missing from
the definition: a criterion in this paper. Note, also the opposite situation: that the issue of
a “resource” is missing as a criterion in this paper because the need to specify what a resource
is by nature simply replaces the need to specify what an asset is by nature (Weetman, 1989).
2. However, there is a body of literature which argues that accounting in the present cannot be HRM/accounting
divorced from either the past or, importantly, the future. Every accrual, for instance, contains
an implicit assumption about the outcome of a future event (Takatera and Sawabe, 2000). interface on
McSweeney (2000, p. 785), for example, concludes “Those events which are temporally human assets
accounted for in financial reports are not isolated past events but configurations which
extend pro-tentionally into the future. Every turning backwards, as it were, to describe past
events also requires a turning to the future as what is not-yet and might never be”.
43
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Further reading
Catasús, B. and Gröjer, J.E. (2003), “Intangibles and credit decisions: results from an experiment”,
European Accounting Review, Vol. 12 No. 2, p. 341.
Gröjer, J.E. (2001), “Intangibles and accounting classifications: in search of a classification
strategy”, Accounting, Organisations and Society, Vol. 26, pp. 695-713.
Honoré, A.M. (1961), “Ownership”, in Guest, A.G. (Ed.), Oxford Essays in Jurisprudence, Oxford
University Press, Oxford, Ch. 5.
Pigou, A.C. (1969), “Maintaining capital intact”, in Parker, R.H. and Harcourt, G.C. (Eds), Readings in
the Concept and Measurement of Income, Cambridge University Press, Cambridge.
Corresponding author
Tony Tollington can be contacted at: Tony.Tollington@brunel.ac.uk