Human Capital and Firm Intangible Capital

There is a lot of confusion in the use of the HUMAN in the Firm Financial Reporting for the Market Value and Accounting reports.

Human Capital is the value of the Human resources that a person has, that can be used for economic gain.

The Human is owner of his intellectual capital but it’s trading this Capital with the financial or physical capital of the Firm.

IFRS mentioned the finance capital and physical capital and there are both linked to the company Assets.

The HUMAN is NOT an ASSET.

 An Asset is anything you own or control that has value:

 “Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (IASB Framework).” (IFRS)

“The value in use of an asset is the expected future cash flows that the asset in its current condition will produce, discounted to present value using an appropriate discount rate”. (IFRS)

In Paris HR Conference 13 February 2005 I present an SAP HR interfaced with a collaborative platforme dedicated to manage Intangible Value Flows with Value Centers.

  Firm Leaders was configured inside Value Center to make possible to count the Intangible Value Transactions made by them, validated by the receiving Value Centers with Market Value impact for the firm.

All Value Centers shape, a virtual “Firm Internal Active Market” and respect the constraints for this.

The goal was to bring from SAP HR the cost of this Leader (payroll, incentives, expenses.) and to compare with his creative activity based on validated Intangible Value Transactions.

The transaction currency is depending of the Leader Value Center currency and will be transformed in monetary once the value contributions made by him are converted in Discounted Cash Flow for the Firm.

We get a picture with all the Firm Leaders and the Value generated for the Intangible Firm Market Value comparative with his cost. Big surprises sometimes but mostly positive.

So, we can achieve this IFRS claim.

HUMANS ARE NOT HUMAN RESOURCES.

Neither, since the abolition of slavery, are they Assets?

Human resources like: education, skills, experience, are producing Knowledge, Intellectual property, Business models and procedure, trade secrets, designs, smart-contracts, software.

  Human Resources produce this Value Flows, which most of it will convert in Intangible Assets, this Assets belongs to the Firm.

Human Produce the Intangible Value like a consequence of his Work contract with the Firm, but this to time basis in the activity mentioned in his contract.

The Firm pays the Human Resources like every kind of external resources in exchange of his time and quality of his resources. Human is an external contractor, but the Intangible Value and Assets produced by him based on the work contract with the Firm is Firm owned Intangible Assets.

Your wealth is the total sum of your assets minus the total sum of your liabilities. A Resource, in business terms, is anything that you can use.

Company can only count and deal with the “intangible value contributions or assets” coming out of the Human creative  activity, so long as the involved parties commit , through the work contract or by-side it, to transfer to the Firm the ownership of the RESULT of the Human activity, like procedures, sales partnership business algorithms or contracts, software, drawings.

Following this established rule means, that even the “special competencies” under serious legal solid work engagements can’t be considered Firm Capital or Asset.

The Market Value of the Firm depends a lot of his “Human Capital «or his “Intellectual Capital” under contract, like Strategic Partner, not like Assets, so Human Capital must be considered like Value Contractor, but not an Asset.

Human is the ultimo Economic Value Creator and the only real CREATIVE VALUE creator, machines, robots are Firm Assets but can’t be Creative out of the knowledge content that Human transferred in their memory.

 So, if we consider the expression, reference to the Firm “Intellectual production Capacity” that means organization of the smart internal procedures to capture the intellectual production of the Creative Humans and flow this production very efficiently to the Intangible Assets validation to the Value Centers and to the Tangible production places.

 Structural and Organizational Intangibles Assets with important Market Value, can speed-up the Intangible Values conversion cycle.

A high Value Intangibles Asset “Structural &Organizational”, means high speed cycle from Value Transaction validation to Intangible Asset validation.

The Intangible Value Conversion speed is a big PLUS for the Firm Intangible Market Value.

The Organizational and structural Capital, is what is left in the company in the night, when people leave.

 The Value Center can be classified like this, by Structural and Organizational domain, Value Creation flows and the Intangible Assets, from this Value Centers can sustain and explain the Intangible Assets included in this domain.

But can be also others domains like “Environment” or “Sustainability” or “Social development” so with Value Centers dedicated to these activities we can have an IFRS-way of inserting them in the Accounting reports based on validated Intangible Value Transaction made in the Firm Internal “Active” Market.

This Intangible Assets, can be software, or drawings for a new model, the accountant will write it in the convenient account, after it will check if it is matured to subscribe to the FASB, IAS obligations.

The Value Centers are part of the Accounting system which is active ,but the rules are not designed (yet) by the Accounting legal institutions, only when the Firm decide to capitalize a Intangible Assets in the Official Formel Legal Accounting system the Intangible Assets will be transfer and his Monetary Value defined by the conversion of the “value units “ used in the the Value Center where it was created, to the monetary value dependent of the strategic importance of the Intangible Assets created and his contribution to the Firm Market Value.

Takeaways:

•     Human and his Human Resources will work for the Firm and create Intangible Value Flows and Assets, this work is under a contract that both parties can cancel

•       The Intangible Values and Assets create by Humans under contract belongs to the Firm

•        Better is the quality of the Humans and competencies under contract more Intangible Value will result

•        The Expression Firm Human Capital part of the Firm Market Value is because if the firm has quality Humans with great competencies under Contract this Contract is a Value Contract like a Strategic Partnership Contract