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Perspectives Paper: Human Capital

31 May 2022

How does Human Capital generate value for organisations? What are the attributes of such value creation? How is this analysed by investors and measured by valuers? The latest Perspectives Paper in our ‘Intangibles’ series explores the concept of Human Capital

In Part 1 of our series, we examined the Case for Realigning Reporting Standards with Modern Value Creation. While long acknowledged as a challenge of common accounting frameworks and related financial reporting regimes, a tipping point has seemingly been reached. The debate has shifted from why the problem should be addressed, to what should be done and how it can be implemented. Within this discussion, and those to follow, our goal is to encourage debate and help ensure that the what is value-relevant and the how is operable across time, geography, and scale.

The matter as to whether such improvements ultimately reside within financial statements, or whether they are central pillars of evolving sustainability standards, is outside our scope. As such, we’ll leave the who, when, and where for others to comment.

Human Capital is the foundation from which all intangible assets are created, yet our understanding of Human Capital value creation and rigor around value measurement is less evolved than other intangible assets.

To assess Human Capital value creation, one must consider the synergistic effect amongst the workforce as well as the network effect with other assets, especially intangible assets. Evidence suggests that investors require more information on the impact Human Capital has on enterprise value.

The phrase “our people are our most valuable asset” is ubiquitous within corporate communications. The idea is echoed by business leaders across geographies, sectors, and size. Recognising the importance of Human Capital is obvious but understanding and measuring its role in enterprise value creation is much more difficult. Even though all intangible assets emanate from an organisation’s Human Capital, our understanding of Human Capital value creation, and the rigor around value measurement of Human Capital, is in many ways less evolved than nearly all other intangible assets.

In the latest Perspectives Paper as part of our Intangibles Series, we:

    • Examine how Human Capital generates value for organisations and the attributes of such value creation
    • Analyse how investors assess the enterprise value creation attributable to Human Capital via KPIs and investments; and
    • Discuss the value measurement techniques used to estimate the value of Human Capital directly.

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  • Johan Enslin says:

    Paper informative as usual with others. Human Capital can be viewed as the heart-beat of a business; without it the undertaking will stop existing. All papers received contribute to better understanding of theories and subjects and help to develop credible work.
    Looking forward to the next one.

  • An excellent paper detailing why how we approach intangibles like human resource and it remains key to a fair valuation. Literature review and methodology were meticulously detailed and included sufficient numbers of samples. It was clear that the recommendation was scientifically and practically sound. This study was lacking one element that I wish it had included: an indication of its applicability by industry.

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There are more than 200 member organisations
of the IVSC, operating in 137 countries worldwide. Join them.

Become part of a global network working to enhance valuation standards and professionalism.