Financial analysis
Key Concept Exercise: Financial analysis
A perplexing issue, particularly for many human resource management and marketing professionals, is the absence of a valuation in the traditional financial statements relating to human capital and other internally generated intangible assets, such as brands.
Often these value drivers of an organisation form a critical key success factor. Goodwill does appear in many financial statements and this includes intangible assets acquired by another organisation, which are often subject to large impairments losses. However, this raises questions about the sustainability and volatility relating to goodwill valuations. It is against this background that accountants have decided to be cautious in respect of recognising intangible assets in the financial statements.
To prepare for this Key Concept Exercise:
– Consider the controversy of whether human capital should be included in the financial statements.
– Consider how human capital could be defined and quantified in financial statements.
In formulating your Key Concept Exercise, consider the following questions:
– How do you define human capital?
– What is the importance of human capital?
– What are the reasons to measure or not measure human capital?
To complete this Key Concept Exercise:
In an approximately 500-word response, address the following issues/questions:
With the rise of the ‘knowledge economy’, the traditional valuation of an enterprise as consisting solely of measurable assets, such as buildings, equipment and inventory, is increasingly being questioned. Human capital, although widely recognised as an important component of an enterprise’s total value, does not appear on a statement of financial position (balance sheet).
– Discuss whether or not you believe human capital should be included in the financial statements.
– Identify how you are defining human capital.
– What are some of the difficulties that may be encountered in attempting to quantify and record this (these) asset(s)?
– If recorded, would such values remain constant or be subject to change?
Answer preview for Financial analysis
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