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Journal of Human Resource Costing & AccountingExploring the HRM/accounting interface on human assets: The case for artefact-based

asset recognition criteriaTony Tollington Nevine El-Tawy

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To cite this document:Tony Tollington Nevine El-Tawy, (2010),"Exploring the HRM/accounting interface on human assets", Journaof Human Resource Costing & Accounting, Vol. 14 Iss 1 pp. 28 - 47Permanent link to this document:http://dx.doi.org/10.1108/14013381011039780

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Exploring the HRM/accountinginterface on human assets

The case for artefact-based assetrecognition 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 embracingan 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 themarketing literature in respect of brands.

Findings – Emphasis is placed on outputs, i.e. what people create, rather than on the more familiarinput orientation, which focuses on investments in human assets. When compared to an outputorientation, the more familiar input orientation is an unsatisfactory basis on which to recognise humanassets.

Practical implications – The asset recognition criteria provide a useful checklist by which todelineate 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, AccountingPaper type Conceptual paper

IntroductionWe 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 ahuman asset for financial reporting purposes. For many in the HR management (HRM)domain this premise would be unacceptable, since “Our employees are our mostimportant asset” is a common refrain amongst senior business executives, even if somepeople disbelieve them (Lancaster, 1995). Others will point to the obviouschicken-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 flourishin the HRM literature (investments in training, recruitment, retention, etc.), in the HRaccounting (HRA) literature it has produced no discernible outcome in terms of theincreased disclosure of human assets on the balance sheet (with the possible exceptionof footballers’ transfer fees). In the paper, we compare the above HR input andHR output approaches and present the case, instead, for the capitalisation of separableHR outputs based upon the accounting recognition of artefacts. In this latter regard(and to quote one reviewer), we are not so much concerned with the level of stringency

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in the suggested model but rather of the possibility to contribute to new ideas – howto recognise assets.

Locating the paper in the literature and establishing a motive for itIt is well known that the legalistic, stewardship-centred, historical foundation of financial reporting (Paton and Littleton, 1940) has evolved over recent decades toembrace more of an economic decision-usefulness stance (IASB, 2001). The marriage of 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 respectof asset recognition (Schuetze, 1993; Samuelson, 1996). We now add to that critiquefrom a human “asset” perspective for two important reasons.

First, HR inputs into, for example, a successful advertising campaign could be saidto comply with the above two definitional requirements, as reinforced by thevalue-relevance literature in respect of “future economic benefits” (Hirschey and

Weygandt, 1985; Holthausen and Watts, 2001). And so to negate this apparent assetstatus one can turn instead to the “separability” requirements of IAS38 (IASB, 2004) toperhaps argue that, despite this definitional compliance, advertising is an expense, notan asset, because it is inseparable from its related product or service. However, evenhere it is possible to argue to the contrary: that advertising can be made separable bybeing copyrighted (the legal, physical and separable HR output) and that it can produceeconomic 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 thisexample and others (Aboody and Lev, 1998 on software “assets”) that a definition andrule approach to asset recognition is too flexible a tool for the purpose of accuratelydelineating the boundary between an intangible asset and an expense. We look

critically at that boundary when applied to separable HR outputs. In this regard, wedraw upon both the HRA and HRM literatures.

Second, as will be evident in the next section of the paper, it is relatively easy tocritique the definition of asset in all its variations over time, but harder to beconstructive in terms of an alternative approach. So, we try to be constructive throughthe use of artefact-based asset recognition criteria that have already received someexposure in the marketing literature in respect of brand assets (El-Tawy andTollington, 2008). We use those same criteria here but this time as applied, in general, tothe recognition of separable HR outputs, notably, those outputs that sit on the boundarybetween an asset and an expense. We are particularly interested in those intangibleassets that are the result of intellectual creativity, as physically and separablyrepresented by an identifiable artefact, preferably where this is legally supported for

the purpose of establishing who has control over it. These two observations provide abrief pointer to the next two sections of the paper before presenting a summary in thefinal section.

Before we continue to he first of these sections, however, we need to explain what ismeant by the recognition of assets based on a legally supported artefact because thissimple idea does not currently appear as asset recognition criteria in either the HRA orHRM domains – a contribution of this paper. A further contribution is that anyapplication of the proposed artefact-based asset recognition criteria would be common

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to all assets. Therefore, an inconsistency would be removed between the definitionbasis for the recognition of all assets, which is one that currently excludes separabilityfrom the asset definitions, and the IAS38 rule basis for the recognition of intangibleassets, 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 recognitioncriteria centred upon legally supported artefacts, as explained next. An artefact is aphysical and visual representation, typically documentary, of expended humanintellectual and physical creativity.

In the accounting domain, artefacts already exist in terms of invoices, bankstatements, stock issue notes, payroll slips and similar physical records relating tomillions of disparate transactions. These artefacts are often standardised andpre-numbered for audit verification purposes. In addition to these artefacts, accountantswill 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-standardisedartefacts for intangible asset recognition purposes, for example, a brand that possesses aphysical and legally recognisable trademark registration document (the artefact). Thatsaid, the accounting regulators would need to be very careful about what constituted anacceptable artefact as well as the “acceptable” person creating it. For example,accountants already accept valuations of pension fund assets for accounting disclosurepurposes but, generally, only from a professionally qualified actuary.

A review of the HRM- and HRA-related literatures on HR inputs andoutputs HRM and related literaturesAn HR input orientation (Pfeffer, 1997) in the HRM and related literature is typified byBarney’s (1991) resource-based view of employee competencies, notably, those that arevaluable, rare, inimitable and non-substitutable. Employee competency has been

judged by a variety of means including, increases or decreases in reputational capital(Hamori, 2003), employee satisfaction, increased employee commitment (Booth, 1997),increased motivation and low labour turnover (Bontis and Fitz-enz, 2002; Bassett, 1972).Employee competency may also be grouped by type of employee, for example,“knowledge workers” (Drucker, 1999; Helton, 1988; MacDougall and Hurst, 2005;Ramirez and Nembhard, 2004). In referring to a store of human capital (Offstein et al.,2005; Carmeli and Schaubroek, 2005), other authors are less explicit about the abovelink to employee competency. Rather, to investments in people in general (Lepak andSnell, 1999), including the obvious one of salaries and wages (a sunk cost according toChen and Lin (2004)).

An alternative HRM viewpoint centres instead upon HR outputs – see Becker et al.’s(1997) conclusion that “HR must focus on business level outputs rather than HR level

inputs” and Carson et al. (2004) for lists of outputs. There are those who, for example,appear to share the artefact-based approach to intangible asset recognition espousedlater on in this paper: tacit knowledge made explicit through legal formalism and/orsome physical representation (Lang, 2001; Williams and Bukowitz, 2001). However, inthe HRM domain this HR output orientation, including the creation of intangible assets,is not as common as the HR input orientation (Ulrich and Smallwood, 2005).

We can see from this brief review of the HRM and related literatures that there arereferences to “reputational capital” and “human capital” as well as connections to the

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“intellectual capital” literature vis-à -vis tacit and explicit knowledge. Whether one looksat such capital in terms of an HR “investment” input or as capital applied to an HR“created” output, the HRM view of capital is not restricted to “financial capital” or therequirement to comply with an asset definition, as would typically be the case in the

financial reporting domain (Boudreau and Ramstad, 1997). As such there are politicalbattles to be fought (Pfeffer, 1992) both inside (Arthur Andersen, 1992) and outside thefinancial reporting domain (Pfeffer, 1997 refers to a “war”) that, for example, haveinspired the development of alternative measurement systems (Walker andMacDonald, 2001 on HR scorecards) and alternative concepts of capital (Cardy et al.,2007 on employee equity) outside the financial reporting domain. So, for example,Carmeli and Schaubroeck (2005, brackets added) argue that “A particular stock of human capital is valuable (Barney, 1991 previously) only if it is aligned with design andstrategy, meaning that the attributes of the workforce mutually reinforce theorganization’s culture, structure and strategy” but such alignments would be ananathema to those who construct published financial statements. It follows that theepistemology is more broadly based than the “principles, definitions and rules” basedepistemology that underpins the financial reporting domain, which is addressed next.

HRA literatureHRA (Brummet et al., 1968, 1969a, b) is based on the capacity of human beings to createeconomic 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 asthe basis for asset recognition, determining a value for a human asset it is a constructfor which there are, at best, weak empirical measures (Scarpello and Theeke, 1989,p. 267). Therefore, research approaches have often utilised surrogate HR outputmeasures instead, for example, composite non-financial measures (Likert and Pyle,

1971; Catasús and Grö jer, 2006; Pedrini, 2007) that included job satisfaction indices andlabour turnover rates (Bassett, 1972), often directed towards decision making also(Harrel and Klick, 1980). Good science, though, requires that any surrogate measuresproposed for a construct should be tested to demonstrate that they are propersubstitutes and that they can be reliably measured. Generally, this was not the casehistorically and as such most attempts to model HRA conceptual frameworks simplydeteriorated into mathematical exercises (Gambling, 1974; Friedman and Lev, 1974;

Jaggi and Lau, 1974). As a consequence, there were calls for more empirical researchwith better experimental controls (Sackmann et al., 1989; Johanson, 1999) as well ascalls for HRA research to be abandoned (Scarpello and Theeke, 1989). However, whilstHRA research perhaps progressed at something less than a snail’s pace in the 1980sand 1990s (Turner, 1996), and continues to be “not a subject that will willingly

disappear” (Roslender and Dyson, 1992, p. 312). Grö jer and Johanson (1998), forexample, point again at the link to “decision making” as well as “book-to-marketvalues” (Lev, 2001, 2003) as two areas for research. More recently, HRA has attractedrenewed attention, for example, from the UK Government in the Accounting for Peoplereport (DTI, 2003; Roslender and Stevenson, 2009).

Even with an HR input approach there is little attempt to justify the asset status of ahuman related “asset” because the HR related expenditures are usually expensed orsubsumed within an asset, as with constructed assets (exceptions being, for example,


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capitalised footballer transfer fees). Consider, for example, an architect’s building plan:an HR output and a legally protected artefact, where copyrighted. The related HR inputsmay 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 theprevious paragraph, the approach here is still measurement centred: the measurement of HR inputs whereas the principal focus of this paper is, to repeat, towards the separablerecognition of HR outputs on a selective basis using legally supported artefacts,particularly where the separable HR output results in an asset that is intangible innature. 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 thoughit may obviously be used to build the building. The architect’s plan, though, alsopossesses many of the asset recognition characteristics raised in the next section of thepaper; for example, it is capable of transference, it may create income where sold toanother builder or where it is franchised, it is a store capital that can be utilised at a laterdate, that capital may not expire for a long period of time or it may alienated immediatelyby being discarded and so on. And it is these characteristics or criteria that the paperseeks 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 isintangible, is a priori to asset measurement and the latter should not substitute for theformer, otherwise, one cannot be too sure of what one is measuring. In recognising aseparable 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 aboveliterature on an HR input basis, first, and then an HR output basis, second, in the nexttwo paragraphs, in order to support it.

Comparing both literaturesThe HRM and HRA literatures are more closely aligned when one considers the HRinput as an investment in people, for example, in their training. Whilst accountantswould probably be disinterested in the added employee competency associated withsuch training, nevertheless, there is common ground between the HRM and HRAviewpoints in the transactions-based-cost-records of such HR inputs, for example,salary payments. The difference in this latter regard lies in whether such HR inputsshould be capitalised or expensed. This is one such battle ground, as referred topreviously, and one that is ultimately reducible to a political policy choice, for example,whether to capitalise footballer transfer fees or not. That said, and this is the point, weare still talking about “asset (or expense?) measurement substituting for assetrecognition” here, despite the a priori logic of the previous paragraph. For example,

there is no asset recognition checklist that says this particular HR input should beregarded as an asset and another HR input should be regarded as an expense – videthe architects plan example again. Indeed, we do not think that one can do so(explored in the next section), for example, because it would be difficult to avoiddouble-counting between capitalised HR inputs and where those same inputs are then,say, subsumed within a recognisable output, such as a constructed asset. So, we wouldargue that only workable solution centres upon the separable recognition of HRoutputs, addressed next.

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If one looks at Carson et al. (2004), referred to previously, one will see an extensivelist of possible HR outputs with supporting literary references; outputs such asincreased leadership skills, communication skills, employee commitment and so on.Likewise, from the HRA literature, we can see the use of similar HR outputs, such as the

surrogate use of job satisfaction indices, again, referred to previously. It seemsreasonable to assume that these outputs could potentially make a positive contributiontowards the creation of future economic benefits (see IAS38, paragraphs 17, 21a, 22).Yet none of them would appear on the balance sheet because the control of them islocated in the person and they are unlikely to be identified with specific past events (seeIAS38, paragraphs 13-16). Also, they are inseparable for the same reason (see IAS38,paragraphs 11-12) and any related future economic benefit cannot be measured reliably(see IAS38, paragraphs 21b, 24). The first two of the four identified IAS38 (IASB, 2004)requirements in brackets are also present in the IASB’s definition of an asset:

A resource controlled by the enterprise as a result of past events and from which futureeconomic benefits are expected to flow to the enterprise (IASB, 2001, CF 49, pp. 53-9).

So, on the face of it, it would appear that such HR outputs should not be disclosed on thebalance sheet too. Yet, for other types of HR outputs we would argue to the contrary,that is, where, to repeat, they are separable, artefact-based intangible assets andsupported by some legally enforceable means. In this regard, we have two criticismsconcerning the latest revisions to the above definition, namely, in respect of “resources”and “separability” – the next two paragraphs, respectively. Those revisions are:

An asset is a present economic resource to which an entity has a present right or otherprivileged access (IASB, 2006b, p. 4).

And, subsequently:

An asset of an entity is a present economic resource to which the entity presently has an

enforceable right or other access that others do not have (IASB, 2007, p. 2).To state the obvious, the economic resources comprising tangible assets are physicallyand visually recognisable, if only in terms of factors of production. We would argue,however, that the same applies, on a surrogate basis, to intangible assets. And theproblem for those who would deny that the same need arises for intangible assetrecognition (the physical artefact) is that the “present right” or “enforceable right” inthe above definitions then becomes the “resource” and vice versa in respect of intangible assets – a conflation. Either that or one is left with a right to an economicbenefit from an indeterminate resource for which the only logical candidate is theright – again, a conflation. If we accept this reasoning, then the latest revised definitionis tautological in nature as regards its application to the recognition of intangibleassets: an asset of an entity is a right (if rights are resources) to which the entitypresently has an enforceable right or other access that others do not have. In addition,the definition refers to “enforceable right or other access” without specifying what theyare. This is why we argue the case for a criteria-led approach rather than adefinition-led approach to asset recognition in the next section of the paper.

Finally, there is some disconnection between the definition of an asset at theconceptual level and IAS38 at the rule level because separability is missing fromthe definition. The issue, as far as we are concerned, is not a minor one that can bedismissed because, conceptually, the distinction affects other assets too. Purchased


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goodwill, for example, has a separable measured value as a residual arising from abusiness acquisition. In terms of a recognisable resource it is completely inseparablefrom the other assets of a business. Indeed, we have a good example here of where theprevious a priori logic is completely reversed: the residual measurement is the basis for

asset recognition. We shall now address our criteria led approach to asset recognitionon the basis that asset recognition is a priori to asset measurement.

Artefact-based asset recognition criteriaWe muster some support for the use of asset recognition criteria from the comments of Walker and Jones (2003, p. 359), in that the identification of asset “properties” is reallywhat the asset the recognition criteria do:

There is probably no disagreement that, without some specification of what properties(or “attributes”) of assets and liabilities are to be measured, the profession cannot claim tohave presented a set of propositions which explain the basic concepts underpinning thepreparation of statements of financial position, let alone the calculation of profit or loss.

The asset recognition criteria and supporting normative framework employed herehave already been extensively discussed in the marketing domain (El-Tawy andTollington, 2008). What we see to accomplish here is to apply them to a differentcontext, specifically, that of human assets. In using these criteria, we make thedistinction between what can be recognised for accounting purposes on an HR inputbasis and an HR output basis in order to support, comparatively, the earlier assertionthat some separable HR outputs should be recognised as intangible assets. Theapplication of those criteria is summarised in Table I.

Each criterion ((a)-(n)) in Table I is discussed sequentially in the following pages,before summarising their impact in the final section of the paper. None of the criteria,below, is a necessary constituent of an asset since reporting entities can be recognised

to possess something in a restricted sense where one or more of the criteria are not met.However, the greater the number of criteria that are applicable to an item, the morethoroughly one can regard a reporting entity’s asset as “recognisable” in the financialstatements.

HR inputs: people-based asset HR outputs: artefact-based asset

(a) No power to control without agreement (a) Power to control use(b) Voluntary use (unless slavery) (b) Involuntary use(c) No security (c) Security consistent with social norms(d) Capable of transference (d) Capable of transference(e) Indeterminate duration (e) Determinate duration where legally based

(f) Harmful use prohibited (often by law) (f) Harmful use permitted sometimes(g) No liability to execution is possible (g) Liability to execution is possible(h) No residuary character (h) Legal residuary character sometimes(i) Human capital (invest in the person) (i) Structural capital (separate from person)(j) Cannot be consumed, destroyed, wasted (j) Can be consumed, destroyed, wasted(k) Measure investment in people (k) Measure what people create(l) Non-additive measurement methods (l) Non-additive measurement methods(m) Measurement often based on prediction (m) Measurement of observed artefact(n) Asset bundling “as a team” is possible (n) Asset bundling of artefacts is unnecessary

Table I.Asset recognition criteria(applied)

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(a) The right to control an asset Control is exercised for a purpose, typically the appropriation of income but notalways. This latter rider is contentious because if one looks at the two latest IASB assetdefinitions, as previously set out, then control over the economic resource is the key

feature. That does not necessarily mean that an asset must produce future economicbenefits (contrast with the 2001 definition) and therefore, control can now be used forother purposes, such as preventing competition. Thus, one can now consider, forexample, lending assets without recompense or holding assets to prevent control byothers where the economic benefits are indirect at best. This is particularly so inrespect of intangible assets where, in the absence of an artefact, there is nothing to lendor to hold and little control (restrictive or otherwise) over who may appropriate (Booth,2003, pp. 312-14, for other aspects of control).

On an HR input basis, control over a human asset is likely to be exercisedcontractually, that is, prescriptively with sanctions for non-compliance and,proscriptively, as with restraint of trade agreements. However, since one cannotcompel action or inaction by a person, one is really referring to asymmetries of powerbetween an employer and an employee. Generally, there is little or no control withoutvoluntary agreement to that effect. This may be selectively and repeatedly modified orwithdrawn according to circumstance and inclination (Giddens, 1982; Fincham, 1992).It is, for example, commonplace that an HR investment in training by one employer can,at no cost to them, be subsequently appropriated by another employer (Lev, 2001, p. 52).

On an HR output basis there is no control over the tacit knowledge held in a person’shead or the person themselves, other than on a voluntary basis. Involuntary control,instead, is exercised over the artefact: the visible representation of explicit knowledgeheld separately from the individual creating it, for example, patent letters.

(b) The right to the future use of an asset

It is the issue of scarcity that is pertinent here. If the asset is not scarce it may be usedby many persons (for example, seawater or atmospheric nitrogen) and the issue of rights become irrelevant. However, with a scarce asset, future use is linked torestrictive control, for example, contractually based rights of usage (Ijiri, 1975, p. 52).

On an HR input basis one cannot comprehend a right to the future use of a humanasset unless one believes in slavery. Use is on a voluntary basis only. On an HR outputbasis, the future use of an asset is involuntary and it is not necessarily restricted toincome generation, for example, the use of an intangible asset to prevent competition.The artefact in this case is separable from the person who created it and its use may bepassed on to another, for example, music downloaded from a web site.

(c) The right to security in an asset

Security is in the expectation that the asset represents a store of capital (criterion (i))and that this capital may be applied as security for raising funds. In this sense it is aspecialist version of criterion (b), previously.

On an HR input basis, there is very little security in a human asset and in anyexpenditure made in augmenting that investment, such as training. Particularly so if aperson becomes sick, idle or incompetent. Basically, this right precludes human“assets” unless, to repeat, one believes in slavery but not, for example, in respect of thepatented idea created by them – the artefact. On HR output basis, a contract or some


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other artefact may secure for a lending institution access to future appropriations, forexample, royalty income from securitised assets, such as Robbie Williams’s musiccopyright.

(d) The capability of transference (including asset disposal)No actual transference is necessary as with a business transaction. The capability issufficient. Asset measurement is independent of this capability which is a physicalcapability and therefore, in respect of intangible assets, it would necessitate theexistence of the artefact.

On an HR input basis, as one can see with professional footballers, human assets arecapable of transference between clubs. On an HR output basis, the existence of anartefact is vital so that the business entity acquiring the intangible asset candemonstrate that the right to control its future use has passed to them.

(e) The absence of duration

In other words, the asset has a life where longer is better than shorter, on an HR inputbasis, the duration of a human “asset” is indeterminable and expires with the person,as with their tacit knowledge too. On an HR output basis, however, where the functionof an intangible asset can be separated from the human being and is vested in anartefact the duration is determined by social norms, notably legalistic ones. Thus, forexample, a trademark registration will last for ten years and thereafter in perpetuityproviding it is re-registered every decade and its continued use is established.

( f ) The prohibition to harmful useThe asset definitions previously identified are clearly economically orientated(economic resource, economic benefits) but it is axiomatic that this pursuit cannot besustained indefinitely. As we saw under criterion (a), the two recent definitions are more

accommodating than the earlier IASB (2001) definition, for example, in terms of preventing competition. This argument can be extended further. Thus, for example, apollution control asset may consume resources, produce no future economic benefitsand yet, may endure as a recognisable asset (in terms of the application of some of thesecriteria) if only because its use was mandated by pollution control legislation. Thus,asset usage also comprehends the right to impose costs on others, as with vehiclepollution costs. Because social norms, notably, statutory ones, indicate who must pay tohave their interests protected against the costs imposed by another party, improper useof an asset is sometimes prohibited or, at least, restricted.

On an HR input basis it is axiomatic that a harmful “human asset” faces thepossibility of legal sanctions. On an HR output basis, whatever is created or used by aperson should, in principle, not be harmful to others. However, the civil and criminal

law is replete with instances where this principle fails in practice. Nevertheless, thatdoes not prevent legislators (and this can be at the national or inter-governmental level)from attempting to remedy such failures. Consider, for example, the creation of “carboncredits” (documented artefacts) where pollution quotas may be traded within andbetween countries in the same manner as, say, fishing quotas designed to sustainfish stocks. In effect, harmful use is both limited and transferable (see criterion (d))but it could, instead, be prohibited and may well be in future according to theprevailing social norms at that time.

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(g) The liability to executionThis criterion refers to the application of an asset in the settlement of a debt. On an HRinput basis, this is clearly a “non-starter” in a civilised society. That said, one only hasto observe the use of indentured, underage, sweatshop labour in many underdeveloped

countries to comprehend that what may be regarded as “civilised” will vary accordingto social norms. Thus, immoral and legally unenforceable contracts may be struckbetween parties for the use of labour in settlement of debts. It could never find its wayon to the balance sheet, however!

On an HR output basis, the sufficiency of an asset for settling debts is a matter of agreement between the parties In respect of intangible assets the legally recognisableartefact is important because, otherwise, it could potentially become a vehicle fordefrauding creditors, and national income would suffer as those with liquid capitalwould be wary of lending it to those with assets lacking this proviso.

(h) The right to a residuary character in an asset

This refers to a situation where the rights to future use or control lapse. There must besocial rules for deciding what to do, for whatever reason, where the pre-existing legalrights to an intangible asset, in particular, are no longer present. On an HR input basis,there is no such thing once a person is dead. On an HR output basis, for some intangibleassets there is no residuary character, as with the expiration of a patent. For others,they may be periodically renewed, as with trademark registration. And for others, theright may be passed on after death, as with copyright.

(i) The right to the capital vested in an asset Fisher (1906, p. 52) refers to capital as “a stock of wealth existing at an instant in time”.Salvary (1997) refers instead to a “stock of money” expressed in nominal terms. In both

cases capital is interpreted in financial reporting terms as a positive difference of assetsover liabilities at the year-end. The amount of that positive difference depends on one’sview of capital maintenance and the amount of income necessary for such maintenance(Newberry, 2003; Barker, 2004; Cauwenberge and De Beelde, 2007, in respect of comprehensive income).

On an HR input basis Adam Smith (1776) (in Campbell et al., 1976) argued the casefor “investments” in human beings (Marshall, 1890, p. 469; OECD, 1996) and onecan easily capitalise labour on an input basis: the cost of salaries; training; retention;,etc. However, whilst that “investment” is clearly measurable and an accuratetransactions-based measurement can be determined, it does not necessarily mean that ameasurable function exists where, to repeat, that labour becomes sick or idle – wherethe function effectively ceases. Thus, whilst one may record the financial capital (say,

the salary), the physical capital is not maintained (say, because they are sick or idle). Theargument is reducible to one of “control” (criterion (a)) over human capital that can bewasted (criterion (j) next) by someone other than the business entity.

On an HR output basis the capital is traceable to an artefact: the separableproduct of utilising the human “asset”. In effect, it is the process of structuralisation(Johnson, 2002), that is, turning human capital into structural capital (Edvinsson andMalone, 1997; Johnson, 1999; Stewart, 1997; Carson et al., 2004) although this is notalways associated with the existence of an artefact in the intellectual capital domain.


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(j) The right to alienate capital This criterion comprehends the right to alienate an asset, or to consume it, or to destroyor waste it, or by any other means, discharge it and thereby deny oneself the right toappropriate. The problem with this right is that it is the antithesis of the economic

orientation espoused previously. As a consequence, the most natural question wouldbe: why would anyone wish to do so?

On an HR input basis human “assets” can certainly be alienated but their destructionor consumption or wasting is not an option unless, for example, one, respectively,subscribes to execution, cannibalism or starvation. On an HR output basis it is possibleto discharge the capital tied to an artefact – what a person creates. Consider that the oilrich owners of a patent for a safe, cheap, compact and highly efficient source of generating electricity may, in their own interest, simply not use it. Thus, it may exist asan artefact and it may have the potential to produce great wealth and yet, in practice,never do so. This is an entity specific strategy that is not connected with the earlierasset definitions. Rather, the purpose here is to hold the asset for the sake of substituting one set of existing, carbon-based economic benefits for some futurenon-carbon-based economic benefits.

(k) The right to income from an asset The right to income is linked to the right to capital, as outlined previously in respect of capital maintenance (Whittington, 1974, 1981). On an HR input basis, as before, there isno right to income if, for example, they decide to be idle, incompetent or become sick.On an HR output basis, any income is from what people create, which is then used toappropriate or prevent others from appropriating. The right to income is thereforestrengthened by the existence of any legal rights to an artefact but the right can also beestablished by custom and practice and then defended, for example, through the tort of passing-off in respect of a brand.

(l) A measurement method should be additiveDespite the title, this is an asset recognition criterion because no measurement methodis specified, rather, a parameter for selecting one. The same logic also applies to criteria(m) and (n), below. Generally, the money metric (£/p) and the time metric(hours/minutes) are individually additive but not when they are mixed together atdifferent points in time (ASB, 1999, p. 79; IASB, 2001, para 100, 2005a) or when they aremixed with non-financial metrics. Thus, all accounting metrics that purport torepresent economic value (the mix of money and time) are inherently non-additive innature and all one can do is minimize the scope for variation in that value by selectingone measurement method only.

On an HR input basis, a few human “asset” models have remained within the money

metric of the financial reporting domain: the capitalisation of historical costs (Likert,1967); opportunity cost approaches (Hekimian and Jones, 1967); a discounted wagesand salaries approach (Lev and Schwartz, 1971); as well as a replacement costapproach (Flamholz, 1973). All mix money and time, and even historical costs.

On an HR output basis, “As a rule, human potential is not expressed in terms of monetary units [. . .] The same applies to investments in human potential” (Milost,2007, p. 124). Therefore, measure their HR output instead and do so using a single“standard” measurement method at one point in time. The measurement process then

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becomes one of internal consistency, for example, compliance with the content of anaccounting standard, rather than external consistency, for example, compliant withmarket values, assuming they exist for the asset in question.

(m) An asset measurement should be based on observationOn an HR input basis, the measurement of the future economic potential of a humanasset is unobservable. Most observations of human beings are in respect of what theycurrently do, or have done, and what they create, or have created. Anything which isfuture based[1] is predictive rather than observable (Aitken, 1990, p. 229 for furtherreasons presented in the HRA literature and Becker et al., 1997; Murphy and Zandvakili,2000 in the HRM literature). The alternative, as Roslender and Fincham (2001) indicate,of placing human beings themselves on the balance sheet would require the accountingpolicy makers to embrace ever more predictive and subjective valuations and a newcategory of unrealised reserves.

That said, one can ignore the issue of “economic potential” and base one’s

measurement on expensed inputs instead, such as salaries and wages. Thus, to repeat,one can currently observe a transaction-based cost for, say, salaries and wages, oradvertised market-based salaries according to discipline. The same though cannot besaid for many valuation-based methods where the time frame is often future based, thatis, predictive, and therefore not observable. It is the current time frame that ispertinent[2] because even transactions-based cost becomes a sub-set of valuation-basedmethods over time.

On an HR output basis the above problem of observing the economic potential of labour is obviated through the use of physical substitutes instead, specifically,artefacts. Whether one would be prepared, for example, to accept the observedsecuritisation of a music copyright artefact or the observed royalties paid for the use of a trademark artefact or the options to do so as a valid approach for all such assets is

unclear, but it is not beyond the “wit of man” to make it so, or some other model,through the accounting regulatory process.

(n) The measurement of bundles should be avoided wherever possibleA separable measurement should be tied to a single asset, rather than as a bundle,otherwise, it may be possible to inadvertently dispose of or discharge individual assets,notably the intangible ones, whilst leaving the measurement of the bundle intact.

On an HR input basis, unless one was, perhaps, buying a football team it is unlikelythat human beings would be bundled together. On an HR output basis, whilst thehuman asset is individual their output may not be. The use of a human “asset” in thecreation of economic benefits tends to be as part of a social group activity on the basisthat it is unlikely that any one person will possess all the knowledge to function

effectively (Berends et al., 2001). The issue then becomes one of “traceability”: whocreated what, which tends not to be a problem with tangible assets but is a problem inrespect of intangible assets. This is because, in the absence of an artefact (the traceablephysical object), there is a danger that one may end up disclosing the measurement of something that has little or no recognisable function let alone a separable one. Forexample, one could argue, speculatively, that had US mortgages not been bundled intofinancial instruments, with artificially inflated market values, there may not have beena 2008 world financial crisis at all.


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In summaryFrom an asset-recognition viewpoint consider, again, that an architect’s drawing is arecognisable separable document (artefact), but so is her/his passport. The difference isthat the latter is not transferable (criterion (d)), there is no security (criterion (c)), no

absence of duration (criterion (e)) or other criterion presented herein except perhaps theright to future use (criterion (b)) and even this can be curtailed. So, we would argue thatthe criteria are a reasonably useful tool for accountants to use in deciding whether theyhave a recognisable asset or not for accounting purposes. Once one has decided on thebasis of the above criteria that an asset is recognisable, one can then turn to the issue of its measurement and not, to repeat, vice versa. Yet, the prevailing reverse logic appearsto be: well, if I can measure the “asset” accurately, de facto, it is simultaneouslyrecognised, that is, without necessarily ever fully knowing what the “it” is (Napier andPower, 1992).

This is particularly evident in respect of intangible assets. The classic example inthis regard is purchased goodwill where the “it” is simply a rule created measuredexcess established at one moment in time. Yet, the purchased goodwill “asset” was

presumably just as compliant with the UK definition of an asset (ASB, 1999) pre-1997,when it was written off to reserves, as it was post-1997, when it was capitalised insteadin line with international norms of practice. That is why we say that the definitions of an asset are, perhaps, too flexible and incomplete a tool for the accurate delineation of what constitutes an asset as distinct from an expense.

At this point in the paper, the reader may be thinking to themselves: OK, I canaccept the obvious logic of asset recognition prior to asset measurement and notvice-a-versa, but why should that recognition be on the basis of artefact-based assetrecognition criteria? Why should I accept the authors’ social construction in preferenceto the IASB’s social construction, which is based on an asset definition? In response, weare not going to repeat the supportive examples already presented in the paper. Insteadwe conclude with what we see as a more strategic view, which clearly demonstrates thetension between a socio-legal and a socio-economic view of an asset.

Asset definitions, old and new, have a clear economic focus whereas the artefact-based recognition criteria have, in the main, a legalistic focus. We have previously hadacademic reviewers say to us that an asset must create future economic benefits or it isnot an asset, and who have rejected our legalistic stance on that basis. Provocative,socially located counter-arguments, such as “there is not much point in creating futureeconomic benefits from an asset if as a result we all die from pollution”, have,understandably, been met with objections from the gatekeepers of accounting research.Yet, we would argue that, for example:

. A pollution control asset does not cease to be an asset simply because it does notnecessarily create future economic benefits. Consider, conversely, that such an

asset may raise barriers to entry into a market because the capital cost is too highfor some competitors. In other words, there may be future economic benefits butthey are indirect at best and difficult to measure reliably. But, to repeat, it is stillan asset in the sense that the business entity has a right to the capital invested init, to control it, to use it, to transfer it, to secure against it and so on – therecognition criteria.

. An asset may have a capability to produce future economic benefits but itis simply held without use in order to prevent others from gaining access to it or,

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in the case of some intangible assets, to prevent competition. The paper hasidentified HR outputs that would fall into this category. Even the IASB’s (2007,p. 2) latest working definition of an asset acknowledges this last point: “[. . .]enforceable right or other access that others do not have”. Yet it is still an asset in

the sense that the business entity has a right to the capital invested in it, tocontrol it, to use it (even if they do not do so), to transfer it, to secure against itand so on – the recognition criteria.

. One man’s current pollution might, in future, become another man’s goldmine asglobal resources increase in scarcity and/or where the cost of access becomesprohibitive to the point where recycling is profitable. It is therefore no longerappropriate to consider an asset just in terms of its economic resources oreconomic benefits, rather, in terms in terms of a balance of rights. Specifically, therights that the business entity has to assets, such as those considered in thispaper, and the rights that society has to be protected from the business entity’suse of those same assets. HR outputs, such as banking data-protection networks,

aircraft landing rights, carbon cap-and-trade quotas, take on an importance to thebusiness entity because society wishes to be protected from financial fraud,congested skies/atmospheric pollution, and energy wastage, respectively. Indeed,it may be argued that a business entity ignores such societal rights at its peril [. . .]And then the light begins dawn because one realises that “economic resources”are perhaps reducible to “rights” (as we argued herein in respect of intangibleassets) because what matters to a business entity is whether the balance of rightsis in favour of it making money or losing money. Asset recognition criteria makeone think about those rights and where the balance lies in the exercise of thembetween what may be regarded as an asset or an expense, the latter being eitherwhere an asset is consumed or where societal rights become so expensive toimplement as to make the use of an asset an unprofitable one to adopt (for now!).

Finding that balance is a subject for future papers and one in which theprohibition to harmful use (criterion (f)) will undoubtedly be a central feature.

. Consider, that some information on a pollution control asset may be conveyed bythe fact that a business entity is compliant with some mandatory pollutioncontrol legislation even if, economically, the reported value on a balance sheet iszero, or is a nominal figure. The information argument then becomes a disclosurepolicy issue as to what is decision relevant. Obviously, we would argue thatmany HR outputs, such as the examples given in this paper, are decision relevantbecause they comply with the recognition criteria and therefore should bedisclosed as assets even if the reported economic value is a nominal figure.

. The general term “future economic benefits” in the definition of an asset (ASB,

1999) is often clarified by reference to a measurement, specifically, future cashflows. This being so, it might be argued that the specific term should be preferredto the general term. There is no asset recognition here, only asset measurement.Be that as it may, we were advised by one unnamed IASB board member that theterm “future economic benefits” was preferred so as to avoid circularity in thelinkage of “capital” to “income”, as would definitely be the case, for example,where capital values are represented on the basis of discounted future cash flows.Again, there is no asset recognition here, only asset measurement. In the paper we


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strongly disagree with this “measurement only” viewpoint (Napier and Power,1992) and signal in the asset recognition criteria that the right to capital(criterion (i)) is separate to the right to income (criterion (k)) and that theunexercised, or absent, right to the latter does not preclude the right to the former

or, indeed (from a “measurement only” viewpoint), a capital value that, to varyingdegrees, is independent of future incomes. One only has to look at the 2008 creditcrunch, the earlier bursting of the dot.com bubble and the impact of irrationalexuberance (Shiller, 2000) to see the weakness of this measurement-only stanceand that capital values can move independently of future income streams.

The use of an artefact is only there as a physical and legalistic basis on which to verifythe recognition of an asset’s rights, notably where the asset is an intangible asset. Weneed to emphasise that these are asset “recognition” criteria, however. Thus, the readermay tick “yes” to all the criteria in this paper and decide that they have recognised anasset but they are still left with the problem of measuring it, which, in the case of someHR 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 purchasedgoodwill on the basis of a mixed measured residual figure rather than recognition of itsrather dubious nature as an asset using the recognition criteria. We would argue thatthe longstanding mixed measurement conundrum at the heart of accounting should notbe used to override the a priori recognition of the rights-based substance of an assetbecause, otherwise, one cannot be too sure of what one is measuring. We think the useof artefact-based asset recognition is better in that regard than the current definitionalbasis for the reasons advanced in this paper but it is ultimately up to the reader todecide as to whether one social construction is better than another one on the basis of apolitical policy choice.

Notes1. The implications for future-based valuations methods such as discounted cash flow (DCF),

all forecasts, some allocations and even some accounting standards (for example, cashgenerating units as part of impairment reviews) are extensive. Also, an asset only has avalue when that value is completely independent of what it is earning in the activity underanalysis (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 toincome (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 assetprovides some tentative support for this point: “An asset of an entity is a present right, orother access, to an existing economic resource with the ability to generate economic benefitsto 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 netrealisable 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 containedin the above definition. Also note that the element of “control” is now missing fromthe 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 resourceis by nature simply replaces the need to specify what an asset is by nature (Weetman, 1989).

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2. However, there is a body of literature which argues that accounting in the present cannot bedivorced from either the past or, importantly, the future. Every accrual, for instance, containsan implicit assumption about the outcome of a future event (Takatera and Sawabe, 2000).McSweeney (2000, p. 785), for example, concludes “Those events which are temporally

accounted for in financial reports are not isolated past events but configurations whichextend pro-tentionally into the future. Every turning backwards, as it were, to describe pastevents also requires a turning to the future as what is not-yet and might never be”.

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Further reading

Catasús, B. and Grö jer, J.E. (2003), “Intangibles and credit decisions: results from an experiment”, European Accounting Review, Vol. 12 No. 2, p. 341.

Grö jer, J.E. (2001), “Intangibles and accounting classifications: in search of a classificationstrategy”, Accounting, Organisations and Society, Vol. 26, pp. 695-713.

Honoré, A.M. (1961), “Ownership”, in Guest, A.G. (Ed.), Oxford Essays in Jurisprudence, OxfordUniversity Press, Oxford, Ch. 5.

Pigou, A.C. (1969), “Maintaining capital intact”,in Parker, R.H. and Harcourt, G.C. (Eds), Readings inthe Concept and Measurement of Income, Cambridge University Press, Cambridge.

Corresponding authorTony Tollington can be contacted at: [email protected]


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