Do people count as assets? It depends on what you mean by “asset”. People are not assets like tangible fixed assets such as equipment. People cannot be owned. People do not depreciate. If they are assets, people are intangible assets.
In the industrial age, the gross domestic product was largely driven by tangible asset investments that appear on balance sheets – equipment, buildings and land. This remained true well into the 1980s. From 1980 to 1985, 88 percent of the increase in GDP was associated with growth in tangible assets. In today’s knowledge – or information – age, the driver of GDP growth has shifted from tangible assets to intangible ones. From 2000 to 2005, only 10 percent of GDP growth was related to tangible assets. Intangible assets drove 90 percent of GDP growth.
Yet only tangible assets appear on company balance sheets. For an asset investment to appear on the balance sheet, it must meet four conditions:
1. It must be defined and separate from other assets.
2. The company must control (own) the asset and be able to transfer that control.
3. It must be possible to predict future economic benefits of an asset.
4. Any impairment of the asset’s value can be determined.
According to these conditions, intangible assets do not appear on the balance sheet. Companies do not own people. So, people are defined as intangible assets, and investments in developing people are treated as expenses on income statements. There is growing awareness of this disconnect between present-day Generally Accepted Accounting Principles (GAAP) and the investments that are driving our economy. Nonetheless, companies are making investments in intangible assets with the intention of building long-term economic value.
The U.S. Bureau of Economic Analysis (BEA) has established a satellite account that allows for experimental measurement of such investments in a framework consistent with GDP. This innovative satellite account captures information on investments in research and development, design and development, and human capital. The human capital account includes spending on employee training and development. This data is used to track the impact of these investments on the economy. For more on this, visit www.bea.gov.
The GDP data, these initiatives, and the large investments in intangible assets suggest that investing for the future should include investing in talent, skills, knowledge and engagement.
Organizations intuitively know that investing in learning has value. ASTD estimates that in 2007, U.S. organizations spent $134.39 billion on employee learning and development. No other business expenditure category receives so much funding with so little accountability. The point is that investors – whether they are owners, managers or stockholders – are recognizing the value of talent, skills, knowledge and engagement. While they wrestle with how to account for these on the balance sheet, savvy organizations are investing in these “intangible assets” to drive their financial success.
As the investment in talent, skills, knowledge and engagement increases, there will be a greater demand for accountability for results. One of the hottest topics in the learning community today is return on investment (ROI). The top-selling books, best-attended workshops and frequency of ROI articles in the trade press all prove that the learning community is seeking ways to measure the value of the investment. The goal is to provide evidence for changing policies and practices to support investments in people. Managers and investors will need this evidence to fend off the assault of short-term earnings pressures on the long-term value of investing in their people “assets”.
About the author:
Bill Wilder is the director of education at Life Cycle Engineering and holds a master’s degree in education from East Tennessee State University. He manages LCE’s Life Cycle Institute and can be reached at bwilder@LCE.com