Journal of Human Resource Costing & Accounting

Exploring the HRM/accounting interface on human assets: The case for artefact-based
asset recognition criteria
Tony Tollington Nevine El-Tawy

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JHRCA
14,1

Exploring the HRM/accounting

interface on human assets
The case for artefact-based asset
recognition criteria

28

Tony Tollington and Nevine El-Tawy

Brunel University, Uxbridge, UK
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Abstract
Purpose This paper seeks is to enhance our understanding of intangible recognition by embracing
an 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 the
marketing literature in respect of brands.
Findings Emphasis is placed on outputs, i.e. what people create, rather than on the more familiar
input orientation, which focuses on investments in human assets. When compared to an output
orientation, the more familiar input orientation is an unsatisfactory basis on which to recognise human
assets.
Practical implications The asset recognition criteria provide a useful checklist by which to
delineate 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, Accounting
Paper type Conceptual paper

Journal of Human Resource Costing &

Accounting
Vol. 14 No. 1, 2010
pp. 28-47
q Emerald Group Publishing Limited
1401-338X
DOI 10.1108/14013381011039780

Introduction
We 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 a
human asset for financial reporting purposes. For many in the HR management (HRM)
domain this premise would be unacceptable, since Our employees are our most
important asset is a common refrain amongst senior business executives, even if some
people disbelieve them (Lancaster, 1995). Others will point to the obvious
chicken-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 flourish
in the HRM literature (investments in training, recruitment, retention, etc.), in the HR
accounting (HRA) literature it has produced no discernible outcome in terms of the
increased disclosure of human assets on the balance sheet (with the possible exception
of footballers transfer fees). In the paper, we compare the above HR input and
HR output approaches and present the case, instead, for the capitalisation of separable
HR 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 how
to recognise assets.
Locating the paper in the literature and establishing a motive for it
It is well known that the legalistic, stewardship-centred, historical foundation of
financial reporting (Paton and Littleton, 1940) has evolved over recent decades to
embrace 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 respect
of asset recognition (Schuetze, 1993; Samuelson, 1996). We now add to that critique
from a human asset perspective for two important reasons.
First, HR inputs into, for example, a successful advertising campaign could be said
to comply with the above two definitional requirements, as reinforced by the
value-relevance literature in respect of future economic benefits (Hirschey and
Weygandt, 1985; Holthausen and Watts, 2001). And so to negate this apparent asset
status one can turn instead to the separability requirements of IAS38 (IASB, 2004) to
perhaps argue that, despite this definitional compliance, advertising is an expense, not
an asset, because it is inseparable from its related product or service. However, even
here it is possible to argue to the contrary: that advertising can be made separable by
being copyrighted (the legal, physical and separable HR output) and that it can produce
economic 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 this
example and others (Aboody and Lev, 1998 on software assets) that a definition and
rule approach to asset recognition is too flexible a tool for the purpose of accurately
delineating the boundary between an intangible asset and an expense. We look
critically at that boundary when applied to separable HR outputs. In this regard, we
draw upon both the HRA and HRM literatures.
Second, as will be evident in the next section of the paper, it is relatively easy to
critique the definition of asset in all its variations over time, but harder to be
constructive in terms of an alternative approach. So, we try to be constructive through
the use of artefact-based asset recognition criteria that have already received some
exposure in the marketing literature in respect of brand assets (El-Tawy and
Tollington, 2008). We use those same criteria here but this time as applied, in general, to
the recognition of separable HR outputs, notably, those outputs that sit on the boundary
between an asset and an expense. We are particularly interested in those intangible
assets that are the result of intellectual creativity, as physically and separably
represented by an identifiable artefact, preferably where this is legally supported for
the purpose of establishing who has control over it. These two observations provide a
brief pointer to the next two sections of the paper before presenting a summary in the
final section.
Before we continue to he first of these sections, however, we need to explain what is
meant by the recognition of assets based on a legally supported artefact because this
simple idea does not currently appear as asset recognition criteria in either the HRA or
HRM domains a contribution of this paper. A further contribution is that any
application of the proposed artefact-based asset recognition criteria would be common

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30

to all assets. Therefore, an inconsistency would be removed between the definition

basis for the recognition of all assets, which is one that currently excludes separability
from the asset definitions, and the IAS38 rule basis for the recognition of intangible
assets, 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 recognition
criteria centred upon legally supported artefacts, as explained next. An artefact is a
physical and visual representation, typically documentary, of expended human
intellectual and physical creativity.
In the accounting domain, artefacts already exist in terms of invoices, bank
statements, stock issue notes, payroll slips and similar physical records relating to
millions of disparate transactions. These artefacts are often standardised and
pre-numbered for audit verification purposes. In addition to these artefacts, accountants
will 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-standardised
artefacts for intangible asset recognition purposes, for example, a brand that possesses a
physical and legally recognisable trademark registration document (the artefact). That
said, the accounting regulators would need to be very careful about what constituted an
acceptable artefact as well as the acceptable person creating it. For example,
accountants already accept valuations of pension fund assets for accounting disclosure
purposes but, generally, only from a professionally qualified actuary.
A review of the HRM- and HRA-related literatures on HR inputs and
outputs
HRM and related literatures
An HR input orientation (Pfeffer, 1997) in the HRM and related literature is typified by
Barneys (1991) resource-based view of employee competencies, notably, those that are
valuable, 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 above
link to employee competency. Rather, to investments in people in general (Lepak and
Snell, 1999), including the obvious one of salaries and wages (a sunk cost according to
Chen 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 espoused
later on in this paper: tacit knowledge made explicit through legal formalism and/or
some physical representation (Lang, 2001; Williams and Bukowitz, 2001). However, in
the 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 are
references to reputational capital and human capital as well as connections to the

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intellectual capital literature vis-a`-vis tacit and explicit knowledge. Whether one looks
at 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 the
requirement 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 political
battles to be fought (Pfeffer, 1992) both inside (Arthur Andersen, 1992) and outside the
financial reporting domain (Pfeffer, 1997 refers to a war) that, for example, have
inspired the development of alternative measurement systems (Walker and
MacDonald, 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 and
strategy, meaning that the attributes of the workforce mutually reinforce the
organizations culture, structure and strategy but such alignments would be an
anathema to those who construct published financial statements. It follows that the
epistemology is more broadly based than the principles, definitions and rules based
epistemology that underpins the financial reporting domain, which is addressed next.
HRA literature
HRA (Brummet et al., 1968, 1969a, b) is based on the capacity of human beings to create
economic 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 as
the basis for asset recognition, determining a value for a human asset it is a construct
for which there are, at best, weak empirical measures (Scarpello and Theeke, 1989,
p. 267). Therefore, research approaches have often utilised surrogate HR output
measures instead, for example, composite non-financial measures (Likert and Pyle,
1971; Catasus and Grojer, 2006; Pedrini, 2007) that included job satisfaction indices and
labour turnover rates (Bassett, 1972), often directed towards decision making also
(Harrel and Klick, 1980). Good science, though, requires that any surrogate measures
proposed for a construct should be tested to demonstrate that they are proper
substitutes and that they can be reliably measured. Generally, this was not the case
historically and as such most attempts to model HRA conceptual frameworks simply
deteriorated into mathematical exercises (Gambling, 1974; Friedman and Lev, 1974;
Jaggi and Lau, 1974). As a consequence, there were calls for more empirical research
with better experimental controls (Sackmann et al., 1989; Johanson, 1999) as well as
calls for HRA research to be abandoned (Scarpello and Theeke, 1989). However, whilst
HRA research perhaps progressed at something less than a snails pace in the 1980s
and 1990s (Turner, 1996), and continues to be not a subject that will willingly
disappear (Roslender and Dyson, 1992, p. 312). Grojer and Johanson (1998), for
example, point again at the link to decision making as well as book-to-market
values (Lev, 2001, 2003) as two areas for research. More recently, HRA has attracted
renewed attention, for example, from the UK Government in the Accounting for People
report (DTI, 2003; Roslender and Stevenson, 2009).
Even with an HR input approach there is little attempt to justify the asset status of a
human related asset because the HR related expenditures are usually expensed or
subsumed within an asset, as with constructed assets (exceptions being, for example,

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capitalised footballer transfer fees). Consider, for example, an architects building plan:
an HR output and a legally protected artefact, where copyrighted. The related HR inputs
may 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 the
previous 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 separable
recognition of HR outputs on a selective basis using legally supported artefacts,
particularly where the separable HR output results in an asset that is intangible in
nature. So, on this alternative HR output basis, the intellectual and aesthetic creativity
(the separable HR output) is manifest in the architects drawing (the separable artefact,
preferably with copyright) and is recognised separately from the building, even though
it may obviously be used to build the building. The architects plan, though, also
possesses many of the asset recognition characteristics raised in the next section of the
paper; for example, it is capable of transference, it may create income where sold to
another builder or where it is franchised, it is a store capital that can be utilised at a later
date, that capital may not expire for a long period of time or it may alienated immediately
by being discarded and so on. And it is these characteristics or criteria that the paper
seeks 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 is
intangible, is a priori to asset measurement and the latter should not substitute for the
former, otherwise, one cannot be too sure of what one is measuring. In recognising a
separable 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 above
literature on an HR input basis, first, and then an HR output basis, second, in the next
two paragraphs, in order to support it.
Comparing both literatures
The HRM and HRA literatures are more closely aligned when one considers the HR
input as an investment in people, for example, in their training. Whilst accountants
would probably be disinterested in the added employee competency associated with
such training, nevertheless, there is common ground between the HRM and HRA
viewpoints 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 inputs
should be capitalised or expensed. This is one such battle ground, as referred to
previously, 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, we
are still talking about asset (or expense?) measurement substituting for asset
recognition 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 be
regarded as an asset and another HR input should be regarded as an expense vide
the 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 avoid
double-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 would
argue that only workable solution centres upon the separable recognition of HR
outputs, addressed next.

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If one looks at Carson et al. (2004), referred to previously, one will see an extensive
list of possible HR outputs with supporting literary references; outputs such as
increased 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 seems
reasonable to assume that these outputs could potentially make a positive contribution
towards 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 is
located in the person and they are unlikely to be identified with specific past events (see
IAS38, 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 IASBs definition of an asset:
A resource controlled by the enterprise as a result of past events and from which future
economic 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 the
balance 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 and
supported by some legally enforceable means. In this regard, we have two criticisms
concerning 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 other
privileged 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 physically
and 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 the
problem for those who would deny that the same need arises for intangible asset
recognition (the physical artefact) is that the present right or enforceable right in
the 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 economic
benefit from an indeterminate resource for which the only logical candidate is the
right again, a conflation. If we accept this reasoning, then the latest revised definition
is tautological in nature as regards its application to the recognition of intangible
assets: an asset of an entity is a right (if rights are resources) to which the entity
presently 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 they
are. This is why we argue the case for a criteria-led approach rather than a
definition-led approach to asset recognition in the next section of the paper.
Finally, there is some disconnection between the definition of an asset at the
conceptual level and IAS38 at the rule level because separability is missing from
the definition. The issue, as far as we are concerned, is not a minor one that can be
dismissed 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 a
business acquisition. In terms of a recognisable resource it is completely inseparable
from the other assets of a business. Indeed, we have a good example here of where the
previous 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 recognition
on the basis that asset recognition is a priori to asset measurement.

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Artefact-based asset recognition criteria

We 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 really
what 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 to
have presented a set of propositions which explain the basic concepts underpinning the
preparation of statements of financial position, let alone the calculation of profit or loss.

The asset recognition criteria and supporting normative framework employed here
have already been extensively discussed in the marketing domain (El-Tawy and
Tollington, 2008). What we see to accomplish here is to apply them to a different
context, specifically, that of human assets. In using these criteria, we make the
distinction between what can be recognised for accounting purposes on an HR input
basis and an HR output basis in order to support, comparatively, the earlier assertion
that some separable HR outputs should be recognised as intangible assets. The
application 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 more
thoroughly one can regard a reporting entitys asset as recognisable in the financial
statements.

Table I.
Asset recognition criteria
(applied)

HR inputs: people-based asset

HR outputs: artefact-based asset

(a) No power to control without agreement

(b) Voluntary use (unless slavery)
(c) No security
(d) Capable of transference
(e) Indeterminate duration
(f) Harmful use prohibited (often by law)
(g) No liability to execution is possible
(h) No residuary character
(i) Human capital (invest in the person)
( j) Cannot be consumed, destroyed, wasted
(k) Measure investment in people
(l) Non-additive measurement methods
(m) Measurement often based on prediction
(n) Asset bundling as a team is possible

(a) Power to control use

(b) Involuntary use
(c) Security consistent with social norms
(d) Capable of transference
(e) Determinate duration where legally based
(f) Harmful use permitted sometimes
(g) Liability to execution is possible
(h) Legal residuary character sometimes
(i) Structural capital (separate from person)
( j) Can be consumed, destroyed, wasted
(k) Measure what people create
(l) Non-additive measurement methods
(m) Measurement of observed artefact
(n) Asset bundling of artefacts is unnecessary

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(a) The right to control an asset

Control is exercised for a purpose, typically the appropriation of income but not
always. This latter rider is contentious because if one looks at the two latest IASB asset
definitions, 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 economic
benefits (contrast with the 2001 definition) and therefore, control can now be used for
other purposes, such as preventing competition. Thus, one can now consider, for
example, lending assets without recompense or holding assets to prevent control by
others where the economic benefits are indirect at best. This is particularly so in
respect of intangible assets where, in the absence of an artefact, there is nothing to lend
or 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 exercised
contractually, that is, prescriptively with sanctions for non-compliance and,
proscriptively, as with restraint of trade agreements. However, since one cannot
compel action or inaction by a person, one is really referring to asymmetries of power
between an employer and an employee. Generally, there is little or no control without
voluntary agreement to that effect. This may be selectively and repeatedly modified or
withdrawn 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 persons
head or the person themselves, other than on a voluntary basis. Involuntary control,
instead, is exercised over the artefact: the visible representation of explicit knowledge
held 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 used
by many persons (for example, seawater or atmospheric nitrogen) and the issue of
rights become irrelevant. However, with a scarce asset, future use is linked to
restrictive 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 human
asset unless one believes in slavery. Use is on a voluntary basis only. On an HR output
basis, the future use of an asset is involuntary and it is not necessarily restricted to
income 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 be
passed 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 a
specialist version of criterion (b), previously.
On an HR input basis, there is very little security in a human asset and in any
expenditure made in augmenting that investment, such as training. Particularly so if a
person 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 the
patented 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, for
example, royalty income from securitised assets, such as Robbie Williamss music
copyright.
(d) The capability of transference (including asset disposal)
No actual transference is necessary as with a business transaction. The capability is
sufficient. Asset measurement is independent of this capability which is a physical
capability and therefore, in respect of intangible assets, it would necessitate the
existence of the artefact.
On an HR input basis, as one can see with professional footballers, human assets are
capable of transference between clubs. On an HR output basis, the existence of an
artefact is vital so that the business entity acquiring the intangible asset can
demonstrate 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 input
basis, 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 function
of an intangible asset can be separated from the human being and is vested in an
artefact the duration is determined by social norms, notably legalistic ones. Thus, for
example, a trademark registration will last for ten years and thereafter in perpetuity
providing it is re-registered every decade and its continued use is established.
( f ) The prohibition to harmful use
The asset definitions previously identified are clearly economically orientated
(economic resource, economic benefits) but it is axiomatic that this pursuit cannot be
sustained 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, a
pollution control asset may consume resources, produce no future economic benefits
and yet, may endure as a recognisable asset (in terms of the application of some of these
criteria) 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 vehicle
pollution costs. Because social norms, notably, statutory ones, indicate who must pay to
have their interests protected against the costs imposed by another party, improper use
of an asset is sometimes prohibited or, at least, restricted.
On an HR input basis it is axiomatic that a harmful human asset faces the
possibility of legal sanctions. On an HR output basis, whatever is created or used by a
person 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, that
does 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 carbon
credits (documented artefacts) where pollution quotas may be traded within and
between countries in the same manner as, say, fishing quotas designed to sustain
fish 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 the
prevailing social norms at that time.

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(g) The liability to execution

This criterion refers to the application of an asset in the settlement of a debt. On an HR
input basis, this is clearly a non-starter in a civilised society. That said, one only has
to observe the use of indentured, underage, sweatshop labour in many underdeveloped
countries to comprehend that what may be regarded as civilised will vary according
to social norms. Thus, immoral and legally unenforceable contracts may be struck
between parties for the use of labour in settlement of debts. It could never find its way
on 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 recognisable
artefact is important because, otherwise, it could potentially become a vehicle for
defrauding creditors, and national income would suffer as those with liquid capital
would 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 be
social rules for deciding what to do, for whatever reason, where the pre-existing legal
rights 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 intangible
assets 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, the
right 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 assets
over liabilities at the year-end. The amount of that positive difference depends on ones
view 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 case
for investments in human beings (Marshall, 1890, p. 469; OECD, 1996) and one
can easily capitalise labour on an input basis: the cost of salaries; training; retention;,
etc. However, whilst that investment is clearly measurable and an accurate
transactions-based measurement can be determined, it does not necessarily mean that a
measurable function exists where, to repeat, that labour becomes sick or idle where
the 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). The
argument is reducible to one of control (criterion (a)) over human capital that can be
wasted (criterion (j) next) by someone other than the business entity.
On an HR output basis the capital is traceable to an artefact: the separable
product of utilising the human asset. In effect, it is the process of structuralisation
(Johnson, 2002), that is, turning human capital into structural capital (Edvinsson and
Malone, 1997; Johnson, 1999; Stewart, 1997; Carson et al., 2004) although this is not
always 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 destroy
or waste it, or by any other means, discharge it and thereby deny oneself the right to
appropriate. The problem with this right is that it is the antithesis of the economic
orientation espoused previously. As a consequence, the most natural question would
be: why would anyone wish to do so?
On an HR input basis human assets can certainly be alienated but their destruction
or 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 possible
to discharge the capital tied to an artefact what a person creates. Consider that the oil
rich 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 as
an 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 earlier
asset 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 future
non-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 is
no 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 to
appropriate or prevent others from appropriating. The right to income is therefore
strengthened by the existence of any legal rights to an artefact but the right can also be
established 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 additive
Despite the title, this is an asset recognition criterion because no measurement method
is 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 at
different points in time (ASB, 1999, p. 79; IASB, 2001, para 100, 2005a) or when they are
mixed with non-financial metrics. Thus, all accounting metrics that purport to
represent economic value (the mix of money and time) are inherently non-additive in
nature and all one can do is minimize the scope for variation in that value by selecting
one 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 wages
and salaries approach (Lev and Schwartz, 1971); as well as a replacement cost
approach (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 an
accounting standard, rather than external consistency, for example, compliant with
market values, assuming they exist for the asset in question.
(m) An asset measurement should be based on observation
On an HR input basis, the measurement of the future economic potential of a human
asset is unobservable. Most observations of human beings are in respect of what they
currently do, or have done, and what they create, or have created. Anything which is
future based[1] is predictive rather than observable (Aitken, 1990, p. 229 for further
reasons 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 accounting
policy makers to embrace ever more predictive and subjective valuations and a new
category of unrealised reserves.
That said, one can ignore the issue of economic potential and base ones
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, or
advertised market-based salaries according to discipline. The same though cannot be
said for many valuation-based methods where the time frame is often future based, that
is, predictive, and therefore not observable. It is the current time frame that is
pertinent[2] because even transactions-based cost becomes a sub-set of valuation-based
methods 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 observed
securitisation 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 possible
A 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 unlikely
that human beings would be bundled together. On an HR output basis, whilst the
human asset is individual their output may not be. The use of a human asset in the
creation of economic benefits tends to be as part of a social group activity on the basis
that 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: who
created what, which tends not to be a problem with tangible assets but is a problem in
respect of intangible assets. This is because, in the absence of an artefact (the traceable
physical 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. For
example, one could argue, speculatively, that had US mortgages not been bundled into
financial instruments, with artificially inflated market values, there may not have been
a 2008 world financial crisis at all.

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In summary
From an asset-recognition viewpoint consider, again, that an architects drawing is a
recognisable separable document (artefact), but so is her/his passport. The difference is
that 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 the
right to future use (criterion (b)) and even this can be curtailed. So, we would argue that
the criteria are a reasonably useful tool for accountants to use in deciding whether they
have a recognisable asset or not for accounting purposes. Once one has decided on the
basis 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 appears
to be: well, if I can measure the asset accurately, de facto, it is simultaneously
recognised, that is, without necessarily ever fully knowing what the it is (Napier and
Power, 1992).
This is particularly evident in respect of intangible assets. The classic example in
this regard is purchased goodwill where the it is simply a rule created measured
excess 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 instead
in 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 can
accept the obvious logic of asset recognition prior to asset measurement and not
vice-a-versa, but why should that recognition be on the basis of artefact-based asset
recognition criteria? Why should I accept the authors social construction in preference
to the IASBs social construction, which is based on an asset definition? In response, we
are not going to repeat the supportive examples already presented in the paper. Instead
we conclude with what we see as a more strategic view, which clearly demonstrates the
tension between a socio-legal and a socio-economic view of an asset.
Asset definitions, old and new, have a clear economic focus whereas the artefactbased recognition criteria have, in the main, a legalistic focus. We have previously had
academic reviewers say to us that an asset must create future economic benefits or it is
not 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 future
economic 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 not
necessarily create future economic benefits. Consider, conversely, that such an
asset may raise barriers to entry into a market because the capital cost is too high
for some competitors. In other words, there may be future economic benefits but
they are indirect at best and difficult to measure reliably. But, to repeat, it is still
an asset in the sense that the business entity has a right to the capital invested in
it, to control it, to use it, to transfer it, to secure against it and so on the
recognition criteria.
.
An asset may have a capability to produce future economic benefits but it
is 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 has
identified HR outputs that would fall into this category. Even the IASBs (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, to
control it, to use it (even if they do not do so), to transfer it, to secure against it
and so on the recognition criteria.
One mans current pollution might, in future, become another mans goldmine as
global resources increase in scarcity and/or where the cost of access becomes
prohibitive to the point where recycling is profitable. It is therefore no longer
appropriate to consider an asset just in terms of its economic resources or
economic benefits, rather, in terms in terms of a balance of rights. Specifically, the
rights that the business entity has to assets, such as those considered in this
paper, and the rights that society has to be protected from the business entitys
use 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 the
business 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 intangible
assets) because what matters to a business entity is whether the balance of rights
is in favour of it making money or losing money. Asset recognition criteria make
one think about those rights and where the balance lies in the exercise of them
between what may be regarded as an asset or an expense, the latter being either
where an asset is consumed or where societal rights become so expensive to
implement 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 the
prohibition to harmful use (criterion (f)) will undoubtedly be a central feature.
Consider, that some information on a pollution control asset may be conveyed by
the fact that a business entity is compliant with some mandatory pollution
control legislation even if, economically, the reported value on a balance sheet is
zero, or is a nominal figure. The information argument then becomes a disclosure
policy issue as to what is decision relevant. Obviously, we would argue that
many HR outputs, such as the examples given in this paper, are decision relevant
because they comply with the recognition criteria and therefore should be
disclosed 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 cash
flows. This being so, it might be argued that the specific term should be preferred
to 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 the
term future economic benefits was preferred so as to avoid circularity in the
linkage 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 the
unexercised, 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 varying
degrees, is independent of future incomes. One only has to look at the 2008 credit
crunch, the earlier bursting of the dot.com bubble and the impact of irrational
exuberance (Shiller, 2000) to see the weakness of this measurement-only stance
and 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 verify
the recognition of an assets rights, notably where the asset is an intangible asset. We
need to emphasise that these are asset recognition criteria, however. Thus, the reader
may tick yes to all the criteria in this paper and decide that they have recognised an
asset but they are still left with the problem of measuring it, which, in the case of some
HR 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 purchased
goodwill on the basis of a mixed measured residual figure rather than recognition of its
rather dubious nature as an asset using the recognition criteria. We would argue that
the longstanding mixed measurement conundrum at the heart of accounting should not
be used to override the a priori recognition of the rights-based substance of an asset
because, otherwise, one cannot be too sure of what one is measuring. We think the use
of artefact-based asset recognition is better in that regard than the current definitional
basis for the reasons advanced in this paper but it is ultimately up to the reader to
decide as to whether one social construction is better than another one on the basis of a
political policy choice.
Notes
1. The implications for future-based valuations methods such as discounted cash flow (DCF),
all forecasts, some allocations and even some accounting standards (for example, cash
generating units as part of impairment reviews) are extensive. Also, an asset only has a
value when that value is completely independent of what it is earning in the activity under
analysis (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 to
income (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 asset
provides some tentative support for this point: An asset of an entity is a present right, or
other access, to an existing economic resource with the ability to generate economic benefits
to 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 net
realisable 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 contained
in the above definition. Also note that the element of control is now missing from
the 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 resource
is 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 be
divorced from either the past or, importantly, the future. Every accrual, for instance, contains
an 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 which
extend pro-tentionally into the future. Every turning backwards, as it were, to describe past
events also requires a turning to the future as what is not-yet and might never be.

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Corresponding author
Tony Tollington can be contacted at: Tony.Tollington@brunel.ac.uk

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