Question

Problem 1: Recognition and Measurement of Intangibles

A friend who likes to invest in the stock market made the following statement to you recently, “I don’t invest in entities that operate in service or knowledge-based industries because their financial statements don’t really reflect the true value of the entity.  This makes it very difficult for me to make informed decisions about whether to invest or not.”

Discuss why an investor may arrive at the conclusion that the financial statements of entities operating in service and knowledge-based industries are not useful for making investment decisions

Explain the recognition criteria that prevent human capital being recognized as an asset in the financial statements.

Answer 1

An organisation whether in trade or manufacturing or in service sector or say knowledge based organisation, human beings are the main Key of success for all organisations. There are some tools through which one can assess the human capital value which needs recognition in such type of particular Organisations which are in service Industry or called as Knowledge based Industries.

The recognition criteria prevents human being capital as an assets in the financial statements because of following reasons:

1. Whatever Intangible Assets created by such human beings the persons of Intellectuals cant be measured in monetary terms.

2. Whatever the experience of human beings in developing the assets, cant be measured in monetary terms.

3. Whatever the services provided by the particular organisations through the assets & human beings can be measured for particular services to any service user but can be different from that of other organisation using such assets or the services of human beings.

4. Exact valuation process will always differ from person to person those who will assess the value of that Intangible assets.

5. Hence, we cannot evolve the valuation criteria for valuation of such type of Human Capital.