ACCOUNTING AND FINANCIAL REPORTING RECOGNITION OF FIRMS’ HUMAN CAPITAL INVESTMENT: AN EMPIRICAL INVESTIGATION OF FIRMS IN THE FTSE 100 LISTING OF THE LONDON STOCK EXCHANGE

Abstract

Firms’ spending on their employees is written off as expense to the annual financial statements under the current accounting treatment. This accounting treatment has been debated over decades, since employees are arguably claimed as the true value creators of firms’ intellectual capital. Value creation potential of employees, identified theoretically as human capital has been researched for valuation and measurement for accounting recognition of human capital investment and decision usefulness of financial reporting recognition through mandatory and mostly voluntary disclosure. Research evidence are found under different phenomenon namely; social capital, intellectual capital, human capital, etc. considering, investment, accounting and reporting practices, though on an ad-hoc basis, highlighting the need for a study covering a holistic picture of the accounting and financial reporting recognition of human capital investment. Hence, the research is conducted, addressing the current practice of accounting and financial reporting recognition of firms’ human capital investment, considering both determinants and consequences of the practice utilising a stakeholder approach. The research is undertaken with data collected from annual reports of firms of FTSE 100 listing of London Stock Exchange for five accounting years, (2004-2009) chosen subjected to data availability, analysed using panel data analysis techniques with fixed and random effect estimators coupled with pooled linear regression as an alternative approach. The results of the study indicated a significant variance in the practice implying positive influences on promoting the practice accounting and financial reporting recognition of human capital investment. The results further indicated the requirement of a framework governed by standards and guidelines in promoting the practice accounting and financial reporting recognition of firms’ human capital investment.