Note from Column Editor Tracey J. Niemotko: This month’s column was written by Aaliyah Layne, one of my students at Marist University, relating her research into the human capital area of sustainability accounting.
As a graduating senior accounting student, I am particularly drawn to the human capital component of sustainability accounting and reporting—an underrecognized, yet indispensable asset that shapes an entity’s long-term success. Human capital disclosures, in particular, offer investors, creditors, managers, and other stakeholders a clearer understanding of a company’s performance and future prospects. As stakeholder-oriented management becomes increasingly common, transparent reporting on the sustainability dimensions of human capital will become even more essential.
Human Capital Disclosures
In the United States, the most significant movement toward a human capital reporting standard emerged from the SEC’s 2019 proposal to update disclosure requirements under “Modernization of Regulation S-K Item 101 Description of Business, 103 Legal Proceedings, and 105 Risk Factors.” With respect to Item 105, human capital may also represent a source of risk, as disruptions in workforce stability or capability can directly and materially undermine operations and performance. Prior to this revision, the regulation had not been updated in more than 30 years, and the only human capital disclosure requirement was to report “the number of persons employed by the registrant” (“Modernization of Regulation S-K Items 101, 103, and 105,” Federal Register, SEC, https://tinyurl.com/cbuyvxrf).
The 2019 proposal generated approximately 3,000 comment letters, many of which emphasized that effective human capital management is critical “in assessing the potential value and performance of a company over the long term” and “fundamental to investors’ understanding of how well a company is managing its human capital.” In response, the SEC advanced a principles-based requirement for companies to provide “a description of the registrant’s human capital resources, including…any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business” (SEC 2019). This rule was finalized and became effective on Nov. 9, 2020 (SEC, “Modernization of Regulation S-K Items 101, 103, and 105,” https://tinyurl.com/225jm7jf), marking the first substantive human capital disclosure requirement in US securities regulation.
Internationally, the Sustainability Accounting Standards Board (SASB)— now consolidated under the IFRS Foundation—provides industry-specific guidance and a suite of sustainability accounting frameworks. From a management accounting perspective, European software company SAP offers a compelling illustration of how organizations have elevated human capital reporting in the wake of the COVID-19 pandemic. The disruptions of the pandemic underscored that human capital is “a primary driver of enterprise value in the new world of work” (Cornells T. van der Lugt, “Management Accounting for Human Capital at SAP,” Management Accounting Quarterly, vol. 23, no. 1, 2021, p. 1, https://tinyurl.com/j5s84hvm). In response, SAP began redefining the role of its management accountants, encouraging them to act as “information brokers,” developing advanced capabilities in analytics and strategic dashboarding, and taking on a more active role in human capital valuation and business case development (van der Lugt, 2021, p. 2).
SAP’s aspirations catalyzed several structural and operational shifts. The CFO assumed oversight of both financial and non-financial performance indicators, bringing the chief sustainability officer under the CFO’s reporting line (van der Lugt, 2021, p.2). SAP also embedded advanced analytics within its HR function, enabling the development of data models that “calculate predictive attrition and vacancies” and illuminate projected headcount trends relative to actuals and operating-unit forecasts (van der Lugt, 2021, p. 3). SAP incorporated indices such as the Business Health Culture Index (BHCI), Employee Engagement Index, and Leadership Trust Index. The company further leveraged dashboarding to integrate financial and nonfinancial indicators into a centralized platform, strengthening the alignment between social metrics and overall business strategy (van der Lugt, 2021, pp. 3-4).
SAP also expanded its use of social key performance indicators—such as employee engagement, work-life balance, retention rates, and customer satisfaction—alongside traditional financial measures. These initiatives have produced measurable gains, including reduced HR costs, shorter time-to-hire, lower cost-per-hire, and faster time-to-productivity (van der Lugt, 2021, p. 3). By quantifying HR outcomes and embedding them within integrated performance analytics, SAP enabled more strategic, evidence-based management decision-making.
Human Capital Reporting
Human capital reporting can also be incorporated into external financial statements through several established models and approaches. Broadly, human capital accounting is executed through two primary models, each offering distinct mechanisms for quantifying employees’ contributions to organizational performance.
Cost-based model. This model assesses human capital by capturing “costs such as employment, selection, training, and development of man-power,” treating these expenditures as an intangible asset that is amortized over the expected duration of an employee’s service (Queen Mpofu and Favourate Sebele-Mpofu, “Conceptualizing a Human Capital Measurement and Reporting Framework,” Journal of Accounting, Finance and Auditing Studies, vol. 9, no. 2, 2023, p. 140, https://tinyurl.com/mrx7rctm).
Value-based model. The value-based model encompasses three principal approaches:
- Market value approach: Estimates the “market value” of an organization’s human capital using metrics such as human economic value added, human capital cost factor, human value-added, and human capital revenue factor (Mpofu, 2023, pp. 140-141).
- Present value approach: Determines value by discounting employees’ projected future earnings using the firm’s cost of capital, with the resulting discounted earnings representing the economic value employees contribute (Mpofu, 2023, p. 141).
- Replacement cost approach: Capitalizes the “total costs that are spent on recruiting, training, and developing a new employee,” thereby valuing human capital based on the expenditures that would be required to replace the existing workforce (Mpofu, 2023, p. 141).
Human capital accounting frameworks can draw on the strengths embedded in these models, combining their components to support the development of a standardized human capital reporting system. Quantifying human resource outcomes is essential, as it enables organizations to assign value to the human capital asset in a consistent and decision-useful way. The use of indices in particular offers a uniform and trackable structure that can be updated as employees join or leave the organization, ensuring that reported values remain accurate and comparable over time.
Human capital can be understood through two complementary dimensions: 1) the value employees contribute to the organization and 2) the value the organization invests in its employees. Employee-contributed value encompasses not only salary, but also the economic worth of their skills, expertise, creativity, and innovation. These elements can be quantified through measures such as “assessing the productivity of each employee” and evaluating “the total costs incurred … [during] research and development” (Mpofu, 2023, p. 146).
Conversely, the value the organization invests in its workforce includes training, development, health, safety, and wellness. Training and development can be measured through the duration and cost of programs, while health, safety, and wellness investments can be assessed using indicators such as “the number of fatalities, the loss due to absenteeism, [and] returns lost due to injuries” (Mpofu, 2023, pp. 146-147). Together, these measures provide a structured way to capture both sides of the human capital equation and support more comprehensive reporting.
SAP repositioned human capital metrics as strategic inputs on par with traditional financial indicators and reinforced this through corporate governance. By embedding workforce data at the highest decision-making level, SAP positioned human capital metrics as core drivers of enterprise strategy, rather than peripheral HR outputs. The company also advanced its HR analytics, developing models that “calculate predictive attrition and vacancies” and forecast headcount trends (van der Lugt, 2021, p. 3), exemplifying value-based, forward-looking approaches to human capital management. Together, these developments show how integrating governance structures, strategic workforce metrics, and predictive analytics can advance the development of standardized human capital accounting principles, enabling more accurate reporting and clearer recognition of workforce-generated value.
Looking for Commitment
As a graduating senior navigating a job search, I place a high value on understanding how organizations support, develop, and invest in their employees. Being able to see this commitment—especially through financial reporting, human-capital metrics, and broader sustainability disclosures—would significantly influence my decision to apply for a position at a firm. These disclosures offer more than numbers; they provide a meaningful window into a company’s culture, priorities, and long-term approach to employee well-being and organizational health.
My interest in sustainability accounting makes this even more compelling. As reporting standards evolve, companies will become increasingly transparent about their environmental, social, and governance practices. I look forward to seeing sustainability reporting become more deeply integrated into mainstream accounting practice.
