A company often has many types of assets it uses to create revenues and wealth in the business environment. Accountants are responsible for classifying assets according to generally accepted accounting principles (GAAP). The two large, overarching asset classifications are tangible and intangible assets. Employees are an asset for a company, but they are not a classically defined intangible asset.
An intangible asset is something a company uses but has no physical representation. Items like copyrights, patents, trademarks and rights to use contracts are common intangible assets. Under GAAP rules, employees are not intangible assets and do not have representation on the company’s financial statement. Traditional intangible assets must fall under one of the previous categories to have inclusion on financial statements.
While employees themselves are not an intangible asset, they do bring wetware to a company, which is an intangible asset. In business, wetware represents an employee’s mental capabilities. Many employees have intelligence and other mental skills that allow them to bring benefits to a company. Research and development or accounting skills are examples of wetware. Individuals bring this intangible asset to the company when completing various business tasks.
Other intangible benefits derived from employees are their skills and abilities. Skills represent the physical abilities an individual brings to a company. Engineers, construction workers or production employees are examples of employees with intangible skills. Through their physical ability, these employees can transform raw materials into finished goods in an efficient and effective manner. Employee skills are typically evident in manual labor positions in a company.
Even though a company cannot properly account for employee wetware or skills as an intangible asset, they do improve the value of a business. In many cases, employee wetware and skills represent the competitive advantage of the business. When another party buys the business, goodwill — the price paid above a company’s actual value — typically represents unaccounted-for assets a company has. Goodwill can encompass employee wetware and skills in the purchase price.