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human resource accounting(HRM)

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Need for H R A

With the growing emergence of the “knowledge economy” the traditional valuation has been called into question due to the recognition that human capital is an increasingly important part of an enterprise total value. This has led to two important questions

How to assess the value of human capital in addition to an enterprise tangible assets and

How to improve the development of human capital in enterprise It is an extension of the accounting principles of matching cost

and revenues and of organizing data o communicate relevant information in financial terms

It can be used as a information tool for internal/external use(for emp,cust,invstr)and as a decision making tool for HRM

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Approaches to HRA

The American accounting association committee has defined HRA is the Process of identifying and measuring data about human resources and communicating this information to interested parties to facilitate effective management with in the organization

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Valuation of HR

Historical cost approach Replacement cost approach Opportunity cost approach Standard cost approach Present value approach Net benefit model Reward valuation approach Total cost concept Aggregate payment approach

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Importance of HRA

It helps in decision making in he following matters Employment , locating and utilization of human

resources Transfers, promotions, training and retrenchment of

human resources Planning of physical assets vis-à-vis human resources Identifying the causes for high turnover at various

levels and taking preventive measures to contain it Locating the real cause of low return on investment It helps individuals employees in improving their

performance and bargaining power

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The aspects of HRA

Valuation of human resource Recording the valuation in the books of

acconunts Presenting the information ion the

financeial statements of communication

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Assumption underlying HRA

People are valuable organizational resources capable of providing present and future services to the organization and such future services have economic value to the organization and can be measured

The information relating to the human resource would facilitate various management decisions on acquisition ,compensation, training and development

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What is human resource accounting? To record, report and analysis human

resource related figures through accounting system

The result can be use for decision making purpose

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What is the value of human?

Human is priceless. Human capital can be counted.

– How do you calculate the value of an employee in the company?

• Minimum value = The present value of her(his) salary in the future, by considering the possibility of early absence.

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Why human resource accounting?

Human capital becomes the most important asset in the corporation to extract value

Present accounting system ignores the importance of human resource value

Managers lack information about the effectiveness and efficiency of human resource investment

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Human capital becomes the most important asset in the corporation

More service(human intelligence) oriented company than before– Higher Tobin’s Q(Price/Equity)– Higher Return on Assets(ROE)

The importance of capital shifts from financial capital to intellectual capital

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Intellectual capital including – human capital, – organizational capital

• Relation capital(outside)• Customer capital(outside)• Process capital(inside)• Learning and development capital(inside)

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Characteristics of Human capital– Hard to imitate– Causal ambiguous– Cannot duplicate in a short time

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Present accounting system ignores the importance of human resource value

Generally Accepted Accounting Principle(GAAP) treats most human capital related costs as expenses, instead of assets

The more the company invests in human capital, the less the current net income

Revenue-Expense(including HR)=Net Income

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Financial ratios, based on financial statements, provide little or bias human capital profitability information, for example– ROA: based on hard asset– Return on Investment(ROI): The “I”

represents the investment on hard assets– Assets Turnover: Sales/Total “hard ”assets

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Reasons why GAAP does not allow human capital investment becomes assets– Future benefit uncertainty– Conservatism– Ethical issue

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Managers lack information about the effectiveness and efficiency of human resource investment Lay off decisions

– Does the lost training cost and future orientation cost be considered?

– Short term, immediate positive impact on current net income VS effect on long term profit

– Impacts on employee’s feeling which may negatively influence company income

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Investment in human capital decisions– Where is the beef?– What is the relationship between human

capital investment and operation result?– The communication of company human

capital to investors.

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The Human capital Architecture

The classification of Human capital (Please see Figure 1 on P.125)– Not all employees are classified as human

capital– Value VS Uniqueness(Lepak & Snell, 1999)– High value Employees can be considered

as human capital– Human capital in quadrant 1are most

valuable 123

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Costs related to human capital

1. Formation and acquisition costs at the early stage of development, eg. Recruiting cost

2. Learning costs in the middle stage of development, eg, Training cost

3. Replacement costs at the final stages of development, eg, discharge cost

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Human resource factors that may have influence on operation result

Financial(human resource accounting, use accounting system to collect data)

Non financial(use questionnaire)– Personal background, such as age,

gender, education, experiences and licenses.

– Personal characteristics, such and personal traits

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My research summary

If we consider human capital cost as the only variable, usually it does not show significant influence on operation result in most companies.

However, if we use an intermediate variable, such as customer capital between human capital and operation result, usually human capital would demonstrate significant influence on operating result through the intermediate variable.

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Some personal background and personal characteristic, together with human capital cost, do have significant influences on operating results

Capitalizing human capital cost may improve the quality of earning.

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The Limitation

Hard to find specific human resource data

Case study rather than general study

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Future development

The influence of mark to market value accounting(such as the evaluation of investments) on human resource accounting

R & D cost also faces the future benefit uncertainty problem, does the accounting treatment for R & D provide any guidance for human resource cost?

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Thank you for listening

Q & A