Transcript Document

New Paradigms in Accounting –
Human Resource Accounting
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Background
Human Resource – An Asset ?
Definitions
Objectives of HRA
Valuation Approaches
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Background
• The most valuable asset of an entity which is not
reported in the Balance Sheet due to
conventional accounting practices
• Behavioral scientists like Maslow, Elton Mayo
emphasized the value of Human Resource
Management to increase output
• Currently, expenses of Selection, Training and
Retirement are considered as Revenue
Expenditure
• Writers such as Kaplan, Landekich are of the
view that the Traditional Framework of
Accounting is expanding
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Human Resource – An Asset ?
IASC Definition of an Asset:
“ Is a resource controlled by the enterprise, as a
result of past event and from which future
benefits are expected to flow to the enterprise”
Theoretical Questions:
1. Are Humans resources?
2. Are they controlled by the enterprise?
3. Do they result from past events?
4. Do they bring future economic benefits?
• If “Yes” for all it is an “asset”
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Human Resource – An Asset ?
Opponents’ View (Against View)
Generally, to recognize an asset in the B/S two
tests have to be satisfied.
1. Verifiability test
2. Measurability test
Since, the second test is not being satisfied HR is
not recognized as an asset
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Human Resource – An Asset ?
Proponents’ View (For View)
Not recognizing HR in Balance Sheet leads to;
1. Discarding the matching principle (Cash Basis ?)
2. Violating the accrual principle
3. Violating the principle of adequate disclosure
4. Under rates the firm’s net worth
5. Does not reflect the “True and Fair” view of the
entity
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Definitions: Human Resource Accounting
Definitions
• AAA Definition:
“ The process of identifying and measuring data
about human resources and communicating this
information to the interested parties ”
2. Stephen Knauf (1983):
“ The measurement and quantification of human
organizational inputs such as recruiting, training,
experience and commitment ”
3. Eric Flamholtz
“ Accounting for people as organizational
resources. It is the measurement of the cost and
value of people for the organization ”
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Objectives and Purposes of Human
Resource Accounting
Objectives
- Recognition of value of all resources controlled/
used by the entity (Primary Objective)
- Improvement of Human Resource Management
(Quality and Quantity of Goods can be Increased)
- Effective and Efficient management of people
Purposes
- Internal Decision Making
- External Decision Making
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Objectives and Purposes of Human
Resource Accounting
Purposes
- Internal Decision Making - on alternative
investment decisions
E.g. Direct Recruitment Vs Internal Promotion
Retirement Vs Retention
- External Decision Making - To evaluate the true
worth of the firm for investor decision making, To
compute ratios as ROCE more accurately
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Valuation Approaches of Human Resource
Measurement is arbitrary and there are mainly 2 approaches;
- Cost based approaches
- Earnings based approaches
Cost Based Approaches
1. Historical Cost Approach
2. Replacement Cost Approach
3. Opportunity Cost Approach
1. Historical Cost Approach
The cost of recruitment, selection, development are all
capitalized and amortized over the useful life time of the
employee. This amortization may be dealt according to the
situation.
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Valuation Approaches of Human Resource
1. Historical Cost Approach
Benefits: Easy to operate, Conforms with the
matching principle, Similar to the treatment of
other fixed assets
Shortcomings: Estimation of the useful life time may
not be easy, The value of humans are generally
increasing over time - but this method gives a
declining picture, This method doesn’t actually
measure the value but undermines it
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Valuation Approaches of Human Resource
2. Replacement Cost Approach - The cost to replace
the existing human resources are estimated. All
costs incurred to attain the current level of
competence of an existing employee. Created
from scratch
Benefits: Is present/ future oriented
Disadvantage: Not always possible to obtain such a
measure (identical replacement), It is hence
subjective
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Valuation Approaches of Human Resource
3. Opportunity Cost Approach – Is based on economic
concept which overcomes the deficiency in
replacement cost app. Measured through a
competitive bidding process within the entity.
Steps:
1. The entity is divided in to investment centers
2. The investment centre managers bid for scarce
employees they need within the entity
3. The maximum bid price may obtained by the
capitalization of the excess profits generated by
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the employee
Valuation Approaches of Human Resource
1. Example:
The capital base of the company = Rs. 200,000/The current net profit
= Rs. 20,000/The ROI of Assets
= 12%
Excess profits generated by emp = Rs. 6,000/Calculate the capitalized vale (O/C) of this
employee
Weaknesses:
1. Restricted to the next best alternative of the same
organization
2. Subjective – Only being bid employees
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3. Discriminatory
Valuation Approaches of Human Resource
Earnings Based Approaches
- Harmon Son’s Approach:
Present value of future 5 years’ earnings
Weaknesses: Discount Rate?, Efficiency Ratio ?,
Highly complex calculations
2. Lev and Schwartz Model
PV of future earnings until retirement.
Weaknesses:
Only
retirement/death
for
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termination, the promotions not considered etc