Understanding financialhuman resource in relation      to business             Paper 4         Arriffin Mansor            ...
Contents•   What is HR accounting?•   What is the value of human?•   Why is HR accounting?•   The importance of Human Capi...
What is human resource accounting?• To record, report and analyze human resource  related figures through the accounting s...
What is the value of human?• Human is priceless.• Human capital can be counted.  – How do you calculate the value of an em...
Why human resource accounting?• Human capital becomes the most important  asset in the corporation to extract value• Prese...
Human capital becomes the most important          asset in the corporation• More service(human intelligence) oriented  com...
Ku-Jun Lin, Associate Professor, Tam Kang University• Intellectual capital including  – human capital,  – organizational c...
Review: Major Balance Sheet Items         Assets             Liabilities and Equity• Current assets:        • Current liab...
Objectives of Ratio Analysis• Standardize financial information for  comparisons• Evaluate current operations• Compare per...
Rationale Behind Ratio Analysis• A firm has resources• It converts resources into profits through   – production of goods ...
Types of Ratios• Financial Ratios:   – Liquidity Ratios      • Assess ability to cover current obligations   – Leverage Ra...
The DuPont System                           ROE                     ROA                     E q u ity M u ltip lie rP ro f...
The DuPont System                           ROE                     ROA                     E q u ity M u ltip lie rP ro f...
The DuPont System                             ROE                       ROA                     E q u ity M u ltip lie r  ...
The DuPont System                                ROE                          ROA                     E q u ity M u ltip l...
The DuPont System: Dell      Net Income       Sales        Total AssetsROE =            ×              ×         Sales    ...
Summary of Financial Ratios• Ratios help to:  – Evaluate performance  – Structure analysis  – Show the connection between ...
Limitations of Ratio Analysis• A firm’s industry category is often difficult to  identify• Published industry averages are...
Ratios and Forecasting• Common stock valuation based on   – Expected cashflows to stockholders   – ROE and ρ are major det...
How Might Ratios Help Me on the             IEM?• Analysis of AAPL, IBM and MSFT, and comparisons to  the S&P500 companies...
• Characteristics of Human capital  – Hard to imitate  – Causal ambiguous  – Cannot duplicate in a short time             ...
Present accounting system ignores the importance of human resource value • Generally Accepted Accounting Principle(GAAP)  ...
• Financial ratios, based on financial  statements, provide little or bias human  capital profitability information, for e...
How about Return on Pay?• Not all post could be associated with ROA.• Jobs at the lowest level has only Pay to  contend wi...
• Reasons why GAAP does not allow human  capital investment becomes assets  – Future benefit uncertainty  – Conservatism  ...
Managers lack information about theeffectiveness and efficiency of human         resource investment • Lay off decisions  ...
• Investment in human capital decisions  – Where is the beef?  – What is the relationship between human capital    investm...
The Human capital Architecture• The classification of Human capital  – Not all employees are classified as human capital  ...
Accounting in HR•   Is HR expenditure an asset or an expense?•   How do you value HR in the Balance Sheet?•   How do you j...
Costs related to human capital• 1. Formation and acquisition costs at the early  stage of development, eg. Recruiting cost...
Human resource factors that may have     influence on operation result• Financial(human resource accounting, use  accounti...
Research summary     Ku-Jun Lin, Associate Professor, Tam Kang University• If we consider human capital cost as the only  ...
• Some personal background and personal  characteristic, together with human capital  cost, do have significant influences...
The Limitation• Hard to find specific human resource data• Case study rather than general study                           ...
Future development of HR accounting• The influence of market value  accounting(such as the evaluation of  investments) on ...
Closing Summary• Is it an asset or expense? Is training an asset  or expense?• How is HR represented in the Balance Sheet?...
Thank you for listening     Q&A                          37
Upcoming SlideShare
Loading in …5
×

Understanding financial in HR

4,456 views

Published on

What HR practitioners must understand in finance

Published in: Business, Economy & Finance
  • Be the first to comment

Understanding financial in HR

  1. 1. Understanding financialhuman resource in relation to business Paper 4 Arriffin Mansor 1
  2. 2. Contents• What is HR accounting?• What is the value of human?• Why is HR accounting?• The importance of Human Capital Asset• Present accounting ignores the human capital• Return on pay• Human capital architecture.• Costs related to human capital• Human Resources• Future development• Researh and development 2
  3. 3. What is human resource accounting?• To record, report and analyze human resource related figures through the accounting system• The result can be use for planning and decision making purpose 3
  4. 4. 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. 4
  5. 5. 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 5
  6. 6. 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 6
  7. 7. Ku-Jun Lin, Associate Professor, Tam Kang University• Intellectual capital including – human capital, – organizational capital • Relation capital(outside) • Customer capital(outside) • Process capital(inside) • Learning and development capital(inside) 7
  8. 8. Review: Major Balance Sheet Items Assets Liabilities and Equity• Current assets: • Current liabilities: – Cash & securities – Payables – Receivables – Short-term debt – Inventories • Long-term liabilities• Fixed assets: • Shareholders equity – Tangible assets – Intangible assets 8
  9. 9. Objectives of Ratio Analysis• Standardize financial information for comparisons• Evaluate current operations• Compare performance with past performance• Compare performance against other firms or industry standards• Study the efficiency of operations• Study the risk of operations 9
  10. 10. Rationale Behind Ratio Analysis• A firm has resources• It converts resources into profits through – production of goods and services – sales of goods and services• Ratios – Measure relationships between resources and financial flows – Show ways in which firm’s situation deviates from • Its own past • Other firms • The industry • All firms- 10
  11. 11. Types of Ratios• Financial Ratios: – Liquidity Ratios • Assess ability to cover current obligations – Leverage Ratios • Assess ability to cover long term debt obligations• Operational Ratios: – Activity (Turnover) Ratios • Assess amount of activity relative to amount of resources used – Profitability Ratios • Assess profits relative to amount of resources used• Valuation Ratios: • Assess market price relative to assets or earnings 11
  12. 12. The DuPont System ROE ROA E q u ity M u ltip lie rP ro fit M a rg in T o ta l A s s e t T u rn o v e r 12
  13. 13. The DuPont System ROE ROA E q u ity M u ltip lie rP ro fit M a rg in T o ta l A s s e t T u rn o v e rROE = ROA × Equity Multiplier Net Income Total Assets = × Total Assets Common Equity 13
  14. 14. The DuPont System ROE ROA E q u ity M u ltip lie r P ro fit M a rg in T o ta l A s s e t T u rn o v e rROA = Profit Margin × Total Asset Turnover Net Income Sales = × Sales Total Assets 14
  15. 15. The DuPont System ROE ROA E q u ity M u ltip lie r P ro fit M a rg in T o ta l A s s e t T u rn o v e rROE = Profit Margin × Total Asset Turnover × Equity Multiplier Net Income Sales Total Assets = × × Sales Total Assets Common Equity 15
  16. 16. The DuPont System: Dell Net Income Sales Total AssetsROE = × × Sales Total Assets Common Equity = Profit Margin × Total Asset Turnover × Equity Multiplier = ROA × Equity Multiplier $1,666.00 $25,265.00 $11,471.00ROE = × × $25,265.00 $11,471.00 $5,308.00 = 0.0659 × 2.2025 × 2.1611 = 0.1452 × 2.1611 = 31.39% 16
  17. 17. Summary of Financial Ratios• Ratios help to: – Evaluate performance – Structure analysis – Show the connection between activities and performance• Benchmark with – Past for the company – Industry• Ratios adjust for size differences 17
  18. 18. Limitations of Ratio Analysis• A firm’s industry category is often difficult to identify• Published industry averages are only guidelines• Accounting practices differ across firms• Sometimes difficult to interpret deviations in ratios• Industry ratios may not be desirable targets• Seasonality affects ratios 18
  19. 19. Ratios and Forecasting• Common stock valuation based on – Expected cashflows to stockholders – ROE and ρ are major determinants of cashflows to stockholders• Ratios influence expectations by: – Showing where firm is now – Providing context for current performance• Current information influences expectations by: – Showing developments that will alter future performance 19
  20. 20. How Might Ratios Help Me on the IEM?• Analysis of AAPL, IBM and MSFT, and comparisons to the S&P500 companies can help to: – Assess the (absolute and relative) financial state of each company – Show each company’s strengths and weaknesses – Predict sustainable growth rate• Combined with current information, this can help to: – Assess likely future performance – Predict future valuation and earnings growth – Predict returns 20
  21. 21. • Characteristics of Human capital – Hard to imitate – Causal ambiguous – Cannot duplicate in a short time 21
  22. 22. 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 22
  23. 23. • 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 23
  24. 24. How about Return on Pay?• Not all post could be associated with ROA.• Jobs at the lowest level has only Pay to contend with.• Hence, return on pay could be meaningful in evaluating the performance of a job holder. 24
  25. 25. • Reasons why GAAP does not allow human capital investment becomes assets – Future benefit uncertainty – Conservatism – Ethical issue 25
  26. 26. Managers lack information about theeffectiveness 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 26
  27. 27. • 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. 27
  28. 28. The Human capital Architecture• The classification of Human capital – 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 28
  29. 29. Accounting in HR• Is HR expenditure an asset or an expense?• How do you value HR in the Balance Sheet?• How do you justify a worker? ROA or ROP• How do you measure efficiency and profit contribution by each employee 29
  30. 30. 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 30
  31. 31. 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 31
  32. 32. Research summary Ku-Jun Lin, Associate Professor, Tam Kang University• 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. 32
  33. 33. • 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. 33
  34. 34. The Limitation• Hard to find specific human resource data• Case study rather than general study 34
  35. 35. Future development of HR accounting• The influence of 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? 35
  36. 36. Closing Summary• Is it an asset or expense? Is training an asset or expense?• How is HR represented in the Balance Sheet?• How do you evaluate the performance of a worker? ROA or ROP• How to identify critical performance gaps for TNA purposes. 36
  37. 37. Thank you for listening Q&A 37

×