2. 2
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
3. 3
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
4. 4
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
5. 5
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
6. 6
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
7. 7
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
8. 8
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
9. 9
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.
10. 10
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
11. 11
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
12. 12
Intellectual capital including
– human capital,
– organizational capital
• Relation capital(outside)
• Customer capital(outside)
• Process capital(inside)
• Learning and development capital(inside)
13. 13
Characteristics of Human capital
– Hard to imitate
– Causal ambiguous
– Cannot duplicate in a short time
14. 14
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
15. 15
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
16. 16
Reasons why GAAP does not allow
human capital investment becomes
assets
– Future benefit uncertainty
– Conservatism
– Ethical issue
17. 17
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
18. 18
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.
19. 19
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
20. 20
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
21. 21
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
22. 22
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.
23. 23
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.
24. 24
The Limitation
Hard to find specific human resource
data
Case study rather than general study
25. 25
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?
