The document discusses human resource accounting and its importance for business. It defines human resource accounting as recording and analyzing human-related figures through accounting to aid planning and decision making. While current accounting treats most HR costs as expenses, viewing employees only as costs ignores their value as important assets. Ratios based only on financial statements provide little information on human capital profitability. The document argues for treating some HR costs as investments in human capital assets to give managers better insights into the effectiveness and efficiency of their human resource investments.

1. Understanding financial
human resource in relation
to business
Paper 4
Arriffin Mansor
1

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 r
12

13. 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 r
ROE = ROA × Equity Multiplier
Net Income Total Assets
= ×
Total Assets Common Equity
13

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 r
ROA = Profit Margin × Total Asset Turnover
Net Income Sales
= ×
Sales Total Assets
14

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 r
ROE = Profit Margin × Total Asset Turnover × Equity Multiplier
Net Income Sales Total Assets
= × ×
Sales Total Assets Common Equity
15

16. The DuPont System: Dell
Net Income Sales Total Assets
ROE = × ×
Sales Total Assets Common Equity
= Profit Margin × Total Asset Turnover × Equity Multiplier
= ROA × Equity Multiplier
$1,666.00 $25,265.00 $11,471.00
ROE = × ×
$25,265.00 $11,471.00 $5,308.00
= 0.0659 × 2.2025 × 2.1611
= 0.1452 × 2.1611
= 31.39%
16

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. 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. 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. 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. • Characteristics of Human capital
– Hard to imitate
– Causal ambiguous
– Cannot duplicate in a short time
21

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. • 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. 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. • Reasons why GAAP does not allow human
capital investment becomes assets
– Future benefit uncertainty
– Conservatism
– Ethical issue
25

26. 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
26

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. 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. 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. 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. 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. 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. • 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. The Limitation
• Hard to find specific human resource data
• Case study rather than general study
34

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. 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. Thank you for listening
Q&A
37