Human capital
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A perplexing issue, particularly for many human resource management and marketing professionals, is the absence of a valuation in the traditional financial statements relating to human capital and other internally generated intangible assets, such as brands. Often these value drivers of an organisation form a critical key success factor. Goodwill does appear in many financial statements and this includes intangible assets acquired by another organisation, which are often subject to large impairments losses. However, this raises questions about the sustainability and volatility relating to goodwill valuations. It is against this background that accountants have decided to be cautious in respect of recognising intangible assets in the financial statements.
To prepare for this essay:
•Consider the controversy of whether human capital should be included in the financial statements.
•Consider how human capital could be defined and quantified in financial statements.
•How do you define human capital?
•What is the importance of human capital?
•What are the reasons to measure or not measure human capital?
In an approximately 900-word response, address the following issues/questions:
With the rise of the ‘knowledge economy’, the traditional valuation of an enterprise as consisting solely of measurable assets, such as buildings, equipment and inventory, is increasingly being questioned. Human capital, although widely recognised as an important component of an enterprise’s total value, does not appear on a statement of financial position (balance sheet).
•Discuss whether or not you believe human capital should be included in the financial statements. Identify how you are defining human capital. What are some of the difficulties that may be encountered in attempting to quantify and record this (these) asset(s)? If recorded, would such values remain constant or be subject to change?
Also,
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don’t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
Note: To prepare for this essay please read the required articles that is attached
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SAMPLE ANSWER
Introduction
The value of a person is difficult to quantify. Different people have different skills and abilities. To measure the actual value that people contributes in an organization is very challenging. It’s almost impossible to compare and measure the services of a lawyer and an accountant in terms of monetary value. Both are valuable in their professions and it’s only the fees that they charge for their services that can act as a rough measure of their value.
Several factors have to be considered before valuing people just like brands have to be differentiated and positioned differently through segmentation; people too have to be segmented on the basis of what they posses and what value exactly are they adding to the company. Valuation of individuals is based on estimates and it results from two different interacting variables. These are the conditional value of a person or employees and the probability that they will still remain for a particular period of time in that company. The conditional value of a person is literally the current worth of the employee’s potential services or even the production that a person can render to a company if the person works for a specific number of years. The conditional value can also be described as a person’s worth in the combination of productivity or performance, flexibility of skills or transferability and the person’s promotability. The last two depend on the first element. These factors are then multiplied by the person’s probability of still working for the business for particular years. The calculated amounts provide the total realizable value that an employee and his skills are worth (Mayo, 2008).
The same way the overall effectiveness of a person’s abilities are developed and the programs that are applicable in the process. Some advanced programs or computer soft ware’s generate specific units that change in respect to transferability and productivity of a person plus it collectively adds value to an employee’s total worth.
However, this approach has problems with future services which is still not clear on how it should be calculated. The concept also leads to lower value estimation for old and experienced persons and who have limited time to offer for services in future mostly because of old age or poor health. The approach fails to consider the rich experience gathered over the years.
Lev & Schwartz (1971) devised a system similar to accounting for human resource management and which some companies like Infosys, an Indian IT firm have already adopted in their systems. The Indian company’s annual report has a section that deals in Human Resource Accounting. The evaluations used to quantify and evaluate the present value of the employees future value is based on the company’s 2006 discounted rates which were estimated to be 12.96% and which were also the company’s cost of capital. The value that has been calculated as the cost of human capital is then applied in all other calculations including ratios and other year-to-year comparisons.
The value that this approach adds to corporate governance is still questionable. The need for this information in accounting or investing circles is yet to felt as it’s just on paper with little or no application at all.
The purpose and objective of human capital management can be classified into four major roles; a) pure labor, b) maintenance and administrative, c) value delivery to stakeholders and those that creates new value for future use.
The basis of classification may be on personal skills and employee behaviors, b) business or professional knowledge and also experience c) the kind of relationship held d) achievements e) alignment f) mobility and the potential to contribute and also grow and be more resourceful.
Fitz-Enz (2000) organized human capital into three levels;
a). The concept of human capital outlines the total contribution of the wholesale process and largely concentrates on manpower and productivity ratios.
b), The second measure deals with the process that leads to the service and quality of productivity.
c). The final part deals with the management of human capital and it concentrates on the traditional roles of the human resource department like acquiring and training staff. It also deals with evaluation and development of staff for effective job placement.
The choice of the people related measures and its application to the employees plan which depend heavily on the company’s strategies and the major goals of each department, its employees and the task that the company expects the department to participate and achieve. However, each workforce would include in its framework careful analysis to evaluate and measure the value of human capital, overall employee engagement, productivity and the added value.
For the balance sheet purposes, human capital would belong either on the assets side or the liabilities depending on the targets derived from the benchmarks or as set by the management.
Finally, to conclude, according to the research done on HRM practices and business performance that was done by the institute of Employment Studies (Tamkin, Cowling and Hunt, 2008) and later supported by the Work Foundation entitled People and the Bottom Line several questions popped up (Mayo, 2001).
Several questions can be posed in respect to human capital cost calculations. For example the relationship between poor performance and employees’ treatment; Are they related, should the management invest on systems that motivate workers or on the feedback systems that calculate individual performance and analysis human capital (Mayo, 2008)
Mayo (2008) contends that the human capital accounting has minimal effect on human performance but if it’s implemented positively it can create significant changes in cost calculations. Few companies have integrated human capital measurement mostly as a result of the challenges and difficulties of standardization. But it would be useful to understand the value of such intangible assets as human capital. There is a lot of knowledge on its benefit and how it can be applied in companies.
References
Fitz-Enz, 2000, The ROI of Human Capital, Amacom New York.
Lev, B. & Schwartz, A., 1971, The Use of the Economic Concept of Human Capital in Financial Statements’, The Accounting Review, January 1971
Mayo, A., 2008, Financial Statements and Human capital, Finance and Management, Management Extra, June 2008 retrieved June 11 2015 from http://www.mayolearning.com/assets/Uploads/Publications/ICAEW-May-08-Measuring-Human-Capital.pdf
Mayo, A. J., 2008, The Human Value of the Enterprise – Valuing People as Assets, Measuring,
Managing, Monitoring
Mayo A J, 2001, People and the Bottom Line’, Nicholas Brealey Publishing.
Tamkin, P., Cowling, M. and Hunt, W., 2008, Institute of Employment Studies Report No. 448, 2008
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