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Human Resources should be. Included in the F/S. AC4304 Financial Reporting Theory. Human Resource should be included in the F/S. A genda. Introduction Human Resource Accounting fulfils the definition of asset Changing Society Economic Structure Cost Measurement Accounting Concept - PowerPoint PPT Presentation
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Human Resources should beHuman Resources should be
AC4304 Financial Reporting Theory
Included in the F/SIncluded in the F/S
1. Introduction
2. Human Resource Accounting fulfils the definition of asset
3. Changing Societya. Economic Structure
b. Cost Measurement
c. Accounting Concept
d. Business Strategy
AC4304 Financial Reporting Theory
Human Resource should be included in the F/S
Agenda
4. Usefulness of HR info for different usersa. Internal Users
b. External Users
5. Distort F/S without HR info
6. Example
7. Conclusion
AC4304 Financial Reporting Theory
Human Resource should be included in the F/S
Agenda
Introduction
Becoming an information based economy, requiring “high-tech services” from highly-trained & educated people
AC4304 Financial Reporting Theory
Definition of HRA
Report of American Accounting Association’s Committee on Human Resource Accounting:
Human resource accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties
AC4304 Financial Reporting Theory
Poem
Though your balance sheet’s a model of what balance sheets should be.
Typed and ruled with great precision in a type that all can see;
Though the grouping of the assets is commendable and clear,And the details which are given more than usually appear;Though investments have been valued at the sale price of the
day,And the auditor’s certificate show everything O.K.;One asset is omitted – and its worth I want to know,The asset is the value of the men who run the show.
AC4304 Financial Reporting Theory
Human Resources
The quality of management varies between companies – the better the quality, the higher the value
Employees possess education and experience which translate to skills – the better the skills the higher the value
The more stable a workforce the less the turnover & hence the need for recruitment, hiring and training costs
Management and other employees are valuable assets- they have future benefits and the entity has exclusive rights to their services
But balance sheets do not reveal these values
AC4304 Financial Reporting Theory
HR fulfills the Definition of Asset
An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
An asset is a resource: controlled by an enterprise as a result of past events; & from which future economic benefits are expected to
flow to the enterprise measured reliably
AC4304 Financial Reporting Theory
HR fulfills the Definition of Asset Services people are expected to provide to an organization
comprise the asset The skill asset value formula
Skill asset value = (cost of skills ) x (average years of service) x (retention rate)
where: the cost of skills is taken as the total pay-roll cost for the relevant
accounting period; the average years of service is taken as the average number of
months service of all employees employed at the end of the period, expressed in years;
the retention rate is equal to 100 per cent minus the number of staff who have voluntarily left the business as a percentage of the average number of staff employed in the accounting period.
AC4304 Financial Reporting Theory
Changing Society: Economic structure
Thedore Schultz, Nobel Prize Winner Laborers have become capitalists not from a
diffusion of the ownership of corporation stocks as folklore would have it, bit from the acquisition of knowledge and skill that have economic value
Changing Society – Economic Structure
Past: agricultural & industrial economic structure where the extent of human capital was significantly less, emphasis on physical capital, like properties, equipments
Now: increasing importance of human capital to the economy, e.g. computer technicians, engineers, lawyers, university professors. And the society is increasingly composed of white collar, technical personnel => HR is not shown in F/S
AC4304 Financial Reporting Theory
Changing Society – Cost Measurement
Past: HR is difficult to value
Now : Have actuary to value HR cost, and many measurement is developed, e.g. Original Cost, Replacement Cost, Opportunity Cost Method (methods measuring costs on recruiting, hiring and training human resources) – is the methods appropriate for our presentations, Amanda???
Put methods into Flash
AC4304 Financial Reporting Theory
Changing Society – Accounting Concept
Past: emphasis on Prudence principle (Prudence is the first priority among all principles)
Now: True and Fair view (assurance)
AC4304 Financial Reporting Theory
Usefulness of HR info for Different users – Internal Users
HR info help management plan and control the use of human resources effectively and efficiently (provide useful info), e.g. questions like …. (next slide). By providing numerical information, it will help managers for better decision making
AC4304 Financial Reporting Theory
Usefulness of HR info for Different users – Internal Users
How to optimal user of human resources?
Whether the firm should hire people from the outside only at the entry level and then advance them gradually to higher levels?
Whether the firm should lay off personnel during recession or retain them to protect company’s human assets?
How much to invest in human resource development?
AC4304 Financial Reporting Theory
Usefulness of HR info for Different users – Internal Users
Example:
Lay off during recession:
=> reduction in payroll costs
=> However, when economy recovers -> hire people -> invest in training people -> hidden replacement cost & affect its name
HR numerical info => analyze the effect
AC4304 Financial Reporting Theory
Usefulness of HR info for Different users – External Users
Investors would like to know the value of a firm’s human assets
Assist in making decisions to acquire, retain, or dispose of stock
E.g. Great human asset value for an R&D company => good potential => acquire shares
AC4304 Financial Reporting Theory
Usefulness of HR info for Different users – External Users
+ EXAMPLE (PDF)
AC4304 Financial Reporting Theory
Distort F/S without HR info
Expense HR cost rather than capitalize
=> distort P/L and B/S, and ratios
=> produce relatively lower reported current earnings -> appear to be doing poorly when it is actually doing well (distortion)
=> conflict between the long-run interests of the organization and the short-run interests of management
AC4304 Financial Reporting Theory
Distort F/S without HR info
P/L: “net income” is distorted because accountants all expenditures made to acquire or develop human resources as expenses during the period incurred, rather than capitalizing and amortizing them over expected service life
B/S: “total assets” is distorted because it does not include the organization’s human assets
Ratios: Rate of Return = Net income / Total assets
AC4304 Financial Reporting Theory
Example – Manchester United
A company of playing Soccer
(Refer to P/L and Notes to account)
P/L: separate column into “operations excluding player amortization and trading” and “player amortization and trading”
B/S: Cost of players’ registrations is put as the intangible fixed assets in B/S
AC4304 Financial Reporting Theory
Conclusion
Human Capital is an asset
Changing Society show that the HR become more important than in the past
Many users found that the HR info is useful for decision making
Distort F/S without HR info
Some companies add Human Capital value into F/S
=> HR should be included in the F/S
AC4304 Financial Reporting Theory
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