Over the years accounting fraternity is on the look for a way out to the ongoing debate of whether to recognize the human resource as a financial asset. The fundamental conflict is the human nature of the resource as only non-human assets are disclosed in a balance sheet. However recognition of intangibles like goodwill always triggers the need of disclosure of HR as a corporate asset.
MEASUREMENT AND RECOGNITION OF HUMAN RESOURCES
Over the years accounting fraternity is on the look for a way out to the ongoing debate of whether to recognize the human resource as a financial asset. The fundamental conflict is the human nature of the resource as only non-human assets are disclosed in a balance sheet. However recognition of intangibles like goodwill always triggers the need of disclosure of HR as a corporate asset.
Human Resources as an Asset
Generally accepted accounting pronouncements define an asset as something that can generate cash or value in future. Going by this simple definition, human resources should be accounted for in the balance sheet. However, the situation is a bit complex if we consider the more formal definition of asset (Glossary of terms used in International Financial Reporting Standards-IFRS) which states that:
An asset is a resource:
- Controlled by an entity as a result of past events; and
- From which future economic benefits are expected to flow to the entity.
As evident from the formal definition, an asset is simply an economic resource representing ownership of value convertible into cash or equivalent liquid resource. One of the major reasons why human resources are not recognized in the corporate financial statements is the controllability/ ownership part of the definition of an asset. The human assets are not owned or controlled by the organization in the way defined in the above referred definition together with the explanatory material given in relevant International Financial Reporting Standards and interpretations. As a matter of fact, human resources do generate cash for an organization, however they are not owned by the organization. They therefore are not recognized in the financial statements.
This definition and accounting practices do not make the importance of human resource any less. Their value and importance for a corporate entity cannot be underrated. Recently practitioners have developed models for the valuation of human assets. Based on these models, some of the renowned companies have valued their human asset and one of the examples of such companies is the 2nd largest software company in India, INFOSYS. According to the additional notes filed with the regulatory authorities, INFOSYS has recently valued each of its employees at over Rs. 10 million.
Financial Models and HR Valuation
There are many financial models to value human assets. Infosys used the Lev & Schwartz model to calculate the value of their human resources. In the past, companies such as Bharat Heavy Electricals Ltd (BHEL), Steel Authority of India Ltd (SAIL), Minerals and Metals Trading Corporation of India Ltd (MMTC Ltd), Oil and Natural Gas Corporation Limited (ONGC) and National Thermal Power Corporation Ltd (NTPC) have also used the same model. The model uses several factors such as age, annual earnings up to retirement, retirement age of the employees & cost of capital to value the human assets of the company. However, the model ignores productivity of employees, attrition rate and training expenses in its calculation.
The concept is still in its infancy and no model has yet been accepted by the accountancy bodies around the globe. However, financial advisory practitioners and standard setters are working hard to develop a harmonious framework for the valuation and recognition of human resource. Awaiting any generally accepted treatment, as a result the corporate bodies are not under any statutory requirement to value its human assets for the purpose of external financial reporting.
People are one of the most valuable resources for any organization. Regardless of the profitability and other performance indicators, it is the people who set the direction of any business venture. This necessitates the valuation of human assets atleast for internal management reporting. This will facilitate the decision making process at different levels of management in a company. Pertinent parameters for such valuation should be the return on human resource value, ratio of total income to human asset value etc. These parameters depict the efficiency of human resources employed by the company. These valuations can also facilitate investors in their investment decisions. They should consider the value of human assets together with balance sheet assets while appraising available investment options. One should not ignore the importance of human assets in planning for future success of an organization.
The Article is Written by Mr. Sami Ullah Khan.
Manager Business Advisory Services
RMDM & Co., Chartered Accountants
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