Indian Journal of Accounting (IJA) 53

ISSN : 0972-1479 (Print) 2395-6127 (Online) Vol. 51 (2), December, 2019, pp. 53-60

IMPACT OF HUMAN RESOURCE ACCOUNTING ON FIRM’S VALUE

Dr. Ritu Sapra

Ramya Jain

ABSTRACT

There has been a large increase in the service or knowledge-based companies where success
and growth of a firm would be determined by the quality, skills, knowledge, expertise, education of human
resources. Traditionally, it is only the financial and physical assets that could be accounted for in the
financial statements as per GAAP and fails to account for human resources. However, the growing
difference between market value of the firm and book value of the firm draws attention towards the
missing value from the statements. In the present knowledge-based economy, there has been growing
acceptance that human resource value could be the missing figure in the statements. Human Resource
Accounting (HRA) is an attempt to ascertain the cost and worth or value of human resource to the firm in
terms of expenses incurred on them by way of recruitment, welfare, training, development, compensation
etc. and try to judge their economic contribution to a firm. The purpose of the study is to examine the
impact of human resource variables viz. Compensation to employees, Staff welfare and training
expenses and Profit after tax per 1000 employees on firm’s value. The proxies used for firm’s value are
Market Capitalization and Total Assets. The data for BSE-500 companies for the year 2018 required to
evaluate the objectives of the study has been collected from CMIE Prowess Database. Out of 500
companies listed on BSE, finally 310 companies have been chosen for study due to non-availability of
data on the variables used in the models. In order to achieve the objectives of study, Multiple Regression
Model have been used. The study found that compensation to employees does not have a significant
impact on Market Capitalization while Staff welfare and training expenses and Profit after tax per 1000
employee have a positive and significant impact on Market Capitalization. The present study also
revealed that compensation to employees have a negative and significant impact on Total Assets while
Staff welfare and training expenses and Profit after tax per 1000 employee have a positive and significant
impact on Total Assets.

KEYWORDS: Human Resource Accounting, Market Capitalization, Profit After Tax.

_______________
Introduction
Conceptual and Theoretical Framework
The economy’s firms are divided into manufacturing-oriented firms and service-oriented firms. While
the manufacturing-oriented firms’ major assets are machineries and equipment, the major assets of service-
oriented firms are its human resources. The manufacturing-oriented firms have been disclosing machineries as
their assets; however, service-oriented firms have failed to disclose human resource as their asset. There has
been a shift from manufacturing-based economy to a service-based economy where employees are the
largest income-generating input. The increasing technological complexity in current businesses and increased
time and money required for human resource to gain expertise are making intellectual manpower a critical
resource of any economy. It is for this reason that large firms purchase small but technologically advanced and
superior firms i.e. not for their physical resources but for their superior human resource. The distinguishing
characteristic between successful and less successful firms is the quality and kind of human resource they are
able to hire, conserve and retain.


Associate Professor, Department of Commerce, Delhi School of Economics, University of Delhi, Delhi, India.

Assistant Professor, Department of Commerce, Ramanujan College, University of Delhi, Delhi, India.
54 Indian Journal of Accounting (IJA) Vol. 51 (2), December, 2019
A firm’s greatest assets are its people. The expenses incurred on enhancing skills, knowledge and
aptitude of employees are investments made in human resource. It has become of immense importance to
realize that human resource is a source of sustainable competitive advantage which is rare, valuable and
difficult to imitate.
The operations of a firm could be either to produce goods or to provide services through the
employment of factors of production viz. land, capital, labor and entrepreneur. While capital and land are
being reported in balance sheet by each and every firm, labor and entrepreneur have not been given the
needed attention. The factors; labor and entrepreneur are the human assets of the firm. The growth,
development and sustainability of any firm is dependent on how efficiently the firm is able to utilize its
resources viz. physical resources and also human resources. Physical resources comprise of land,
building, machinery, equipment, material, money etc. which are used by human resources to achieve
firm’s goals and objectives. Productivity, profitability, efficiency, solvency of a firm is dependent on human
resources. Consequently, whether there is optimum utilization of scarce physical resource is dependent
on the quality, skills, knowledge, talent, experience, morale, innovative thinking and such other features
of human resource. As a result, human resource should be considered as of immense importance which
makes its valuation and its reporting to firm’s stakeholders invaluable and priceless.
Traditionally, it is only the financial and physical assets that could be accounted for in the financial
statements as per GAAP and fails to account for human resources. As a convention, all expenses incurred
on human resources in the form recruitment, welfare, training, development, compensation etc. are all
charged against revenue of that year on the basis of assumption that such expenses does not provide
future benefits and hence, cannot be considered as an asset. However, in today’s competitive world, the
perceptions of people about human resource have been changing, they now consider human resource as a
source of competitive advantage, they have accepted the fact that any expense incurred on human
resource is an investment which has the ability to yield future benefits. There is thus, a need to ascertain
and report the value of quality, skills, knowledge, talent, experience, morale, innovative thinking and such
other features of human resource along with the organizational processes viz. recruitment, welfare, training,
development that are must for building, enhancing and supporting such human characteristics. Human
resource accounting (HRA) is concerned with the process for ascertaining this value and its appropriate
reporting in the financial statements. HRA is an attempt made to identify measure and report the
investments made in human resource and their economic contribution to the firm.
Concept of Human Resource Accounting (HRA)
According to (AAA) American Accounting Association Committee on Human Resource Accounting
(1973), Human Resource Accounting is defined as “the process of identifying and measuring data related to
human resource and communicating this information to interested parties”. HRA provides a framework on
how to value and disclose human asset (Likert, 1967). According to Davidson & Roman L. Weel, “Human
Resource Accounting is a term used to describe a variety of proposals that seek to report and emphasize
the importance of human resources – knowledgeable, trained and loyal employees in a company earning
process and total assets.” Human resource accounting can be well-defined as the art to recognize,
compute, record and report with consistency all the relevant and pertinent information concerning human
resource of the firm to the interested stakeholders both internal and external. HRA is an attempt to ascertain
the cost and worth or value of human resource to the firm in terms of expenses incurred on them by way of
recruitment, welfare, training, development, compensation etc. and tries to judge their economic contribution
to a firm. HRA is accounting for human resource as a firm’s organizational resource. It is an information
system whose purpose is to communicate the requisite information and changes therein concerning human
resource of the firm; to the interested stakeholders both internal and external. It reflects the potential of
employees of a firm in monetary terms in their balance sheet. HRA is a method of assigning value to human
resource in monetary terms and stating it as an asset in the balance sheet of a firm.
Relevance of Study
Human resource has been acknowledged as key factor in enhancing productivity and a source of
sustainable competitive advantage and human capital as a source of building firm’s assets which will
ultimately result in higher firm’s financial performance. This influence of human resource and human capital
on firm’s financial performance and value put emphasis on the need to study the influence of human capital
investment on firm’s performance and value. Conventionally, investors analysed the financial statements
which reported only physical assets of the firm as per GAAP to take investment decisions; however, the
outcomes of the study would give investor a new perspective to evaluate firm’s performance as the study
Dr. Ritu Sapra & Ramya Jain: Impact of Human Resource Accounting on Firm’s Value 55

aims at investigating the impact of HR investment on firm’s value. Thus, it is valuable to examine the impact
of human resource accounting on firms. When the impact of expenses incurred on human resource would
be analysed on firm’s value, then the need to treat such expenses as investments in human resource rather
than as a charge against revenue; would be highlighted. The growing difference between market value of
the firm and book value of the firm draws attention towards the missing value from the statements. In the
present knowledge-based economy, there has been growing acceptance that human resource value could
be the missing figure in the statements.
Literature Review
Kazan (2016) investigated on the impact of CEO compensation on firm’s performance measured
by Return on Assets and Return on Equity for Scandinavian firms. The sample under study consists of
Scandinavian firms that had place in Forbes Global 2000 List of 2016. Correlation results showed that no
significant correlation was found between CEO compensation and both the firm’s performance measures.
Regression results found that there was negative but non-significant impact of CEO compensation on both
ROA and ROE.
Ogbodo & Egbunike (2016) aimed at determining the relation between HR performance ratios
(proxy taken were Revenue per employee and Net income per employee) and firm’s financial performance
(Proxy taken were Return on Assets and Net Profit Margin) in Nigeria. The sample under study was
Insurance companies & Banks that were quoted on Nigerian Stock Exchange for the financial year 2012-13.
The panel data was generated taking this sample and data for financial years 2008-09 to 2011-12 and was
analysed using multiple regression. The results showed that Net income per employee had a positive and
significant influence on ROA and Net profit margin while Revenue per employee had a negative and
significant influence on ROA and Net profit margin. The authors advocated that firms should disclose soft
and hard both the factors that are contributing towards accomplishment of firm’s goals and objectives. Also,
statutory bodies should develop models to recognize, measure and report Human resource in balance
sheet as an asset.
Muhammad and Abdullah (2016) investigated into the influence of compensation on
organizational performance. Self-administered questionnaires were distributed among the 5,058 branch
managers of 10 selected commercial banks of Nigeria; from which 258 completely filled questionnaires
were obtained. SEM i.e. Structural Equation Modelling and PLS i.e. Partial Least Squares were used to
analyse the data obtained from filled questionnaires. Reliability analysis revealed that all the items were
suitable to measure the variables used in study. The authors found significant and positive influence of
compensation on firm’s performance. They also found that organizational commitment could facilitate the
impact of compensation on firm’s performance as significant mediator. The study concluded by emphasizing
the importance of implementing such effective compensation policies that could result in desired behavior of
employees that will ultimately lead to improved firm’s performance.
Onyinyechi & Ihendinihu (2017) aimed at determining the influence of human resource
accounting on firm’s financial performance using multiple regression analysis being tested at 5%
significance level. Personnel Benefit costs including expenditures on training and development, motivation
and welfare were taken as a proxy for human resource accounting while profits after tax (PAT), total
revenue and net assets were taken as a proxy for firm’s financial performance. The study analysed time
series data ranging from financial year 2011 to 2015 for 10 firms using multiple regression analysis. The
study revealed that personnel benefit costs had a strong positive influence on profit after tax (PAT), no effect
on total revenue and strong negative influence on net assets (reason given was that expenses on human
resource was not capitalized). The authors suggested that firms should invest in training and development
of human resource in order to enhance their productivity as they contribute towards enhancing firm’s
financial performance.
Vaddadi, Surarchith, & Subhashin (2018) determined the relationship between human resource
accounting and firm's performance through a study on 10 branches of an Indian nationalized bank situated
in Andhra Pradesh. The author developed and distributed 100 questionnaires in all the departments of
banks and received 92 completely filled questionnaires back. Questionnaire was developed on a 5-point
Likert’s scale extending from very important to not important; having multiple choice questions. The author
also conducted the reliability test using Alpha value to determine if the items used to measure the
underlying variables were reliable and found them to be reliable. The correlation analysis discovered that
independent variables had significant correlation with the dependent variables. The study used F-statistic
56 Indian Journal of Accounting (IJA) Vol. 51 (2), December, 2019
and beta values to determine the association between HRA and firm’s performance. The results found that
HRA for which training and development costs were taken as a proxy; had a positive relation with firm’s
performance. The author suggested that banks should pay attention on investment in human resource to
improve firm’s performance.
Masuluke and Ngwakwe (2018) examined the impact of human capital investment (in the form of
training and development) on firm’s profit performance. The study was carried out on panel data for 28
companies in FTSE/JSE Responsible Investment Index series for six years i.e. 2010 to 2015 using
regression. The authors found that human capital investment had a negative but non-significant impact on
net profits when taken in isolation but it had a negative significant impact when taken with sales turnover as
a control variable; in short-run but emphasized on the likelihood of positive impact of human capital
investment on net profits in long-run.
Objectives of the Study
The purpose of the study is to examine the impact of human resource variables viz. Compensation
to employees, Staff welfare and training expenses and Profit after tax per 1000 employees on firm’s value.
The proxies used for firm’s value are Market Capitalization and Total Assets.
Research Hypothesis
Ho1: Compensation to employees does not affect Market Capitalization.
Ha1: Compensation to employees affects Market Capitalization.
Ho2: Staff welfare and training expenses does not affect Market Capitalization.
Ha2: Staff welfare and training expenses affect Market Capitalization.
Ho3: Profit after tax per 1000 employee (PAT per 1000 employee) does not affect Market Capitalization.
Ha3: Profit after tax per 1000 employee (PAT per 1000 employee) affect Market Capitalization.
Ho4: Compensation to employees does not affect Total Assets (TA).
Ha4: Compensation to employees affects Total Assets (TA).
Ho5: Staff welfare and training expenses does not affect Total Assets (TA).
Ha5: Staff welfare and training expenses affect Total Assets (TA).
Ho6: Profit after tax per 1000 employee (PAT per 1000 employee) does not affect Total Assets (TA).
Ha6: Profit after tax per 1000 employee (PAT per 1000 employee) affect Total Assets (TA).
Sample for Study
The companies listed on the Bombay Stock Exchange (BSE) – 500 make up the population of the
study. The data for BSE-500 companies for the year 2018 required to evaluate the objectives of the study
has been collected from CMIE Prowess Database. Out of 500 companies listed on BSE, finally 310
companies have been chosen for study due to non-availability of data on the variables used in the models.
Model Specification
Model 1: LogMCi = α + β1CEi + β2SWTEi + β3PATPEi + β4LogNSi + + β6D/Ei + ei
Model 2: LogTAi = α + β1CEi + β2SWTEi + β3PATPEi + β4LogNSi + β5LogMCi + β6D/Ei + ei
Where,
i = individual firm ranging from 1 to 310;
α = parameter representing intercept;
β = parameters used in explaining the impact of independent variables on the dependent
variables;
e = error term
LogMC = Natural Logarithm of Market Capitalization;
LogTA = Natural Logarithm of Total Assets;
CE = Compensation to Employees;
SWTE = Staff Welfare and Training Expenses;
PATPE = Profit after Tax per 1000 Employees;
LogNS = Natural Logarithm of Net Sales;
D/E = Debt-Equity Ratio.
Dr. Ritu Sapra & Ramya Jain: Impact of Human Resource Accounting on Firm’s Value 57

Data Analysis
Model 1: LogMCi = α + β1CEi + β2SWTEi + β3PATPEi + β4LogNSi + + β6D/Ei + ei
2
In the present study, R value is 0.391 which implies that all the predictor variables viz.
compensation to employees (CE), staff welfare and training expenses (SWTE), profit after tax per 1000
employees (PATPE), net sales (LogNS) and debt-equity ratio (D/E); when taken together explains 39.1% of
2
the variation in the outcome variable i.e. Market Capitalization (LogMC). The value of Adjusted R is 0.381
which implies 38.1% of the variation in Market Capitalization (LogMC) is explained by all the selected
human resource variables and control variables when taken from the population instead of sample. The
2 2
difference between R and Adjusted R is 1% or 0.01 (0.391 – 0.381) which is very small. This fall in value
states that the present model will explain approx. 1% less variation in the outcome variable i.e. Market
Capitalization (LogMC) if it were derived from population instead of sample. The F-statistic for the current
model is 39.002 with a p-value < 0.01 which implies that the existing model (Model 1) has significantly
improved the ability in predicting the outcome variable i.e. Market Capitalization (LogMC) as compared to
the mean outcome. The present model is significant in predicting Market Capitalization (LogMC) at 1%
significance level.
Table 1: Model Summary for Model 1
R Square Adjusted R Std. Error of F- value Sig. Durbin-
Square the Estimate Watson
.391 .381 .92350 39.002 .000*** 1.940
Source: Secondary Data Analysis; ***p-value < 0.01 i.e. Sig. at 1%
In the existing model, compensation to employees (CE), t = -1.372693, p-value = 0.171 is not
significant in predicting Market Capitalization (LogMC) while Staff Welfare and Training Expenses (SWTE), t
= 4.111647, p-value < 0.01 and Profit after tax per 1000 employees (PATPE), t = 3.525968, p-value < 0.01
are significantly predicting Market Capitalization (LogMC).
The model that has been estimated from multiple regression model is as follows:
LogMCi = 8.364418 - 0.000005CEi + 0.000497SWTEi + 0.000002PATPEi + 0.301165LogNSi +
0.020024D/Ei + ei
Table 2: Coefficients Table for Model 1
Variables Unstandardized Standardized t Sig. Collinearity Statistics
Coefficients Coefficients
B Std. Error Beta Tolerance VIF
(Constant) 8.364418 0.384833 21.735198 0.000
CE -0.000005 0.000004 -0.129459 -1.372693 0.171 0.225307 4.438391
SWTE 0.000497 0.000121 0.415526 4.111647 0.000*** 0.196211 5.096551
PATPE 0.000002 0.000001 0.161887 3.525968 0.000*** 0.950647 1.051915
LogNS 0.301165 0.038158 0.421074 7.892580 0.000*** 0.704060 1.420333
D/E 0.020024 0.060030 0.015198 0.333569 0.739 0.965320 1.035926
Source: Secondary Data Analysis; ***p-value < 0.01 i.e. Sig. at 1%, **p-value < 0.05 i.e. sig. at 5%, *p-value < 0.1 i.e. sig. at 10%.
Model 2: LogTAi = α + β1CEi + β2SWTEi + β3PATPEi + β4LogNSi + β5LogMCi + β6D/Ei + ei
2
In the present study, R value is 0.712 which implies that all the predictor variables viz.
compensation to employees (CE), staff welfare and training expenses (SWTE), profit after tax per 1000
employees (PATPE), net sales (LogNS), market capitalization (LogMC) and debt-equity ratio (D/E); when
taken together explains 71.2% of the variation in the outcome variable i.e. Total Assets (LogTA). The value
2
of Adjusted R is 0.706 which implies 70.6% of the variation in Total Assets (LogTA) is explained by all the
selected human resource variables and control variables when taken from the population instead of sample.
2 2
The difference between R and Adjusted R is 0.6% or 0.006 (0.712 – 0.706) which is very small. This fall in
value states that the present model will explain approx. 0.6% less variation in the outcome variable i.e. Total
Assets (LogTA) if it were derived from population instead of sample. The F-statistic for the current model is
124.954 with a p-value < 0.01 which implies that the existing model (Model 2) has significantly improved the
ability in predicting the outcome variable i.e. Total Assets (LogTA) as compared to the mean outcome. The
present model is significant in predicting Total Assets (LogTA) at 1% significance level.
58 Indian Journal of Accounting (IJA) Vol. 51 (2), December, 2019
Table 3: Model Summary for Model 2
R Square Adjusted R Std. Error of F- value Sig. Durbin-
Square the Estimate Watson
.712 .706 .68838 124.954 .000*** 1.823
Source: Secondary Data Analysis; ***p-value < 0.01 i.e. Sig. at 1%
In the existing model, compensation to employees (CE), t = -2.659801, p-value < 0.01, Staff
Welfare and Training Expenses (SWTE), t = 3.928335, p-value < 0.01 and Profit after tax per 1000
employees (PATPE), t = 2.581834, p-value < 0.01 are significantly predicting Total Assets (LogTA).
The model that has been estimated from multiple regression model is as follows:
LogTAi = 1.929464 - 0.000007CEi + 0.000364SWTEi + 0.000001PATPEi + 0.263015LogNSi +
0.500410LogMCi + 0.516595D/Ei + ei
Table 4: Coefficients Table for Model 2
Variables Unstandardized Standardized t Sig. Collinearity Statistics
Coefficients Coefficients
B Std. Error Beta Tolerance VIF
(Constant) 1.929464 0.458432 4.208839 0.000
CE -0.000007 0.000003 -0.173239 -2.659801 0.008*** 0.223919 4.465901
SWTE 0.000364 0.000093 0.280829 3.928335 0.000*** 0.185875 5.379974
PATPE 0.000001 0.000000 0.083265 2.581834 0.010*** 0.913297 1.094934
LogNS 0.263015 0.031221 0.339658 8.424170 0.000*** 0.584326 1.711374
LogMC 0.500410 0.042752 0.462204 11.705017 0.000*** 0.609204 1.641486
D/E 0.516595 0.044755 0.362157 11.542762 0.000*** 0.964966 1.036305
Source: Secondary Data Analysis; ***p-value < 0.01 i.e. Sig. at 1%, **p-value < 0.05 i.e. sig. at 5%, *p-value < 0.1 i.e. sig. at 10%.
Discussions and Conclusions
The reason for a negative impact of compensation on total assets could be high compensation to
employee's leaves very limited funds for investment in assets, thus resulting in lower total assets.
Essentially, it is a manifestation of the underlying conflict between labor-intensive and capital intensive
approaches to investment. Investment in employee training generates human capital which helps firm achieve
sustainable competitive advantage through acquisition and enhancement of skills and knowledge which are rare
and valuable and cannot be imitated. This leads to higher productivity, profitability, cash inflows and also total
assets. The cumulative benefits derived from training add up in the form of higher total assets in long-run.
This is perceived as an indicator of future growth by the investors and they tend to invest in shares of such growth
companies which lead to an increase in market value of shares and market capitalization. Higher profits after tax
per 1000 employees suggest that employees’ efficiency is high; the firm is generating high profits with the
existing number of employees. Higher profits and higher employees’ efficiency indicates growth
opportunities and higher returns in future which attracts investors to invest in such growing firms; all these
lead to increase in total assets of firm, as a result of which stock prices would be expected to rise, thereby
increasing market capitalization.
Implications and Recommendations
 Training of employees should be considered as an investment in; and not as an expense on
human resource because firstly, investment in human resource does not yield immediate results, it
requires an intermediate period to realize its benefits and secondly, it helps in the survival and
sustainability of the firm in long run by ensuring competitive advantage; thus, it provides returns
over a long period of time.
 A firm can increase its wealth by increasing its profit after tax per employee as can be evidenced by a
positive significant relationship between profit after tax per 1000 employees and market capitalization
as productivity is enhanced. The productivity of employees could be increased by using more
advanced technology, enhancing skills and knowledge of employees, reducing employees’ turnover.
 Human resource accounting focuses on treating expenses on human resource as assets and not
to charge them against revenue, the results of study namely the positive impact of training
expenses on market capitalization asserts that the difference between book value and market
value could be because of human resource value.
Limitations of the Study
The study has following limitations:
Dr. Ritu Sapra & Ramya Jain: Impact of Human Resource Accounting on Firm’s Value 59

 The non-availability of data of many firms forming a part of BSE-500 index was a constraint for the
study.
 The study on the relationship between human resource variables and value variables has been
conducted cross-sectional for the year 2017-18 only.
 The study has focused on only three human resource variables and analysed their impact on firm’s
value.
 The study has been conducted for only one developing nation India.
 Industry heterogeneity has not been taken into consideration.
Scope for Future Research
The limitations of present study leave following scope for further research:
 The present study is a cross-sectional analysis of data for BSE-500 companies for the year 2017-
18, future studies could focus on analysing panel data in order to investigate whether there are
significant differences in impact of human resource variables on firm’s valuation across different
time periods.
 The impact of other human resource variables like number of employees, human resource value,
human capital efficiency, employee utilization ratio, employees’ turnover, different components of
compensation like salaries, bonus, stock options etc. on firm’s value can also be studied.
 The present study could be carried out industry-wise to investigate regarding whether the impact of
various human resource variables on firm’s value are different across industries.
 International comparison of the relationship between human resource variables and firm’s value
variables can be done by considering both developing and developed nations.
Qualitative research and survey based studies can be conducted to assess the role of behavioural
constructs such as employee morale, motivation and commitment on the relationship between human
resource variables and firm’s value variables.
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