ASSIGNMENT

CROSS FUNCTIONAL ISSUES IN MANAGEMENT

TOPIC :- INTERFACE OF ACCOUNTING AND HUMAN

RESOURCE MANAGEMENT- VALUATION OF HUMAN
RESOURCES - METHODOLOGIES AND PRACTICES

Submitted To: Submitted By:

Dr. Kulwinder Singh Priyanka (Finance)

University Business School Ph.D. Research Scholar

Panjab University, Chandigarh

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Many organizations have a challenge in forging a good working relationship between the
finance department and the human resource (HR) department. A strong relationship
between HR and finance departments is key to business success. Often times, the core
values of each department can be seen as drastically different, making it difficult to find
common ground. HR departments often live by the motto, “People are our greatest asset.”
Finance departments, on the other hand, operate under the old belief, “Cash is
king.” Conflicts regarding the roles and goals of these departments are common in many
organizations. The tension between the two departments starts from their traditional goals
and perspectives. The differing perspectives raise unnecessary tensions in an organization.

The Changing Business Context

Human resources (HR) and accounting are both crucial areas in most companies, yet they
often operate in silos, functioning independently. But more and more businesses are
realizing this practice needs to change, and there’s a growing recognition of the critical
role that employees play in the financial success or failure of a company. Organizations
can no longer hold on to ineffective traditions and outdated perspectives. Managerial
teams must shift from internal problems to the high competition in the global business
environment, which is a threat to many companies’ survival. In addition, the roles and
responsibilities of human resource managers and finance officers are changing.

Under the traditional business model, employees were often considered an expense.
The cost of salaries, benefits, hiring, and firing received much more attention than the
critical contributions that employees made to the company. In reality Human resources
are the real asset of an organization. Now, as companies better recognize the role that
employees play in business success, things like employee output, knowledge,
creativity, and problem solving are valued more highly and are seen as critical revenue-
producing or profit-contributing assets. This growing appreciation has led to increased
focus on human capital management strategies in order to maintain, protect, and
expand employee resources.

In the current competitive world, it is complicated to find skilled & self-motivated

employees. Human intelligence is the most significant element for efficient organization
operation. No machinery can replace their creativity, knowledge and skill. Traditional
resources such as financial capital and technological innovation are no longer a source of a
competitive edge, as it can be easily replicated, therefore it is necessary for the firms to invest
on something which cannot be duplicated. The increased pressures of corporate governance
and transparency issues further support the need for developing methods for estimation of
human capital and reporting of human capital in financial reports. All these initiatives has led
to development of concept HRA (Human resource accounting).

Human resources accounting is a combination of both the concepts human resource and
accounting it means measurement and quantification of Human in an organization. According
to Flamholtz human resource accounting involves measuring the cost incurred by an
organization to recruit, select, hire, train, and develop human assets. It involves measuring the
economic value to people.

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HRA is generally regarded as an information system which provides information about the
overall changes in the human resources over a period of time in a particular company. At the
beginning of 1990s industries of the western countries were used to report the worth and
importance of their human resources. When the service sector business started, they
understood that the primary source of revenue is by their employees and these industries
started considering their employees as human assets. In the other business sectors like IT,
BPO’s and Banking, the main asset of the organization are its human resource because their
employees are primarily responsible for building investors value. From the year 1960, the
process of identifying and valuing of human beings are initiated by some of the behavioral
scientists. In the current scenario, there is a massive demand for a skilled workforce. So, the
entire world today considers human resource as a real asset to any organization because they
bring business and profitability.

Several research studies have proposed models for measuring human resource value despite
there is no model which is globally accepted to measure the economic worth of human
resources. HRA is an emerging methodology in India, which helps the organizations to
recognize their employees as an asset in the balance sheet. Let us now consider some of the
studies conducted in past to identify of HRA.

Klase, (1996). The study was an attempt to evaluate the merits of utilizing human resource
accounting (HRA) concepts to account for human resource development (HRD) in the public
sector. The study concludes that the application of HRA concepts to HRD would have
significant benefit for the operational and strategic management of human resources in public
organizations. The application of HRA concepts in pubic organizations, whether to internal
managerial accounting and decision making or to public sector financial reporting, would
heighten the priority of HRD activities by recognizing them as asset building rather than as
an expense.

Kamath. (2008) conducted a study on Teck firms of India to study the extent of voluntary
intellectual capital disclosers in India's emerging information, communication and technology
sector and the relationship between the size of the firm and the extent of disclosures. Content
analysis technique has been used for 30 technology, entertainment, communication and other
knowledge (Teck) companies listed on the Bombay Stock Exchange during 2005-2006. The
results found significantly small extent of intellectual capital disclosures in Indian firms.
Information technology industries disclosures were more than any other sectors disclosures,
closely followed by the telecommunication industry. Entertainment industry showed the
minimal disclosures. There was no significant correlation between the occurrence of the term
and the size of the firm based on its market capitalization.

Crook et al., (2011) carried out a meta-analysis of the relationship between human capital
and firm performance” within 66 studies of the human capital-firm performance relationship
and investigated 3 moderators suggested by resource-based theory. The analysis found that
human capital relates strongly to performance, especially when the human capital in question
is not readily tradable in labor markets and when researchers use operational performance
measures that are not subject to profit appropriation.

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Steen & Welch. (2011) conducted a study to investigate the concept of human capital and its
measurement through a review of the HRA literature, as well as the literature in human
resources. This paper then draws on the findings of a small exploratory study into the
measurement of Return on Investment (ROI) for international assignments. Interview data
revealed that intangible costs and benefits are problematic when measuring and therefore
difficult to isolate and effectively measure.

Kashive. (2012) examined the annual reports of successful Indian companies like BHEL,
INFOSYS, NTPC to understand role of intangible asset and human capital in building
attractive employer brands . The Finding of this study showed many firms accept that
intellectual capital is a very useful part of their asset and appreciate its role and know that it
surely enhances the firms valuation in the market, few firms actually understand its meaning,
use any specific management and measurement tools, and adopt uniform reporting and
voluntary disclosure practices. Many Indian companies have understood the importance of
measuring human capital and disclosing its value in their balance sheet. This practice not
only helps them to identify their total worth in terms of tangible asset and intangible asset ,
but also project themselves as employee friendly companies who value their employees and
are proud to say so. It enhances their employer brand in terms of good place to work or
valued human resources.

Akintoye. (2012) examined the relevance of Human Resource Accounting to effective

financial reporting using investment in human capital, profitability and capital employed. The
study was carry forward by simple liner regression. Secondary data was obtained from annual
reports and accounts of Oceanic Bank Plc from 2002-2006. It was discovered that human
resource has a positive effect on the profit and capital employed by the bank, suggesting that
there is association between components of intellectual capital and firm-and marketlevel
financial outcomes. It was recommended that the likely length of time an employee will
spend in an organization should be considered during recruitment and such estimated human
resource should be capitalized and amortized overtime.

Ratti. (2012) studied of Human Resource Accounting Practices in India by focusing on the
calculation of the value of human resources at different levels of organization & determined
the human resource efficiency quotient. The study examined fifteen companies for the
measurement of human resource measurement. According to the conclusion of the study
incorporation of the value of HR is very expensive and not easy to calculate the value of HR
and if they calculate it, then the value will not indicate the true position of human resource.

Kashive. (2013) studied the importance of Human Resource Accounting practices and
implications of measuring value of human capital as case study of successful PSUs in India.
The researchers have evaluated the HRA practices of the top public sector undertakings
(PSUs) in India in 2011. The study concluded that, many Indian companies have understood
the importance of measuring human capital and disclosing its value in their balance sheet.
This was seen as the major practices of successful public sector companies. This practice not
only helps them to identify their total worth in terms of tangible asset and intangible asset,

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but also project themselves as employee friendly companies who value their employees and
are proud to say so. It enhances their employer brand in terms of good place to work.

Kaur et al., (2014) the study was undertaken with the objective to measure the extent of
HRA practices in the form of reporting in selected companies. The researchers has critically
analyzed that which companies among the NSE S&P CNX 500 are reporting HRA in their
annual reports, what is the industry type and sector of the companies reporting HRA, what
are the objectives of reporting HRA valuations, along with that the method of presentation of
HRA information and significant deficiencies in the measurement were pointed out. The
result found stated that only five companies out of sample companies of 500 (i.e. only 1
percent) reports HRA in their annual report. These companies were Cement Corporation of
India (CCI), Hindustan Petroleum Corporation Limited (HPCL), Infosys, ONGC and Rolta
India Ltd. The results indicates that application of HRA in companies leads to improved
employees’ performance, thereby improving company’s profitability and growth prospects. It
was also found that above stated five companies collect and report HRA information, but this
is just a supplementary statement and not a part of main financial statements.

Stovall & Neill, n.d.(2017). The study was based on two objectives; first aim was to
critically analyze the ethical implications of current accounting principles relating to human
resources. Second purpose was to propose three alternatives to the current accounting
treatment of human resource costs as an expense of doing business. Institutional economic
analysis was used and it was concluded that the language that accountants use to describe
human resource costs as expenses must change as current accounting treatment of human
resources lessens the dignity and even the inherent humanness of a company’s labor force,
and clearly does not match common rhetoric from management that refers to employees as an
“important” asset or resource. Therefore, shift in accounting language toward a multiple
stakeholder perspective is required. It has been suggested that change in accounting language
may give insights into how company’s management promotes and cultivates its human
capital in a rapidly changing business environment in which human intellect increasingly
drives economic activity.

Sapra & Jain. (2019). The purpose of the study was 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 were
Market Capitalization and Total Assets. The data for BSE-500 companies was retrieved for
the year 2018. Out of 500 companies listed on BSE, finally 310 companies was chosen for
study due to non-availability of data on some variables. The study found that compensation to
employees was 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.

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Conclusion

The tension between HR and finance departments has existed for many years. The differences
in primary goals and responsibilities cause strife between the two departments. However,
both departments must work together to achieve the overall objectives of business growth and
profitability. A strong relationship between the two departments is necessary because of the
overlap in their responsibilities and the changing business context. In this changing scenario
many Indian companies have understood the importance of measuring human capital and
disclosing its value in their balance sheet. They realized that this intellectual capital is a very
useful part of their asset and appreciation of their role will surely enhances the firm’s
valuation in the market. Literature indicates that Indian companies are now focusing on
valuation and recognition of human assets but in a supplementary statement and not as the
main part of financial statement. (Kaur et al., 2014). The result of empirical studies also
indicates that application of HRA in companies leads to improved employees’ performance
thereby improving company’s profitability and growth prospects (Klase 1996; Crook et al.,
2011; Akintoye, 2012; Kashive, 2012, 2013; Kaur et al., 2014;Sapra & Jain, 2019) Studies
also indicates that there is not such universally applicable method of valuation although,
maximum companies are using Lev and Schwartz model for valuation and reporting of HRA
(kaur et.al,2014). Human resource is an asset whose valuation is considered to be very
expensive, objective and biased calculation. Therefore, researchers suggests a strong need to
set up proper systems in place to ensure that the HRA information is objective, true and free
from the bias in order to make it useful and reliable for decision making and (Ratti, 2012;
kaur et.al 2014; Stovall & Neill, n.d.2017).

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