INSTITUTION: KENYATTA UNIVERSITY

UNIT CODE: BAC 302

UNIT TITLE: ADVANCED FINANCIAL ACCOUNTING II

FACILITATOR: DR. MITHI

CAT 1

MEMBERS

No. NAME ADMISSION NUMBER SIGN

1 MICHAEL AKHWALE D33/1387/2021
2 DORCAS KITUA D33/1229/2021
3 IVYONNE KARIUKI D33/1589/2020
4 DERICK OMONYA D33/1309/2021
5 CHELOTI SAMUEL D33/1389/2021
6 SAMUEL OKETCH D33/3053/2021
7 TERENCE AMBANI D33/1501/2021
8 VASHTI AYUMA D33/1333/2021
9 CHARLES OMONDI D33/1426/2021
 A.

According to the study, people are the key asset in an organization. This is due to the following

reasons:

i. Other factors within the organization cannot function on their own without being manned

by people.

ii. They bring in new skills, knowledge, and experience in the organization that are essential

for achieving organizational goals.

iii. They take part in decision-making in the organization. It is from these informed decisions

that organizational objectives are achieved and output improved.

iv. They are in the best position to utilize scarce physical resources in the best way for the

success of the organization.

v. They protect the organization from mismanagement, which could otherwise negatively

impact performance and profit the organization at large if not dealt with.

vi. They make it easy to address personal problems; that is, they enhance a better

understanding of personal problems from an applied perspective and, thus, better balance

applied values against other values.

B.

From the case study, the various stages of the development of human resource accounting are

stipulated as below:

i. Human resource objectives.

Every organization has to accomplish a certain set of goals. These goals and the

organizational requirements are the foundation for setting the objectives of the human

resource accounting systems. For instance, in the study, the objectives include improving

output and increasing human capital, which is an important part of an enterprise's total

value.

ii. Developing human resource accounting measurements.

There are two methods by which human resource accounting measurements can be made.

They are explained below:

 Monetary and non-monetary methods.

Can be used as standards for measuring the cost, value, or both of human

resources. For instance, in the case study, human resource accounting aims at

depicting human resource potential in financial terms.

Either the management can go for one particular measurement method or a number of

methods for the measurements.

Before implementing any of these methods, the validity and consistency of these methods

can be checked. This is to ensure credibility and comparability.

iii. Developing a human resource accounting database.

The human resource accounting system is based on certain factors, such as the time

management sheet, the cost of each employee working in the organization, and various

psychological factors. For instance, from our case study, the current accounting systems

have not been able to provide the actual value of an employee’s capability, knowledge,

and experience. This seems to indirectly affect future investments in a company as the

cost of human resources and development increases each year.

iv. Pilot testing the system.

This involves pre-checking the workings of the system before finalizing it as part of the

organization. Management coordination and cooperation throughout the process of pilot

testing are essential to its success. For instance, pilot testing should be carried out to

ensure the current accounting system is able to provide the actual value of employees’

capabilities, knowledge, and expertise. This is to avoid affecting future investments in a

company.

v. Implementing the human resource accounting system.

In this process, the organization introduces the entire workforce and staff to a new

accounting system. The importance and different methods of human resource accounting are

specified to the employees so that they become familiar with the new concept and accept it

wholeheartedly. For instance, in our case study, since the current accounting system has not

been able to provide the actual value of employees’ capabilities, knowledge, and expertise,

the organization should implement an accounting system that can do so.

 C.

From the case study, the human resources of an organization are yet to be recognized on the

balance sheet due to the following reasons:

i. The current accounting system has not been able to provide the actual value of an

employee’s capabilities, knowledge, and experience.

ii. Soft assets, often referred to as our greatest asset, that is, human resources, are not

reflected in the financial statement. Despite the fact that auditors give a true and fair

opinion on financial statements,.

iii. A balance sheet of a company that experiences high labor turnover would be unstable if

human resources were reported as an asset, and this has decision implications.

iv. As seen in the case study, human resources are a key aspect of a firm’s competitive

intelligence, and their inclusion would expose the firm to its competitors.

v. There is no appropriate model for measuring human resources, which leads to subjective

measurement. This defeats the uniformity concept, which is one of the qualitative

characteristics of financial statements, and comparability becomes a problem.

vi. It would not be in the interest of shareholders because they receive nothing if they do not

incur additional costs if human resources are disposed of.

vii. They were also of the view that the reward of labor is wages and salaries, and once it is

treated in the income statement, there is no need to include it in the statement of financial

position.
D.

The actual value of employee capability, knowledge, and experience should be ascertained

because of the following reasons:

i. Succession planning

Understanding employees’ skills and potential helps in succession planning,

ensuring a smooth transition when key roles need to be filled.

ii. Resource allocation

It helps in allocating resources effectively by matching the right talent to the right

task, maximizing productivity and efficiency.

iii. Retention and engagement

Recognizing and utilizing employees’ capabilities increases job satisfaction,

engagement, and retention rates, as employees feel valued and challenged in their

roles.

iv. Competitive advantage

A workforce with diverse skills and experiences gives organizations a competitive

edge, enabling them to innovate and adapt more effectively to changing market

conditions.

v. Development opportunities

Identifying employees’ strengths and weaknesses allows for targeted training and

development programs, fostering growth and improving overall performance.

vi. Future investments

Each year, the cost of human resources and development increases.

vii. Placement

Placement ensures putting recruited staff into their area of specialization.

E.

In the case study, human resource potential is depicted by human resources accounting in

financial terms while casting the organizational financial statement.

The value of human resources can also be measured in the following ways:

i. Cost per hire.

This is the report of recruitment costs for a given period, divided by the number of hires.

This measurement is critical as it will help recruiters understand the effectiveness of

talent accusation interventions and where and how costs can be distributed going

forward.

ii. Employer turnover

It is the measurement of how many people are working in an organization versus how

many have left employment in a defined period. This human resource measurement is

time-tested and tells the human resource team a lot about retention, organizational health,

and reasons for leaving.

iii. Time to hire

It is the average time taken to fill a position from the date it was posted online. Typically,

time to hire stops counting up as soon as the contract of employment is signed, although

some organizations only consider a person hired on their first day of employment. It is

concerned with how quickly you are hiring.

 iv. Employee satisfaction rule

It is often gleaned from engagement results and will tell you a great deal about how

employees are feeling at work. This human resource measurement is made up of many

different questions and points, including overall engagement, pay and benefit, leadership,

quality of life at work, teamwork, and standalone questions.

v. Overtime hours worked

Tracking overtime concerns who has been working overtime most often, as well as

payroll costs and any legal limits concerned with overtime.

vi. Revenue per employee

It looks at the organizational revenue over a set period and averages this by the number of

employees working in the organization. This is a useful measure in terms of

understanding productivity and efficiency, as well as aligning human resources

measurements with top-level business metrics.

vii. Absenteeism rule

Measures the rule of absence in an organization through sickness days, including the

reason for sickness, length, and cost, as well as any emerging patterns of sickness

regarding individual employees. It is important as it tracks employee conduct, welfare,

and payroll costs.

viii. Attrition rule

Measures the rule by which your employees leave and are not replaced. Calculating and

analyzing the attrition rule allows you to identify how many workers are left over a

specific time period and their reasons for resignation, such as voluntary and involuntary.
 F.

The role of human resource accounting in an organization includes the following:

i. Used as a political tool to demonstrate mismanagement of human resources, a situation

that will negatively impact performance and consequently profit.

ii. Used as an instrument for analyzing and structuring, thus better understanding of

personal problems from the applied perspectives and thus better balancing applied values

against other values.

iii. It measures the value of employees, which helps the management take vital decisions

related to human resources in order to increase production.

iv. To assign value to human resources and to present human assets on the balance sheet.

v. Human resource accounting is an economic indicator of what an organization spends on

its human capital.

vi. To treat human resources as assets and to generate human data about human resources.

vii. To aid in the development of management principles and proper decision-making for the

future by classifying the financial consequences of various practices.

viii. To furnish cost-value information for making proper and effective management decisions

about acquiring, allocating, developing, and maintaining human resources in order to

achieve cost-effective organizational objectives.

G.

i. Recognition of Human Capital

Human resource accounting acknowledges employees as valuable assets to the

organization, shifting focus from treating them as expenses to recognizing their

contribution to organizational value.

ii. Informed Decision Making

By quantifying the value of human capital, human resource accounting provides

management with data-driven insights for strategic decision-making related to

recruitment, training, development, and resource allocation.

iii. Performance Evaluation

Human resource accounting facilitates more accurate assessment of individual and

collective employee performance, aiding in performance management, talent

identification, and succession planning.

iv. Optimized Resource Allocation

Human resource accounting helps organizations allocate resources more efficiently by

identifying areas where investments in human capital can yield the highest returns,

thereby enhancing productivity and competitiveness.

v. Strategic Alignment

Human resource accounting ensures that human resource strategies align with

organizational goals, fostering synergy between HR initiatives and business objectives.

 vi. Risk Management

By quantifying the value of human capital, human resource accounting enables

organizations to identify and mitigate risks associated with talent management, workforce

stability, and succession planning.

vii. Enhanced Financial Reporting

Incorporating human capital into financial reporting through human resource accounting

provides stakeholders with a more comprehensive understanding of the organization's

assets and liabilities, enhancing transparency and accountability.

viii. Competitive Advantage

Leveraging human capital effectively through human resource accounting can provide

organizations with a competitive edge by fostering innovation, agility, and adaptability in

the marketplace.

ix. Stakeholder Confidence

Transparent and comprehensive reporting of human capital value through human resource

accounting can enhance stakeholder confidence in the organization's management and

performance.