Accountings - Accounting for Human Capital Essay

Accounting for Human Capital


Despite the long and ( by and large ) honorable tradition of their profession, comptrollers have merely comparatively late ( 50 old ages ago or so ) come to gain that accounting should concentrate its primary attending on back uping the determinations of directors and external stakeholders. This bound in their vision was likely due to a preoccupation with the “stewardship” map of accounting – the proviso of largely factual information, to those with a fiscal involvement in a concern, about its past minutess. Small attending was paid to intangible assets, and even less to that valuable resource, the cognition and accomplishments of the work force. The cost of “labour” was treated as an disbursal, merely like rent and warming, and the accomplishments and cognition people provided to their employers were non considered. Even the emergent subject of cost and direction accounting based its involvement on touchable “things” , and attempted “scientific” measuring of labor cost through such techniques as clip and gesture surveies. It was merely after accounting began to be recognised as an academic subject in its ain right ( in the mid-twentieth century ) that any important involvement was taken in attempts to mensurate the elusive but important plus that is human capital.

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In portion, this reluctance to see the intangible is non the mistake of comptrollers, for it is necessary that they try to be nonsubjective in their coverage ; users of accounting information hope to trust upon its public-service corporation, which means relevancy to their demands, consistence in measuring, neutrality and reliaiblity. As will go obvious, such techniques that have been developed for accounting for human values could barely be called nonsubjective. Accountants shy off from countries that require them to show excessively much of their ain opinion ; it is better to show an historic fact, and allow the decision-maker draw the illations he or she wishes from it. Indeed, this is the attack that has emerged in the embryologic field of human capital accounting – most techniques suggest the coverage of factual informations, instead than any effort at overall rating.

It is likely besides of import to see the work done on human capital accounting in its political context. The internal proviso of information about human resources for corporate direction is likely to be motivated as much by thoughts of increased efficiency, reduced costs, greater competitory advantage ( and therefore greater net income ) , instead than by a deeper concern for the societal public assistance of the work force. Of class greater prosperity for the administration may good convey benefits to its forces, but that is seldom the primary aim, whatever the rhetoric. Change may yet be forced, nevertheless, by the developments taking topographic point in the planetary economic system as we move progressively to the accomplishment of competitory advantage through cognition application every bit good as technological excellence. It is the cognition, accomplishments and other intangible assets, particularly those that are rare and hard-to-imitate, that provide concerns with a taking border. Good farming of such resources becomes indispensable, and such direction is hard without appropriate information ( accounting or otherwise ) on which to establish determinations.

Academic involvement in the external coverage of human capital information has waxed and waned over the last 50 or 60 old ages, but the complexness and subjectiveness of the practical application of the conceptual theoretical accounts posited by research workers has encouraged the profession to shun alteration. Large Business is frequently complicit in this reluctance, given that describing on the work force is seen ( wrongly? ) as improbable to better net incomes ( and may, so give unwelcome advantage to the competition ) , and is likely to turn out dearly-won in footings of informations aggregation. The subject has late seen a revival of involvement in the UK, however, in portion as a consequence of Government ( and CIPD ) force per unit area.

Academic work on the nature and direction of cognition, and cognition assets has continued apace, nevertheless, and authors on human capital accounting now draw to a great extent upon the work of their co-workers in this related sphere. A long, but clear and well-written sum-up of this literature is that provided by Stiles and Kulvisaechana ( 2003 ) .

So what is human capital accounting?

Governments differ, but possibly the simplest definition is:

“The procedure of identifying, mensurating and pass oning information about human resources to determination makers.” Flamholz ( 1972, p588 )

This is an accounting definition, of class, which avoids the demand to specify what is meant by “information” in this context. A definition of the nature of the plus concerned is given by Dess and Picken ( 1999, p8 ) :

“ [ Human capital consists of the ] capablenesss, cognition, accomplishments and experience of the company’s employees and directors. . . every bit good as the capacity to add to this reservoir of cognition, accomplishments, and experience through single learning.”

Even this definition fails entirely to capture that the corporate plus represented by an organisation’s people is likely to supply a much greater resource than the simple amount of value that persons can offer, provided, ever ( besides crucial ) that they are motivated ( and facilitated ) to make so.

Wright, Dunford and Snell ( 2001 ) argue that human capital is one of three constituents of “intellectual capital” , the other two being “social capital” ( the webs and informal relationships within the administration – this might be seen as the informal civilization ) , and “organisational capital” ( the formal constructions and systems within the administration, including the formal civilization ) . There are analogues here with the Kaplan and Norton “Balanced Scorecard” ( 1992 ) , and before composing by Likert and Bowers ( see below ) .

Why Measure Human Capital Values?

Once there is a acknowledgment that human capital represents an plus, it follows readily that effectual direction of that resource is necessary to maximize the benefits to be achieved from it. It must be noted, nevertheless, that efforts to demo a causal nexus between assorted human resource direction ( HRM ) patterns and concern public presentation have proved to be debatable. It may be intuitive to propose that “good” HRM pattern will better organizational public presentation, but this has been hard to turn out once and for all, given the many confounding variables. It is even possible to surmise a contrary causing – profitable companies can afford to handle their employees good.

Few would differ, however, that measuring of human capital is likely to supply utile information both to direction and to external stakeholders. Many benefits can be hypothesised ; some of these are:

  • Measurement of concern public presentation, based on all the assets employed, instead than merely those that can be measured readily in money footings ;
  • Allotment of forces on the footing of most valuable to most critical undertakings ;
  • Comparison of the usage of labor as against the usage of other resources, such as machinery ;
  • Consideration of the effectivity of preparation and development outgo ;
  • Business rating for take-over and amalgamation intents ;
  • The proviso of a footing for more appropriate computation of rewards and wages ;
  • The scene of human resources policies.

Even a comparatively uncomplete and instead rough list such as this high spots at one time a farther trouble with human capital accounting – its application is likely to raise sensitive internal issues in people direction, every bit good put on the lining exposure of valuable information to rivals.

The Techniques of Measurement

In order to do many determinations in concern, comparing must be made between really disparate things. Person has to make up one’s mind, for illustration, whether to construct a new canteen with the available financess, or invest in some new machinery on the store floor. Accountants are obliged to utilize money as the footing for comparing, as no satisfactory alternate exists. The primary intent of money, nevertheless, is as a medium of exchange, non a step of value. This leads to troubles in the rating of about any plus, but the job is peculiarly terrible with human capital. Indeed, the most traditional accounting method, which is normally used for most touchable assets – historic cost – is non straight available for human capital. Apart, possibly, from football players, human existences are fortuitously no longer ( lawfully ) bought and sold, and therefore the last known exchange value can non be used as an estimation of present value.

This inquiry of ownership is an of import one, for the accountants’ definition of an plus assumes some kind of rights over it by the receiver of the future benefit. There can be no inquiry that administrations do profit from their employees, and that the being of a present work force is likely to be of future benefit. The world is that people work for administrations for long periods of clip, and an appraisal of what proportion of the work force will go forth in the coming old ages is non a hard affair. But it is a large measure from this to state that the administration owns its work force! The premise of human capital accounting is that it is the cognition and accomplishments of the employee over which the administration exercises some rights. The proviso of cognition and accomplishments for a wage is non needfully, in itself, nevertheless, ground to believe that an plus exists: this could be seen as merely the purchase of a resource on a day-to-day or monthly footing. The plus, if one does be, is something even less touchable, and related to trueness, motive, silent and/or specializer cognition, and the “added value” that a capable and committed work force provides in the chase of competitory advantage. In this context, it is non hard to see that any measurement theoretical account will necessarily be debatable and subjective.

Attempts to mensurate the value of human capital can utilize two wide attacks: the collection of the measuring of the value of each person, or the measuring of the value of the work force as a whole. The latter is likely to turn out less dearly-won, although non needfully the most utile.

Flamholz ( 1973 ) was one of the earliest theoreticians to give serious thought to the jobs of mensurating the value of an person. He argued that this should be based on three variables: productiveness, transferability, and promotability ( these could possibly be seen as foster ways of mensurating accomplishments and cognition ) . He besides proposed, nevertheless, that the value of an person will be linked to the likeliness that that person will remain with the administration ( trueness, possibly measured by occupation satisfaction ) . The trouble, of class, is measurement. It is possible to build profiles of employees, assessed on cardinal variables, such as trueness, trust, motive, effectivity, experience, etc.. Cataloguing these, separately, and in entire, may give a utile penetration into the development of the administration. It could be, for illustration, that a short-run addition in net income has been brought about merely at the disbursal of an overall diminution in motive.

Recognizing the troubles of measuring through the behavioral variables he proposed, Flamholz and a figure of others have suggested nearing the measuring job by using bing techniques of economic sciences and accounting. Some of these are:

  • Replacement Cost

It is comparatively straightforward to measure the direct cost of replacing of an employee ; direct enlisting costs can normally be calculated. Less easy is the measuring of the economic cost to the administration of the period during which the fledgling is trained up to full potency. This method is sometimes used by life confidence companies in computation of premiums on cardinal forces in the administration. ( A good illustration of a state of affairs where preparation cost is really important is that of the combatant pilot, who frequently costs even more – many 1000000s of lbs – than the aircraft he or she flies. )

  • Opportunity Cost

Opportunity cost expressions at the following best alternate usage for an employee to the present employment. Attempts are made to value an person on the benefits he or she could supply if non making his or her present occupation. This technique can merely be used for those employees who have particular accomplishments, movable within the administration, but non readily bought in from exterior. The lone manner of really happening a value would be by inquiring directors to “bid” for the employee. This thought of competitory command may hold limited application.

  • Capitalization of Salary

A theoretical account borrowed from the economist’s technique of cost-benefit analysis is salary capitalization. It has been reasonably good developed, non least because of the demand to try to measure the loss suffered by a household when a breadwinner is killed as a consequence of person else ‘s carelessness. This thought is attractive, in that it is advanced and efforts to mensurate future benefit, which is the lone existent beginning of present value. There may non, nevertheless, be much correlativity between net incomes and productiveness ( and such correlativity may even be negative for some workers! ) . A farther trouble is that other assets are non frequently valued on the footing of future benefit, and comparing may be hard and deceptive.

  • Economic Value

As does salary capitalization, economic value looks at future benefits, but it attempts to mensurate the service the employee will supply to the administration, instead than what he or she will be paid for that service. If this could be done efficaciously, it would be of tremendous usage ; once more, the measuring jobs are the trouble.

It will be apparent that there are still important troubles with each of the above, and whichever is adopted, the cost of using the technique to each person in a whole work force would probably be prohibitory.

Measuring the value of the work force as a whole is likely a more attractive path, both in footings of practicality and cost. Early advocates of this attack were Likert and Bowers ( 1969 ) . Their seminal thoughts can be traced through to much of what is written in the sphere today. They suggested that three variables influence the effectivity of the human administration: causal, intervening, and end-result. Causal variables are the enabling constructions put in topographic point by direction ( without which no work force will be effectual ) , such as policies, schemes, organizational construction, leading, etc.. Intervening variables are steps of the wellness and public presentation capablenesss of the administration ( frequently cited in human capital measuring discourse today ) such as attitudes, trueness, motive, civilization, and the “collective capableness for effectual action.” End-result variables are steps of organizational success, such as profitableness, market portion, productiveness, growing, etc.. Causal variables induce degrees of step ining variables which yield end-result variables. Then as now, the coverage of net income and loss history and balance sheet says much about some of the end-result variables, but Likert and Bowers highlight the poorness of these histories in presenting information about the value and consequence of the critical causal and intervening variables.

Present Practice

Few, if any, public corporations attempt to supply elaborate pecuniary estimations of the overall value of their work forces ; it should be apparent from the above that, even if it could be provided, such informations would be so subjective as to be of doubtful value, and possibly even misdirecting and damaging.

Most contemporary governments suggest foster steps that may give some counsel to workforce value, and are more readily measured and reported. The list suggested for the Operating and Financial Review ( Accounting Standards Board, 2005 ) is barely advanced, nor comprehensive, but would stand for something of a measure frontward for many companies, many of which do non even collect, allow entirely print such informations:

  • Health and safety informations, including RIDDOR studies, absenteeism, working hours, emphasis degrees, etc. ;
  • Recruitment and keeping informations, including turnover, keeping rates, wage policies, accomplishments deficits, etc. ;
  • Training and development informations, including hours and money spent, type of preparation, policies, etc ;
  • Morale and motive, measured by employee feedback ;
  • Performance and profile informations such as productiveness, gross or net income per employees, diverseness, degrees of employee making, etc..

Rather more comprehensive lists of possible proxy indexs are provided by Foong and Yorstan ( 2003 ) , and the Centre for Business Excellence in Management and Leadership ( 2002 ) . Both beginnings are at strivings to indicate out, nevertheless, that there are serious methodological troubles in showing such informations in a robust signifier that would be utile to readers of external studies, even if the troubles of commercial sensitiveness could be overcome.

CIPD have published a figure of first-class studies sing the measuring of human capital. Possibly the most interesting is a commissioned survey by Scarborough ( a University of Warwick faculty member ) , entitled “Human Capital: External Reporting Framework” ( 2003 ) , published as portion of the “change agenda” series. Appended to this paper is a transcript of Scarborough’s suggested prosodies. Once once more, it will be apparent that merely foster steps are used. Despite their comprehensiveness and fullness, there is no effort to make other than leave it to the reader to ascribe a value for the work force from the informations. Indeed, Scarborough is slightly dismissive of the value of seeking to value the work force as a whole, every bit good as being highly pessimistic about the hereafter of human capital coverage by and large ( he talks of the “intransigence and ignorance of analysts and investors” ( p16 ) , many of whom, of class, will be comptrollers themselves, or advised by comptrollers! ) .


  • CIPD ( 2003 )Human capital: External coverage model[ Online ] ( accessed January 2006 )
  • Dess, G and Picken, J ( 1999 )Beyond Productivity: how prima companies achieve superior public presentation by leveraging their human capital. New York: American Management Association.
  • Dess, G G and Picken, J C ( 2000 ) “Changing functions: Leadership in the 21st century”Organizational Dynamicss, 29 pp18-34
  • Flamholz, E ( 1972 ) “Toward a Theory of Human-Resource Value in Formal Organizations.”The Accounting Review, October, pp666-78
  • Foong, K and Yorston, R ( 2003 )Human Capital Measurement and Reporting: A British Perspective,London Business School MBA Project [ Online ] ( accessed January 2006 )
  • Kaplan, R S & A ; Norton, D P ( 1992 ) “The balanced scorecard: Measures that thrust performance” ,Harvard Business Review, 70, 1, pp71-79.
  • Likert, R and Bowers, D G ( 1969 ) “Organisational Theory and Human Resource Accounting” ,American Psychologist,24, 6, pp588-601
  • Stiles, P and Kulvisaechana, S ( 2003 )Human Capital and Performance[ Online ] ( accessed January 2006 )
  • Wright, P M, Dunford, B B and Snell, S A ( 2001 ) “Human resources and the resource based position of the firm.”Journal of Management. 27, pp701-721.

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