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.Human Capital and Accounting
Term Paper ID:42089
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Essay Subject:
This paper responds to the question Whilst accountants around the world continue to ignore ...... More...
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3 Pages / 675 Words
5 sources, 11 Citations,
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Paper Abstract:
This paper responds to the question: “Whilst accountants around the world continue to
ignore the value of human capital in measuring
business assets and the management of
resources, ratio analysis and the interpretation
of financial statements is bound to be fraught
with difficulties and has little real meaning,” taking the position that the student agrees.
Paper Introduction:
Human Capital and Accounting I agree that accountants around the world continue to ignore the valueof human capital in measuring business assets and the management ofresources causing ratio analysis and the interpretation of financialstatements to be fraught with difficulties and have little meaning Accounting for human capital is also problematic however As Ezewuchi F Amaefule p points out Many organizations big and small acknowledge that \'our biggest asset is our staff \' However no organizationknows how to account for its employees on
Text of the Paper:
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3, pp. As Ezewuchi F.Amaefule (2 8, p. 2). 2, no. HCA enables organizations to quantify the value oftheir human capital, and when they face layoffs or downsizing, HCA servesto facilitate analysis of potential impacts on the organization (Amaefule,2 8, p. 41). The team started at the top with the highest-paidprofessionals on staff, cutting them and not replacing them. When the team was finishedterminating employees, the company's financial statement looked muchbetter, but the organization was crippled by the loss of its key talent.It never recovered from the loss. Having an expert on board that can invent productsthat give the firm a competitive edge, for example, is a high-value assetnot reflected in any of the usual ratios. A metric specifically developed to provide thatinformation is the Human Capital Value Metric, which "explains the value ofthe individual employee as the difference between the Present Value ofFuture Contribution and the Present Value of Future Costs" (Bukowitz,Williams, & Mactas, 2 4, p. 1, (Jan-June), viewed 2 October 2 8, .Fadel, H 1977, 'THE PREDICTIVE POWER OF FINANCIAL RATIOS IN THE BRITISH CONSTRUCTION INDUSTRY,'Journal of Business Finance & Accounting, vol. However, it must also beacknowledged that human capital is difficult to quantify. A new metric is designed to help,' Research-Technology Management, (May-June), BNET, viewed 2 October 2 8, .Ezewuchi, AF 2 8, 'Human Capital Accounting: Should Employees be Classified as Assets?,' Journal of Business and Public Policy, vol. 36) points out, "Many organizations, big and small,acknowledge that 'our biggest asset is our staff.' However, no organizationknows how to account for its employees on its financial statements."Acknowledging that human capital is vital to a company's success is justthe first step; determining how it can be accurately and effectivelyaccounted for is more challenging. To address the need for including human capital in organizations'accounting, a new breed of accounting has been developed-human capitalaccounting, or HCA (Amaefule, 2 8, p. 37). 343) have suggested that the historical developmentof various measurement systems has provided important lessons that canenable companies to do a better job of HCA; these lessons include"articulating the links in the value chain, focusing on key organizationalconstraints, and using data to make 'soft' intangible factors moretangible." Organizations' new focus on human capital renders ratio analysis andother financial measures geared strictly for assessing the financial valueof assets less useful and meaningful as a measure of a business's totalcomplement of assets. 36, no. Hisham Fadel (1977, p. Boudreauand Ramstad (1998, p. ReferencesBoudreau, JW, Ramstad, PM 1998, 'Measuring intellectual capital: Learning from financial history,' Human Resource Management, vol. Despite the value and need for HCA, however, it essentially representsan attempt to measure what people know, a difficult task at best. 41). What is theactual dollar value of the expert that can create high-dollar products?Metrics such as revenue per employee can provide an indication of anorganization's overall workforce performance but do not identify what partof the workforce is responsible for that performance (Bukowitz, Williams, &Mactas, 2 4, p. 343-356, Wiley InterScience, viewed 2 October 2 8, .Bukowitz, WR, Williams, RL, Mactas, ES 2 4, 'Human capital measurement: the centrality of people to knowledge-intensive organizations makes it important to measure the ROI on human capital. The company had suffered financial reversals and hadbeen bought out. 342). Human Capital and Accounting I agree that accountants around the world continue to ignore the valueof human capital in measuring business assets and the management ofresources, causing ratio analysis and the interpretation of financialstatements to be fraught with difficulties and have little meaning.Accounting for human capital is also problematic, however. This metric incorporates a spectrum offactors, such as "time and risk dimensions, learning curve, wage, turnover,tenure, position, and industry," all of which are specific enough to theemployee that "a highly customized view of individual contribution" ispossible (Bukowitz, Williams, & Mactas, 2 4, p. Then itworked its way down the ladder, largely targeting the highest-paidemployees at every level of the company. In1968, Motorola's market value dropped by over $49 million while Fairchild'ssimultaneously increased by more than $34 million as the result of theresignation of eight top executives from Motorola that went to Fairchild(Fadel, 1977, p. Likewise, if the company is considering a merger, it canutilize HCA to provide "a true picture of assets and strengths used tovalue a company by another" (Amaefule, 2 8, p. 4). An example of the failure to account for human capital occurred in acompany I worked for. Thus, whileaccountants have hitherto largely ignored the value of human capital, thenew metric will enable them to render a more accurate accounting of humancapital and will likely increase efforts to include human capital incorporate accounting. The buyer sent in a team whose purpose was to downsizethe company by 3 %. 3, pp. 8). Human capital accounting canbe defined as "an attempt to place a financial figure on the knowledge andskills of an organization's employees or human capital" ("Human CapitalAccounting," 2 8). 4, no. 342) asserts that "The omission of human assetsfrom the accounting records and reports is...a limitation to the accountingdata, [as] human assets should be considered as an extremely importantasset of a firm." Fadel gives the example of Motorola and Fairchild. 339-352, Wiley InterScience, viewed 2 October 2 8, .Human Capital Accounting, 2 8, BNET, viewed 2 October 2 8, .
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