The cliché “Our people are our most valued assets” is one that is commonly heard from executives of organizations. The truth is, are people really organizations most valued assets?
This topic will be a bit academic but really looks at how people are valued in organizations and how they are currently reported in the books of the organizations.
Although robots are being introduced gradually into the workplace in certain industries, the success of any organization is a function of the quality of its workforce. Quality is a function of the combination of individual skills/experience and the corporate culture of the organization. Where the corporate culture encourages professionalism, capacity development and appropriate rewards, it translates to organizations achieving their objectives through its people.
Despite the roles that people play in organizations, the value placed on people is only represented on the profit and loss statement of organizations as an expense item (Theeke & Mitchell, 2008). Stakeholders in organizations consider people the most valuable asset of an organization (Cantrell et al., 2006; Tarantino, 2005). However, accounting bodies are yet to agree with management scholars on the basis and principle of reporting the value of human capital on the balance sheet, therefore, the economic value of human resources only reflects as an expense item on financial statements of organizations (Mayo, 2001). The Chartered Institute of Personnel and Development (CIPD) in 2003 reported that measuring human capital results in better HR policies and practices and should reveal the difference between real value added by employees and potential value that would have been achieved if employees’ contribution were at their full potential (Kouhy, Vedd, Yoshikawa & Innes, 2009).
Items on the balance sheet are recognized as assets if the organization will derive economic benefits from them as well as have total control over the assets so that all measurable benefits accrue to the organization (Samudhram, Shanmugam & Low, 2008). The world has however, been witnessing a transition from manufacturing-based economies to service-based economies over the past decades, as such physical assets such as plant and machinery have been replaced with knowledge and attitudes of employees (Choudhury, 2010).
Human resource accounting (HRA) is described as the art of valuing, recording, and systematically presenting the worth of human capital in the accounting books of an organization (Seth, 2009; Verma & Dewe, 2008). The objective of HRA is to highlight the potential of human capital in monetary terms in the organization’s financial statement (Seth, 2009). The disparity between book and market values of organizations has been attributed to the value of intangible assets or intellectual capital; omitted from the balance sheet (Samudhram, Shanmugam & Low, 2008; Sonnier, Carson & Carson, 2007). In professional sports, for example, total remuneration of sportsmen is agreed at the beginning of the contract. It is assumed that the remuneration package agreed for the contract period is inclusive of all benefits which in principle include retirement benefits if the contract is not renewed, or the sportsperson has to withdraw because of injury (Krautmann, Allmen, & Berri, 2009; Tang & Chen, 2009).
This is not the case in the public sector and other private sector organizations where remuneration is adjusted based on promotions, salary increases, and other allowances (Javed, Khan, Azam, & Iqbal, 2010). Because of the fixed contract arrangement in the sports industry, the possibility of capturing an accurate value of people on the balance sheet is higher (Tollington & El-Tawy, 2010). Previous studies have considered various formulas and models that could be used in determining employee value, such as human capital index, return on investment, the balance scorecard, the intellectual capital index, economic value added, and Tobins Q (Verma & Dewe, 2008).
The main assets in service companies such as Microsoft, Facebook and Google are its people, the payout to people may exceed expenditure on other assets. The effect of 50 top programmers leaving Microsoft on its share price would be more significant as against Microsoft losing an equipment (Choudhury, 2010). Competitive advantage of organizations is driven and controlled by its people not the organization (Choudhury,). The objective of this study is to examine how HR managers, accounting/finance managers, and executives in seven sectors of the economy in Nigeria perceive HRA and its importance to organizational performance.
Human Capital (HC): This is the knowledge, experience, skills, and abilities of employees of an organization (Sonnier, Carson & Carson, 2007). It includes creativity, innovation capacity, problem solving ability, leadership, expertise, know-how, entrepreneurial and managerial skills, teamwork capacity, previous experience, flexibility, motivation, tolerance for ambiguity, learning capacity, formal training, loyalty, and education of the organization’s employees (Sonnier, Carson & Carson,).
Intellectual Capital (IC). Intellectual capital comprises economic value of three categories of intangible assets of an organization – human capital, social capital, and organizational capital (Choudhury, 2010).
Human Resource Accounting. HRA is the measurement of cost and value of people or employees to an organization (Seth, 2009) and recognizes the importance of accounting for people as primary resources. Interest in HRA can be traced back to the 1960s when the issue was first raised on reflecting employees, an organization’s most valuable asset, on the balance sheet (Verma & Dewe, 2008). HRA is the art of valuing, recording and presenting systematically the worth of human resources in the books of account of an organization (Seth, 2009). Accounting for human resources as assets has not gained acceptability within the accounting or finance profession because human resources are not owned or controlled by the company and therefore do not meet the accountant’s definition of an asset hence people are treated as an expense item (Theeke and Mitchelle (2008).
Many models have been accepted for valuing human assets even though they are not perfect (Mayo, 2001; Tarantino, 2005; Verma & Dewe, 2008). Seth (2009) discussed the Lev and Schwartz model of human resource accounting, which has been adopted by some Indian companies. Based on the Lev and Schwartz model; the human resource of a company is the summation of value of all the Net Present Value (NPV) of the expenditure on employees. expenditure on employees. This is represented by Formula where Vr is the value of an individual r years old, I(t) is the individual’s annual earnings up to retirement, t is the retirement age, and r is the discount cost of capital to the company.
There are other views regarding the objective of HRA and balance sheet treatment. HRA should be a management tool as against publishing the value on financial statements. HRA should be aimed at providing management with relevant, timely, quantifiable, and verifiable information about human resources to encourage informed judgments and decisions (Roslender, 2009). A misconception organizations have, is that they believe that their people are their most valuable asset, the most valuable asset of an organization is not its people, nor its technology or even its managers. Each can be an important asset, but each is simply a tool. Even the most gifted personnel will fail if they operate in a work system that is implemented piecemeal (Denton, 2006). Although most of the authors agreed on the fact that people are the most valuable asset of an organization, Denton’s view that people may not be the most valuable but one of the valuable assets re-emphasizes the importance people play in organizations.
People as assets: An asset is defined as an economic resource to which an organization has an enforceable right or access to, that other organizations do not have (Tollington & El-Tawy, 2010).
Items on the balance sheet are recognized as assets if the organization will derive economic benefits from them as well as have total control over the assets so that all measurable benefits accrue to the organization (Samudhram, Shanmugam & Low, 2008). The world has however, witnessed transition from manufacturing-based economies to service-based economies over the past decades and physical assets such as plant and machinery have been replaced with knowledge and attitudes of the employees (Choudhury, 2010).
The value of employees in an Information Technology company is likely to be higher than that of its physical assets. The same would apply to consulting firms, hospitals, academic institutions and sports clubs. In knowledge-based organizations, the value of people that are the strategic resources are important and should be recognized (Choudhury,).