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The purpose of this study is to analyze the contribution of human resources management to organizational profits and the need for inclusion of its contributions in company's financial statement. Measurement of human resources should assist in recognising and defining problems (Brummet et al, 1968).Trends in ratio of investments in human assets to total assets may be a useful predictor of future profit performance. (Brummet et al, 1968)There is some evidence to indicate a degree of meaningful correlation between profitability in organizations and their expenditures on acquisition, and retention of human resources (Brummet et al, 1968). This suggests that firms with high human asset investment ratio will ultimately generate high profits, while firms with low ratio may experience profits decline (Brummet et al, 1968)
According to the report on Evaluating Human Capital from people management specialists, the Chartered Institute of Personnel and Development (CIPD) study's one of the most essential intangible assets in today's economy, this include the knowledge, skills and ideas owned by employees (CIPD). However, company accounts presently record the costs related with individuals, but not the profits they bring. This is as a result of the fact that many organizations now agree that individuals represent the main driver of value in organizations (CIPD).
Also, companies need to have to hold with measuring and reporting on the contribution their people add. This would allow stakeholders to formulate better-informed decisions about the long-term capability of an organization and its capability to create value in a fast changing world (CIPD). In addition, Chartered Institute of Personnel and Development contended that companies need to have better knowledge with and put in place important measures of the value which individuals bring to the organization, like labour turnover rates, skills and qualifications, levels of innovation, the extent of teamworking and vital employees statistics in areas like employee behaviour and demographic structure (CIPD).In view of this, certain terms such as Human resource management, Human resource accounting, Human resource planning, Human resource forecasting and Human resource evaluation need to be define and examined.
WHAT IS HUMAN RESOURCE MANAGEMENT?
Human resources management has evolved considerably over the past century, and has experienced a major transformation in form and function primarily in the past two decades. Driven by a number of significant internal and external environmental forces. Broadly speaking, scholars and practitioners have regarded it as the source of competitive advantage for companies operating in a global economy (Ferris et al. 1999). However, it has been argued that tightening the linkage between HRM and organization strategy has become important to competitive viability (Dyer, 1983; Schuler and Jackson, 1987) in (Lam). The term human resources management
HUMAN RESOURCES ACCOUNTING
Today, people in the business world view human resources or individuals as the organization's greatest asset. However, the employee's worth is infrequently reported on the balance sheet (Ebersberger, 1981) . Thus, human resource accounting attempts to solve this problem. Also, social scientists have picked interests in the concept of human resources accounting which have captured the imagination of a significant group of accounting academician and practitioners. This work has been considered as a true challenge to accountants, a challenge as regards to preparing financial statements, which will include human resource.
Human resource accounting denotes accounting for individuals as organizational resources (Flamholtz, 1974). Similarly, it signifies the measurement of the cost and worth of individuals to organizations (Flamholtz, 1974). According to Flamholtz (1974) the term human resource accounting is not only a process of reporting the cost and value of individuals to organizations, it is also a method of thinking about the management of people in formal organizations. Walker (1980) defined the term as the management process of analysing a company's human resource requirements under changing conditions and enhancing the necessary activities to satisfy these needs. Broadly speaking, in the human resource accounting approach, expenses associated to human resources are accounted as assets on the balance sheet as opposed to the traditional accounting method which treats costs associated to an organization's human resources as expenditures on the income statement that decrease profit (Bullen and Eyler( ) . Human resource accounting proposes that in addition to the measures themselves, the means of measurement is essential in decision-making involving organizations (Flamholtz, 1974).
Organizational psychologist 'Rensis Likert', in his book: 'Human Organization' asserted that perhaps the most perplexing problem relating to human resources accounting is measuring the effect of managerial decision on what he called 'intervening variable and interpreting these into changes in human asset valuation'. He further stated that essentially, intervening variable are those forces that have impact on individual satisfactory and productivity. They include 'The loyalties, attitudes motivation, performance goals and perception of every members and their collective capacity for effective interaction, communication and decision making. In addition, he concluded that the action of management that influences these variables would be translated into capacity for future earning. These values he said could in turn be used to help determine the current worth of human resources.
Also, one of the major objectives of human resources accounting is to improve ways of measuring human resources cost and worth (Flamholtz, 1974). He stated further that these measurements are intended to offer a quantitative foundation for decision-making by managers and investors. For management; it would serve as a means for decisions including the acquisition, development, allocation, compensation and replacement of human resources on a cost-value basis (Flamholtz, 1974). A second objective of improving the ways of measuring the human resource cost and worth is to examine the effectiveness of management's utilization of human assets. Another ultimate objective of human resource accounting is to develop a theory describing the nature and determinants of the worth of individuals to formal organizations (Flamholtz, 1974).
HUMAN RESOURCE ACCOUNTING AND INTERNATIONAL FINANCIAL REPORTING STANDARDS
Recently, there has been a shift in the United states GAAP in adopting a more complex measurement methods as regards to financial reporting compared with the traditional historical cost approach to asset measurement, including concentration on the measurement of time value of money and present value calculations.
Accountants have become more familiar with complex measurement approaches, some of the approaches are similar to the approaches taken in improving human resource accounting value measures, it appears reasonable that non-traditional human resource accounting measures may become more accepted in future financial reports. Also, there has been growing concern in accounting for intangible assets in financial reporting between the financial Accounting Standards Board and the Securities and Exchange Commission. Flamholtz, Bullen and Hoa (2002, p.948) contended that since human resources are a primary element of intangible assets, the status is being established for a renewed interest in human resource accounting from a financial accounting viewpoint.
Moreso, in November 2007, the Security and Exchange Commission announced that non U.S organizations listed on the U.S stock exchanges could use International Financial Reporting Standards (IFRS) as an alternative of U.S GAAP (SEC, 2008).
Furthermore, based on the shift toward fair value reporting seen over the years between U.S GAAP and international standards, denotes a more sophisticated approach to the measurement of assets, tangible and also intangible. This might propose a willingness to identify the need for and take into account the measurement and use of human resource accounting in future external financial reporting.
HUMAN RESOURCE ACCOUNTING MEASUREMENT MODELS
Research in human resource accounting has also concentrated on the difficulty of improving valid and reliable ways of measuring the cost and value of individuals to organization (Flamholtz, 1974). Flamholtz's attempts to develop and assess the validity of a model of an individuals value to an organization. . Flamholtz's model identifies the economic, social and psychological determinants of an individual's value to an organization (Flamholtz, 1974). The model is based on the principle that an individual value to an organization is a product of the attributes he brings to an organization and the features of the organization itself (Flamholtz, 1974).
However, human resource accounting may be measured in terms of human resource cost or in terms of human resource value (Bullen and Eyler, ).According to Flamholtz model, for measurement of human resource costs, three different approaches have been suggested: Original costs, Replacement costs and Opportunity costs (Flamholtz, 1974). The Original costs may be described as the actual, historical outlay incurred as an investment in human resources (Flamholtz, 1974).In addition, Flamholtz's model for measurement of original human resource costs (1973, 1999, p.59), may be described in terms of the two main groups of acquisition costs and learning costs. Acquisition costs include the direct costs of selection, recruitment, hiring and placement, and the indirect costs of promotion or hiring from within the organization. Learning costs consist of the direct costs of formal training and orientation and on -the-job training. In a human resource accounting system these costs are recorded in asset accounts with future economic benefits rather than as expenditures. Replacement cost is the cost that would have to be incurred at the moment in order to replace an organization's human resources. Opportunity costs is described as the maximum amount that human resources could get in an alternative use (Flamholtz, 1974).
On the otherhand, Flamholtz (1999, p.160) asserted that the concept of human resource value is originated from general economic value theory, and like every resources people hold value because they are able of offering future service. Therefore, as Flamholtz stated, a person's value to an organization can be defined as the present value of the future services the person is expected to render for the period of time the individual is expected to remain in the organization. Likert ( ) contended that the model recognizes the determinants of the productive capability of the human organization, therefore it reflects the value of individuals to the organization. Recently,
The Stochastic Rewards Valuation model, that was developed by Flamholtz (1971) for valuation of human resource, and further described in Flamholtz (1999), provides a five phase process that starts with defining the different service states or organizational positions that a person may occupy in the organization. The next phase is to ascertain the value of each state to the organization, the service state values, which can be calculated either by using a number of ways such as the price-quality method or the income method. Then the individual's expected tenure or service life in the organization is calculated and the individual's mobility probability or the probability that an individual will occupy each possible state at a particular future period is derived from archival data. Next the expected future cash flows that the individual makes are discounted so as to ascertain their present value. According to Flamholtz (1999, pp 160-161) there is a dual aspect to an individual's worth. First, the person's 'expected conditional value', is the amount the organization could possibly realize from his or her services if the individual maintains organizational membership during the time of his or her productive service life. Second, the individual's 'expected realizable value', is the amount actually expected to be derived, taking into consideration the individual's likelihood of turnover in the organization. Similar to the Flamholtz model, is another earliest model of human resource value, it measures human capital by estimating the present value of an individual's future earnings (Lev and Schwartz, 1971). Also, Dobija (1998) suggested an alternative model for capitalization, where the proportion of capitalization is determined in the natural and the social conditions of the atmosphere. Utilizing a compound interest approach, this method takes into consideration three factors for valuing the human capital embodied in an individual. These consist of the capitalized value of cost of living, the capitalized value of the cost of professional education, and the value achieved through experience. Turner (1996) refers to the model provided by the International Accounting Standards Committee and recommended the use of the present value of the value added by enterprise, and measures assets by the four methods of historical cost, current cost, realizable value and present value. Cascio (1998) suggested a method for measuring human capital based on signs of human capital of innovation, employee attitudes and the inventory of skilled employees. In addition to this method, innovation commands a premium and thus needs to be measured, for instance by comparing gross margins from new products to the profit margins from old products. Employee attitudes predicting customer satisfaction and retention are an essential indicator of human capital and thus need to be measured, also measures of tenure, turnover, experience and learning.
DEVELOPMENT IN HUMAN RESOURCE ACCOUNTING IN UNITED KINGDOM.
Human capital is one of the intangible assets that investors seek for in valuing a company, together with structural capital (processes, information systems, patents) and relational capital (connection with customers, suppliers, and other stakeholders)(Wagner, 2007). According to a research of more than 600 manufacturing and service organizations that was led by Dr. Chris Hendry, Centenary Professor of Organizational Behaviour and Human Resource Management at the Cass Business School, City University of London, Wagner states that annual reports now overemphasize the role of relationship capital in organization performance and minimize the role of human capital, giving a skewed view of organization's future performance.
DEBATES IN HUMAN RESOURCE ACCOUNTING
HUMAN RESOURCES PLANNING
In this period of global economy with increasingly sophisticated information technology the request for professional services is growing. Given the type of the operations, the quality of services an organization can provide ultimately depends on the quality of its employees. Thus, it is obvious that corporate management has to focus its attention to human resources planning affairs (Hwang and Kogan, 2003). Boxall and Steeneveld (1999) asserted that a well- designed and carefully executed human resource system, involving recruitment, hiring and retention, can not only improve an organizations profitability, but can also sharpen its competitive advantage.
Bramham (1994) defined human resource planning as a vital planned approach to the management of individuals, linking practice to a company's strategic objectives and planning responses to prevail labour market conditions. Taylor (2005) asserted that human resource planning is mainly concerned with assessing an organization's position as regards to its labour markets and forecasting its likely situation in the future. It only gives consideration to skill auditing within organization but additionally requires that human resource goals give attention to labour market condition in the environment of the organization. Similarly, it is based on the idea of assessing the environment and putting together the data required to plan the path the organization needs to follow if it is to achieve its objectives (Taylor, 2005).In addition, Bramham (1987, pp56-57) highlighted some of the major objectives of human resource planning, there include recruitment, training and development, staff costing, redundancy, collective bargaining and accommodation.
According to Wendell F.French human resource planning is important to organization as planning the procurement and utilization of finances, material, capital equipment, and market resources. Also, the absence of human resource planning could lead to not having the right individuals in the right jobs at the right time, and any of the important management processes can become so inefficient and may cause threats about the existence of the organization (Jain and Murray, 1984).
Human resource planning is infrequently integrated with strategic business planning (Jain and Murray, 1984).According to the 1978 survey of the largest 200 companies in the USA and its 1980 update show that none of the companies reported any communications between the chief corporate planner and the personnel/human resource management function. Likewise, in their case-by-case carefully study six mid-western organizations, Kendrith M. Rowland and Scott L. Summers report that only one of six organizations integrated human resource planning with strategic business planning (Jain and Murray, 1984).
HUMAN RESOURCE PLANNING IN PRACTICE
In recent years, few studies have preferred to view directly at the application or lack of application of specific human resource planning techniques, instead of looking at wider issues (Taylor, 2005). A survey conducted by Cowling and Walters (1990) for Chartered Institute of Personnel and Development, asked several questions to ascertain whether or not specific activities related to systematic human resource planning were carried out. Respondents where asked to declare if the activity was undertaken on a formal and regular basis, as an ad hoc activity or not at all. The outcome provides that only three operations where undertaken formally and regularly by a greater part of respondents: the recognition of future training needs, analysis of labour costs and productivity, and a consideration of the need for structural change resulting from business plans. Also, fewer than half, thus, carried out formal forecasts of demand and supply of labour, and below 20 percent formally examined human resource planning practices. Though, the figures rose considerably when the amount of respondents claiming to perform these activities on an ad hoc basis was included.
Based on this research it was now difficult not to conclude that a vast majority of UK employers view human resource planning activities as a low priority for their organizations. Marchington and Wilkinson (2005, pp. 278-279) stated that there are number of reasons why human resource planning techniques have been neglected by employers in the United Kingdom. These involve the following:
-There is hostility to the application of statistical techniques in place of managerial judgement.
-It is considered that human resource planning, while desirable, is not important to organizational effectiveness; funding thus tends to be channelled elsewhere.
-The occurrence of a short-termist outlook in UK organization brings a belief that individual managerial careers are unlikely to be improved by long-term activities like human resource planning.
-There are practical difficulties associated with insufficient historical data on which to base forecasts.
- There is lack of knowledge of the existence of human resource planning techniques and their prospective advantages for organizations.
-Similarly there is a more general unawareness or fear of mathematical methods.
Furthermore, it has been argued that the traditional way of practising human resource planning that many employers often desire no longer suits the approach to P&D and to management as a whole (Taylor, 2005). Another argument put forward by some scholars about human resource planning is based on the simple proposition that it is impossible to forecast the demand for and supply of labour with any accuracy (Taylor, 2005). Mintzberg (1976, 1994) asserted that most forecasts come out to be wrong and as a result of this, the process of planning is likely to hinder the achievement of competitive advantage. In retrospect, Mintzberg terminology on the amount of obstacles to successful planning, in the form of discontinuities has been disputed, as he contended that changes in the environment infrequently occur suddenly. Taylor (2005) stated that Mintzberg arguments are based on business planning as a whole and are not only associated on the management of individuals. Thus while it is vital from a general management point of view, it may have little importance to the management of people. In addition, the major problem with forecasting is that it relies on past experience in order to predict future growth (Taylor, 2005).
HUMAN RESOURCES FORECASTING
Human resource forecasting focuses on institutional adaptations resulting from external pressure and changes. This human resource forecasting is important because of several external pressure and future contingencies. Some of the factors and variables that affect resources forecast include:
AMOUNT OF PRODUCTION: The degree of production of an organizations supplies and demands can severely curtail the activity of any manufacturer. If raw materials cannot be obtained, production has to be reduced eventually and forecasting done will be affected.
TECHNOLOGICAL CHANGE: Human resource forecasting must take into consideration changes in technology. There is a decision by the owner of the business to introduce a new piece of highly automated machinery. In this situation workers are displaced, permanently dismissed, temporarily laid off, retired or relocated.
SUPPLY AND DEMAND CONDITION: This relate to the labour market. If the demand of human is high and supply is low or vice versa the human resources forecast will be affected.
HUMAN RESOURCE FORECASTING TECHNIQUES
Various techniques exist in forecasting human resource. Meehan and Ahmed (2002) contended that the human resource forecasting techniques has four broad categories, this include judgemental, stock-and-flow models (mainly Markovian), demand forecasting models, and integrated models. Judgemental uses qualitative techniques, unlike the other categories that use quantitative techniques. It is viewed as the most common type of human resource forecasting employed. There involve supervisory estimates, rules of thumb, replacement charts and the Delphi technique. The stock-and-flow models deal with supply issues. Its aim is to project employee's movement through the organization over time, and to forecast the amount of employees in several jobs and skill classifications in the future. This technique is based on Markovian models. According to Bartholomew (1982), the models are meant for explanatory purposes, and also investigating reforms in the mix of employee population. The integrated models combine the multiple aspects of the planning process in such complex environment. Finally the demand forecasting models, it forecasts future demand for human resource on the basis of the relationship between staffing levels and indicator variables like sale or production volume (Meehan and Ahmed, 2002).
HUMAN RESOURCE EVALUATION
Human resources evaluation is the process of assessing the value of individuals to an organization. It includes measuring the productivity (performance) and promotability of individuals. Human resources accounting can be use in the human resource evaluation process by enhancing valid and reliable means of measuring the value of individuals to an organization (Flamholtz, 1974). These means or methods will consist of both monetary and non-monetary measurement (Flamholtz, 1974).
They will permit human resources management decisions to be made on cost value basis.
Human resources evaluation will also have an impact on the administration of human resources reward systems, such as compensation, promotion and symbolic reward like performance appraisals. These systems are intended to motivate and reinforce the best possible performance of individuals in attaining organizational goals. Human resources evaluation will allow reward to be administered in relation to an individual's value to an organization.
Although, human resource accounting is intended primarily as a managerial tool. It also has significant purposes for investors or stakeholders and other external users of corporate financial statement. This is as a result of present and potential stakeholders of an organization are also interested to obtain information about an organization's human assets, as suggested in a poem by Sir Webster Jonkinson:
Though your balance sheet's a model of what balance sheet should be, typed and noted with great precision in a type that all can see,
Though the grouping of the asset is commendable and cleared,
And the detail which are given more than it'
Though investment have been valued at the sales price of the day;
And the auditor's certificate shows everything o.k;
One asset is omitted and its worth I want to know;
The asset is the value of the man who runs the show.
As Jenkinson's poem means, investors would like to know the value of an organization's human assets. In addition, they want to understand an organization's investment in human resources. This information would help in making decision to acquire, retain or dispose of stock.
Unfortunately, such information is not available to investors. At present, financial statement prepared in accordance with general accepted accounting principles do not state the value of an organization's asset. In addition, financial statement does not notify investors of an organization's investment in human asset, because conventional accounting treats investments in human resources as 'express' rather than as 'assets'.
The practice of accounting for investment in human resources as expenses rather than as asset result in distorted income statement and balance sheets. In the income statement the figure designated 'not income' is distorted because accountants treat all expenditure made to acquire or improve human resources as 'expenses' during the period incurred, rather than capitalization and amortizing over their expected service life. The balance sheet is distorted because the figure marked 'total assets' does not contain the organization's human assets.
Human resources costs are sacrifices incurred to obtain or replace people. They have expense and asset component, just as any cost does. According to Flamholtz model, for measurement of human resource costs, three different approaches have been suggested: Original costs, Replacement costs and Opportunity costs (Flamholtz, 1974). The Original costs may be described as the actual, historical outlay incurred as an investment in human resources (Flamholtz, 1974).In addition, Flamholtz's model for measurement of original human resource costs (1973, 1999, p.59), may be described in terms of the two main groups of acquisition costs and learning costs. Acquisition costs include the direct costs of selection, recruitment, hiring and placement, and the indirect costs of promotion or hiring from within the organization. Learning costs consist of the direct costs of formal training and orientation and on -the-job training. In a human resource accounting system these costs are recorded in asset accounts with future economic benefits rather than as expenditures. Replacement cost is the cost that would have to be incurred at the moment in order to replace an organization's human resources. Opportunity costs is described as the maximum amount that human resources could get in an alternative use (Flamholtz, 1974).
Also, two models of human resources value were presented; one by Flamholtz (1971) explains the determinants of individual value and the other, by Likert explains the determinant of the group value.
In Flamholtz's model, the ultimate measure of an individual's value is the expected realisable value. This is made up of two variables via conditional value (potential) and the probability that the individual will remain with the organization during his expected service life. The conditional value of an individual depends on his promotability, transferability and productivity. This in turn depends on both skills and acquisition level of the individual. The organizational determinants of an individual's conditional value involve the extent to which the assignment corresponds with the employee's skills and the reward system used by the company. The possibility of an individual remaining in an organization is directly related to the extent of job satisfaction that the employee feels.
The Likert and Bowers model (1975) were used to represent the variable, which affect group's value to an organization. Casual variable (those that are often contributed by the organization) and intervening variable (reflecting organizational capabilities) determine the end-result variable of the organization (Flamholtz, 1974). The casual variable consists of managerial behaviour and organizational structure. The intervening variable consists of group processes peer leadership, organizational climate and subordinates satisfaction. The outcomes are the total productive efficiency.
Each of these models recognises variables that determine the value of individual to organizations. These variables must be taking into consideration in measuring the value of individual as organizational resources. There are two related approaches to measuring the aspects of an individual's value: direct and indirect. The former approach attempts to apply to normative economic valuation model to measure a person's expected conditional and realizable value parse. This is an attempt to derive a direct or principle measure of an individual's value. The latter approach involves applying several possible surrogate or proxy measures of economic value to individuals in order to obtain indirect measures of expected conditional and realizable value.
One method that has been proposed for measuring an individual's expected conditional and value directly is called STOCHASTIC REWARDS VALUATION METHOD. It is based on the notion that an individual is not valuable to an organization in the abstract, but in relation to the roles be is expected to fill (Flamholtz, 1974). The process of movement transition of individuals among organization roles is a 'stochastic process'. That is the movement of individuals from one role to another over some specified time period is a probabilistic process depending on prior states of the system (Flamholtz, 1974). Therefore, the role an individual will occupy in the future is uncertain and depends on the role previousely occupied.
A model of a stochastic process shows the likelihood that a person will move from one state (role) of the system (organization) to any other state during a specified period. The state of a stochastic model may be defined to involve not only organizational role but also the state of exist, a state occupied when an individual leaves an organization. In certain stochastic processes 'reward' accuses as the systems element make transitions from one state to another during a specified period of time. The rewards are in otherwords called the stochastic processes with reward.
As regards to the difficulties encountered in measuring a service state value, it may not always be possible to apply the stochastic reward. This proposes the need for a surrogate way of measuring an individuals expected conditional and realisable value. There are various possible surrogate monetary measures of an individual's value to a formal organization.
ORIGINAL COST: The advantage of using original cost is that first, it would be consistent with the conventional accounting use of cost as an implicit surrogate of value. Secondly, it's viewed feasible to measure the cost actually incurred in acquiring individuals.
REPLACEMENT COST AND CURRENT COST: Replacement and current cost have greater significance than historical cost because there are by definition more closely related to the market's current assessment of an asset's economic value. In both replacement and current cost reflect on people value to a formal organization.
COMPENSATION COST: Compensation measures like salary or commission are feasible surrogate compensation is the price paid for the unit of human service. This approach requires forecasting an individual's future salary and discounting those expected earnings to their present worth.
OPPORTUNITY COST: Opportunity cost is the value of an asset in an alternative use. It is measured by the amount of net cash inflows that must be sacrificed so as to direct a resource from one use to another. In the case of an individual, the opportunity cost is the value forgone by allocating the individual's job rather than to another.
In conclusion, they accept that the work of Flamholtz (1971) as regards the application of replacement cost is an interesting study that the idea of replacement of cost can be applied only in the following ways; if slavery exist and where an individual can be replaced by a machine not aided by human being, such machine fulfils the exact role played by human beings and such machine has a price.
However, human resource accounting may be measured in terms of human resource cost or in terms of human resource value (Bullen and Eyler, ).
EMPLOYEE LIFE CYCLE