Human Resource Accounting and the Importance of Human Capital Assets

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Human Resource Accounting Essay
The success and failure of an entity will depend on how effectively it utilizes its available resources. Managers must attempt to optimize the acquisition, allocation and development of the assets of the firm. Managers always equate assets to the physical and financial assets of the firm and often ignore the most important and the key element to the success of the organization – its employees. In service related businesses tangible assets contribute far less to the value of the service than do the intangible assets. These intangible assets are represented by the accumulated and current knowledge of the entity’s past and present employees. The abilities of all the employees of an organization at all the levels – management, supervisory and ordinary – to produce value from their knowledge and capabilities of their mind are known as HUMAN CAPITAL ASSETS. THE IMPORTANCE OF HUMAN CAPITAL ASSETS

Value is created when intangible resources are deployed and degrades when they remain unused. Today knowledge or more colloquially, intelligence and brainpower have become the key determinant for the economic and business success. The key success factor of an individual business enterprise is no longer its sheer size or the number of tangible assets it controls – It is its Human Capital. The importance of the human resources of a company can be illustrated in several ways. The market prices of corporate securities often reflect values substantially different from those indicated by the recorded values of the individual assets. Obviously, a number of intangible assets including human resources continue to remain unrecorded. Early evidence suggested that the replacement costs of human resources are quite substantial. In a survey, five hundred corporate presidents were asked about the cost of replacing their entire workforce. The estimates ranged from three to five times of the annual payroll of the company. If an organization pays Rs. 500 million payrolls it would have a worth of Rs. 1 billion to Rs. 2.5 billion. Further, in any organization the payrolls exceed the earnings by eight to ten folds, and since the human organization can be regarded as worth three to five times the payroll, the human organization could be valued at twenty five to fifty times a company’s annual earnings. A five percent fluctuation in the firm’s human capital would be equal to its reported annual earnings. The growing technical complexity of the modern business and the increasing time required for an individual to gain the experience is making the brainpower a critical resource in many developed countries. In such countries a lot of financial capital is invested in creating the knowledge and intellectual capital. For this reason it is not uncommon to learn of a large corporation purchasing small technologically superior firms – not for their plant and equipment but for their skilled managers, scientists and engineers as evidenced by the “merger mania” experienced in the last 15-20 years. Clearly human capital assets, device creations such as patent able inventions and copyrightable materials, which provide exclusive future benefit potential. Human capital also provides various expert services, consulting and financial planning, which are valuable for free services and are in demand. In fact, the intellectual assets of a company are often worth three or four times the company’s tangible book value. HUMAN RESOURCE ACCOUNTING

Human resource accounting historically has been defined as the process of identifying and measuring data about human resources and then communicating this information to interested parties. Human resource accounting, after almost 40 years of extensive research, still continues to be a topic hotly debated by both accounting theoreticians and practitioners.

Since initially appearing in the accounting literature, Human Resource Accounting has gone through several stages of development, which are: 1. Development...
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