Summary of Research on Human Capital Accounting

Summary of research on human capital accounting Filomena Antunes Brás – University of Minho - Portugal

Human capital has always been a critical factor for business success. Nowadays, in the information era and the study of intellectual capital, the interest for human capital study has grown. We still hear and read frequently from top management or in the financial report that people are the most important asset that an organization has, but at the same time financial statements do not demonstrate this. Human resources (human capital) are seen just like an important cost item in the income statement. Even here we find that only wages and social charges paid by the organization due to his employees are considered. If this resource is so important as it is said by many people, it demands a better treatment, namely by accountants. At same time, there is some empirical evidence suggesting that when there is human capital information disclosure, investors make different decisions from those that would be made with no such information. Studies like Elias (1972), Schawn (1976), Hendricks (1976), Flamholtz (1976), Hansson (1997) are examples of that. There is also empirical evidence that suggests a relationship between human resource (human capital) practices and the firm’s outcomes, and sustain the premise that better deployment and use of human resources practices are correlated with higher business results (Ulrich, 1997; Flamholtz and Main, 1999; Boudreau, 1998). So, in the presence of such powerful empirical evidence we, accountants, must study how can we disclosure useful information about human capital. Accounting for human resources has already been a theme of agenda in the accounting community. In the sixties and seventies (20th century) several studies have appeared, trying to account this kind of resources. The main purpose of the authors at that time was to put information into the financial statements, that is, they tried to put a monetary figure (value) to each human being working at the organization. Though the extraordinary development of models in this period of time, the lack of impact on management practices and normalization in accounting, during the following period, has stable this field study. As several authors say, many kinds of models have been proposed in scientific journals over this time (about thirty years) but human resources accounting has progressed at something less than a snail’s pace in the past two decades (Johanson and Mabon, 1998, 67). Nowadays, in a context of a rapid transfer from the industrial society to the post- industrial or service society and appearance of concepts like balanced scorecard of Kaplan and Norton (1996), intellectual capital (ex: Edvinsson, 1997; Sveiby, 1997), knowledge management (ex: Huang, 1998) and the knowledge worker, human resources increase in importance, so there is a greater need to measure and control its utilisation. In the intellectual capital literature, human capital is an important component. Several authors present metrics to value this resource but mostly all measurements rely on indicators, mostly non-monetary ones. I believe that this kind of information is important but the quantity of indicators that have been proposed may be so huge that it is impossible for management and investors to consider all the information they provide. Therefore, no practical impact exists in the organizational policies. On the other hand, if we cannot translate human information in a monetary basis and in a more aggregate form, investors and financial analysts will not consider it important in such a way that it would lead them to make different decisions or different projections of firm’s financial performance. Although I consider that the research that is being made by human resources academics and managers is important, I think accountants should play an important role translating human resources or human capital information in a monetary way, in terms of cost/benefit for the organisation from its human resources. And since it appears that although several attempts to incorporate information of these resources in the traditional financial statements have had a null impact on the accounting community, maybe it is time to think human resources (human capital) as a whole, but outside the financial statements, in order for them to be fully studied, so then we may integrate this two perspectives. My point of view relies on my research done until the moment. The discussion of human resources as an asset or as an expense hasn’t got an end yet. If we read IAS 38 we conclude that human resources are still considered not as an asset, because they do not fulfil all the requirements for that, although almost everyone thinks human capital as an asset, and most importantly, the critical factor for creation and sustainability of a competitive advantage for any organization. The financial statements do not show this, neither the financial report. The accounting community has been very conservative on this matter. Indeed, they usually point out the great mobility of workers, the fact that organization does not own human capital and the great subjectivity in valuing this kind of resources. But this is precisely the kind of information that needs to be studied and eventually disclosure. We need to understand what kind of flows there are between organization and human capital holders, and try to value them in monetary way, if possible. If we do this, we will obtain an overall picture of organization human capital. In Portugal, the financial statements only report about wages and social charges paid by organization due to its employees. But there is a document called “Social Balance” that must be filled by organizations with more than 100 employees, and enclosed to the Employment and Social Security Minister, as well as to unions, that contains qualitative information about human resources (human capital) inside organization. There is no obligation to disclosure this information in or out the financial report. This information is not collect in order to form a database for further studies. So the only way I may investigate the flows between those two entities is doing a case study. I have already authorization from one big Portuguese organization to do my empirical work. I want to try to develop a statement where relevant information about human capital, mostly on a monetary basis, is presented. I want to be able to show how the profile of human capital is changing or not, and at the same time I want to know more about the indirect costs concerning the human capital, in order to define rules. Finally, I would like to give a contribution for the accounting treatment of training costs as an expense or as an asset. At this moment, I am collecting and analysing documentation about my case study and that’s way I do not present any results, but I hope to have some in a short time from now.

References

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