acc 30 research paper

8/18/2019 ACC 30 Research Paper

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Ateneo de Manila University

John Gokongwei School of Management

Finance and Accounting Department

A.Y. 2015-2016

Human Resources Accounting: The Problem of

Cost-Value Reconciliation

Human Resources Accounting Research Paper with Recommended

Preliminary System Incorporating Human Capital and Human Asset

In fulfillment of a requirement for

an Accounting 30 Class under Dr. Venus C. Ibarra

Dianne Ashley Tan

Sherwin Uy

Patricia Rivera

2 BS Management-Honors

Submitted on:

April 12, 2016


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Introduction

The dramatic increase in market competition causes companies to find themselves in

an arms race to acquire more capital and technological advancement. Better machinery and

more efficient methods in production equate to enterprise development and profit generation.

Countless organizations have been pursuing a lifelong goal of globalization, sourcing their

resources and inputs from advanced countries that provide high-end technology. In a society

obsessed with technique, companies maintain a certain level of competitiveness by providing

their customers the best products and services that they can offer. Aside from all these

however, there is another widely recognized factor that contribute to the overall success of an

organization—people.

In our investment-driven economy, companies are aggressively tapping into human

capital, recruiting talented young people and training them to become better workers or

leaders in the firm. Known to be the most valuable asset of an enterprise, human capital

consists of a company’s labor force. What really keeps a company going are not the shiny,

automated machines in a factory nor the tall buildings that house the executives, but the

employees and people behind the development of an organization. They are the ones who

make good use of the resources available and produce the results of a well-managed

company. Human capital is at the forefront of knowledge-based management and ventures,

and this knowledge comes from the people hired in a firm (Rylander & Peppard, 2005).

Since people are considered as the most important asset or investment of a company,

a certain type of accounting method emerged in order to give credit to the value of human

capital. As defined by the American Accounting Association in 1980, human resources

accounting refer to “the process of identifying and measuring data about human resources

and communicating this information to interested parties” (Hossain, Islam & Bhuiyan, 2014).

Human resources accounting is not a new topic in economics, and the emergence of human

resources accounting in the 1960s was attributed to the prevalent notion that conventional

accounting methods fail to recognize people as a significant resource among other tangible or

intangible assets (Ganta & Geddam, 2014). The main problem in current accounting methods

is that it overlooks the apparent mismatch of revenue and expenses in relation to employee

training and performance since good performance of an employee (that is, a revenue) is rarely

attributed to the training expense incurred in the past years (Elias, 1972). Due to various

limits and problems in human resource accounting, only a few companies have followed its

practices as a norm in their own accounting office.


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The Significance of Human Resources Accounting in Investment Decisions

In the experiment of Elias (1972), he tries to prove the significance of human

resources accounting in external financial reporting. As companies become more knowledge-

based, there is an inclination toward hiring the right, talented and skillful employees; thus,

presenting the productivity level of a firm’s human capital would play a big role in helping

investors with their financial and investment decisions.

Following sound accounting principles, Elias (1972) focuses on historical costs

incurred as expenses of the company for its employees. In conventional accounting systems,

costs are usually recorded at the monetary value at the time of purchase or expense; thus,

recording historical costs is the normally accepted accounting method.

Toward the end of his experiment, he found a statistically significant relationship

between investor decision (participants were CPAs and accounting students) and the

incorporation of human capital information in financial statements. Though he also notes that

while there is a relationship, other data show that the relationship is rather weak due to

certain factors and limitations.

While the results are not weighty, several parts of the article point toward the benefits

and possibilities that human resources accounting can bring to a company. For example, the

comparative balance sheets provided by the experiment only included a general “human

asset” account with no further details or information. Should there have been more data that

could help paint the whole picture of the firm’s human capital, then it would most probably

produce a different result in the experiment since the experiment itself did show a

relationship between investor decision and human resources information because of an added

“human asset” account.

This article by Elias (1972) showed the potential of human resources accounting in

the development of current accounting systems and this has been agreed by countless

literature (Pyle, Brummet & Flamholtz, 1968; Stanko, Zeller & Melena, 2014; Ganta &

Geddam, 2014). There is an outcry of a need to account for human asset in financial

accounting, but the main problem remains—setting a monetary value on an employee that

shows his productivity. Numerous researches were undertaken by professionals and

practitioners, and many models were created, but they were not widely accepted due to their

limitations and possible misrepresentations.


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The Cost Perspective of Human Resources Accounting and Its Limits

In Barcons-Vilardell et al.’s journal article Human Resources Accounting , they

analyzed how various elements of human resources can be incorporated into the accounting

system. Rather than providing a specific solution to the problem, the article merely points out

the related costs incurred in the human resources department and explained how these costs

are significant in light of the juridical definitions of accounting terms (such as “assets”).

Barcons-Vilardell et al. introduces human resources accounting by starting with the

resource theory which states that a company’s survival in a market depends not on its

duplicate assets but on its specific assets, the employees (Conner, 1991, as cited in Barcons-

Vilardell et al., 1999). In this case, it would be important to measure the value of each

employee in order to gauge the real productivity level of a firm in relation to human resources

and make use of these measurements for internal control.

After establishing this point, the authors proceeded to enumerate the different types of

costs incurred in human resources and discussed how these alternatives can be incorporated

into the accounting system. The bulk of the article primarily focuses on three types of costs:

general costs, training and selection costs (divided into acquisition and learning costs) and

exit costs. Much of the paper argues about whether a particular expense should be capitalized

or not, turning these into assets that appear on financial statements. The authors conclude that

general costs and training and selection costs can possibly be capitalized and amortized over

a certain period under the notion that these costs do bring about long-term benefits and

returns in the future through the productivity of the personnel. Long-term value-adding

expenses or costs become the basis of capitalization. However, for exit costs, staying true to

the prevalent juridical concept of an asset, exit costs (indemnities for a resigning/leaving

employee) are considered mostly as current expenses because the company is not purchasing

an asset or investing on anything.

While the article has laid out numerous costs related to human resources, the main

question of what to do afterwards remains unanswered. The article has recognized two

pervasive problems with human resources accounting: identifying the relevant costs to be

capitalized or to be recorded as current expenses and setting the period of amortization.

Along with these problems, a framework is needed to incorporate human asset account titles.

Human Resource Accounting Cost Models

The main difficulty with human resource accounting is that there is no definitive way

to assign value to an employee. With this, human resource accounting has developed


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different methods for the valuation of human assets. In this section, we will discuss some of

the most dominant models utilized in human resource accounting: the Historical Cost model,

the Replacement Cost model, the Discounted Cash Flow model, the Adjusted Discounted

Future-Wages model, and the Opportunity Cost model.

Historical Cost Model

The Historical Cost Model aims to ascertain the firm’s investments made in human

assets, and measure of the value of a firm’s human resources. This model gives emphasis on

human resources being classified as business investments on account of their futurity–their

ability to provide potential economical benefits in the future.

The model takes note of four general types of expenditures involved in acquiring

human assets: recruiting, hiring, training, and development. These include all (direct and

indirect) expenses incurred in searching and selecting the individuals needed to fill the

personnel requirements of the organization; moving, placing, and establishing the employee’s

initial records; training the employee through formal or informal sessions; and providing the

employee with the necessary avenues for the development of his skills and growth. All of

these are summarized by employee and amortized over the expected employment time span

for each employee.

The two main advantages of this model is that it is reflective of current accounting

procedures because the acquisition cost recorded is the price actually paid by the firm; and

that the system is simple, and entirely feasible to install within a reasonable time frame. This

does not limit the firm to simply reporting tangible assets in its financial statements, and

reflect a more accurate representation of the firm’s value. While this method is aligned with

current accounting principles, it may be outdated and could not account for the true market

value of the investment. Carper (2002) believes that this model may be substantially

misleading because the values listed in financial statements would be economically incorrect.

The value of the employee may not correlate well with the investment, as individuals can

greatly appreciate in value and this may have little to do with costs or expenditures. Aside

from that, there is much difficulty in the determination of a universal write-off period, as the

method undertaken can be up to the firm’s discretion. It is necessary to take the prior period

investments into account, and this does not take account for the different rates at which

employees assimilate the knowledge and skills gained from their training programs;

therefore, making this model incompatible with the comparison of human-resource values.


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Replacement-Cost Model

The Replacement-Cost Model involves the calculation of the estimated costs of

replacing a firm’s current human resource. Replacement costs provide better managerial

information because they are more current, and are market-price oriented. This model

assumes all related costs needed to reinstate the human assets of a firm to the point of

existing employees in a situation where the firm retains all its assets. These include the

necessary acquisition, learning, and termination costs needed to reinstate the firm’s human

resources in a level of competence similar to the existing employees. The model takes note of

the direct and indirect expenses incurred in searching and selecting individuals to replace

those already in the organization and the cost of bringing new employees up to the level of

competence or standard of the people replaced. The possibility of promotion within the

organization still exists, as not all positions necessarily have to be filled from the outside. The

comparison of the costs of promotion with the cost of replacement from outside the

organization may help in making key managerial decisions as the lower of these values would

be the acquisition replacement cost. Lastly, Ripoll and Labatut (1994) classifies the

termination costs, expenditures necessary upon separation of an employee from the

organization, into three categories: lost efficiency prior to separation, job vacancy cost during

the new search, and termination pay. While lost efficiency is hard to quantify, this can be

based from each employee’s productivity. There is also a need to quantify how much the firm

ceases to gain because of the vacant position. Termination pays are usually regarded as

indemnities in accounting systems. The classification of an indemnity as either an

extraordinary expense or operating cost is dependent on the rate of personnel turnover in the

firm. For organizations with high personnel turnover, indemnities become a frequent issue

and should be included in a firm’s operating expenses. For firms that need to cancel contracts

in order to survive, indemnities become extraordinary expenses because they do are not part

of the typical activities of the firm and are not supposed to happen frequently.

The main advantage of this method is that it is reflective of the market value of human

resources in the economy and takes account of the effect of inflation on asset values. It must

be noted, however, that this approach is not consistent with current accounting methods, as

this prevents human asset valuation from being comparable with other assets in the financial

statements. The Replacement Cost Model may not denote the true economic value of

individuals and groups within the organization because of subjective estimates necessary for

computation. In fact, it is possible that certain individuals cannot be replaced without

disruption of key behavioral relationships.


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Discounted Cash Flow or Compensation Model

Lev and Schwartz (1971) developed a model which considered the use of the

economic concept of human capital for organizations, which is now the most popularly used

model for human resource accounting across the globe. Using the model, they attempted to

accurately predict the future earning employees will generate, by discounting these cash

flows to the present, a valuation for human assets is produced.

This is based on the premise that an asset can be said to be an economic resource and

we acquire these resources to utilize them, then it is the future benefits and costs we are

concerned with, not past outlays or even present expenditure (Savich et al., 1976). Based on

Irving Fisher’s human capital theory, Lev and Schwartz conclude that “capital is defined as a

source of income stream and its worth in the present value of future income discounted by a

rate specific to the owner of the source”. This approach uses an individual’s earning profile,

probability of termination, and minimum desired rate of return. The earning profile is a

mathematical representation of the income stream generated by a person. With this, a general

earning profile first increases with age as a person’s skills and capacity to learn develops and

eventually declines due to technological obsolescence and health deterioration. An

individual’s economic value, therefore, is the summation of all estimated annual earnings

from acquisition up to termination, which is discounted at a rate specific to the organization.

Firms usually construct average earning profiles for various groups within the organization.

These are then compiled to represent the total human capital associated with the firm.

Adjusted Discounted Future-Wages Method

Hermanson (1964) proposed a model that involved the discounting of future

compensation with an adjustment using an “efficiency ratio” to determine the value of an

individual. Here, discounted future wages are adjusted by an efficiency factor intended to

measure the relative effectiveness of the human capital of a given firm. The efficiency ratio is

then computed as the summation of the ratio of the return on investment of the firm relative

to other firms in a given economy for a particular period.

This model, however, has limited use as a predictor because the values acquired are

historically based. The model also leaves no allowance for other “unowned” assets, as this

assumes that human resource is the total of all “unowned” assets.

Opportunity Cost or Market Value Model

Developed by Hekimian and Jones (1967), the Opportunity Cost Method measures the

human resources of a firm with respect to an economist’s concept of opportunity cost, which

is the value of benefit foregone by putting all assets to present use. The model follows a


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situation wherein talents and skills within the firm suddenly become scarce and the individual

departments must bid on existing employees in the organization. The valuation is achieved

through competitive bidding, where managers bid for any scarce employee.

In this model, there is no opportunity cost for employees that are not scarce. This

model assumes that only scarce people should comprise the value of human resources. As a

result, this model excludes the type of employees which can be hired readily from outside the

firm and is only concerned with individuals that possess special skills and knowledge.

Despite the development of various account models throughout the decades, no model

of human resource accounting is accepted by accounting bodies from all over the world.

Therefore, development in the human resource accounting system because of the lack of

implementation and further research. Human beings, in a strict sense, are also hardly

recognized as assets by tax laws because of the inability of firms to actually own human

beings.

Cost vs. Value Approach

The cost models discussed in the literature are all models that would fit Barcons-

Vilardell et al.’s definition and accounting terminologies for human resources. The

perspective laid out in the research of Barcons-Vilardell et al. however, only show a

dimension of human resources accounting. It does not encompass the equally significant

counterpart of costs or expenses, and that is how to recognize revenue. In another article

entitled Human Asset Accounting and Measurement: Moving Forward by Stanko, Zeller &

Melena (2014), they criticized one of the most prevalent (though flawed) human resources

accounting approach—the Cost Approach (Historical Cost Model and Replacement Cost

Model fall under this umbrella concept). In contrast to Barcons-Vilardell et al., their main

criticism on the Cost Approach lies in its prejudice toward emphasizing the cost rather than

on value, that the worth of an employee is the sum of all the costs incurred to recruit, train

and develop the employee. It fails to recognize his contributions to the company. For

example, when the article discussed the history of human resources accounting, they traced it

back to the Medieval Ages where the decision on keeping or killing an enemy prisoner

depended on the cost of keeping and the potential earning in the future, should they decide to

keep him. In our current case however, employees are more than just decorations to the

company; they are active members of a firm and constantly contributing to value-creation.

Barcons-Vilardell et al. on the contrary, overlooked this point and focused more on


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distinguishing costs rather than on identifying relevant revenue or return on investment

generated by the respective employees in relation to the expenses (matching principle).

Stanko, Zeller & Melena have also highlighted in their study the various Value

Approaches that were proposed by other authors. These approaches included Lev & Schwartz

Model, Jaggi & Lau Method and the Economic Value Model. In this case, while it

encompasses the value aspect of human capital, it is still lacking and not “all-inclusive,” as

described by the authors. A better way for accounting cost, value and investment remains to

be the primary concern of many practitioners and researchers on top of the issue that it is

extremely complicated to label a monetary value on a complex human being.

Measurements of Human Resources Accounting

In another article, attempting to solve the problem of matching the employee’s

individual performance to the benefits it gives to the company, Andrew Mayo discusses the

different measures that can be used in human resources accounting. A major point tackled in

his article, The Human Value of an Enterprise is a dilemma of several companies: because

workers who should also be deemed as assets are difficult to quantify as compared to other

financial assets, they become quite challenging to manage.

Mayo introduces a few people-related measures which he believes may play a positive

factor in dealing with management problems, the first being workforce analytics which

focuses on the return on investment for people initiatives and programs. Mayo himself came

up with a Human Capital Monitor as well, which stresses that the performance of laborers

may be highly involved with how they are managed, their determination, and their working

environment. Moreover, the author also reviewed a formula that researchers W.J. Giles and

D.F. Robinson developed to compute for HAW (human asset worth). The HAW is solved by

multiplying employment cost and the individual asset multiplier and then divided by 1000.

The individual asset multiplier involves elements that make a worker creditable such as

potential, skill, and productivity, put on a relative scale (estimated by the company) to get a

numerical value.

In summary, Andrew Mayo talked about the possible human capital measurements in

his paper with the aim of showing that there are indeed frameworks and systems to quantify

human capital. He observes that corporations tend to overlook this and fail to recognize how

essential employees could be and emphasizes that it is imperative to continuously use

measures in valuing employees in order to administer them well and ensure their progress.


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Various literature included in this section all point toward the possibilities and

breakthroughs that human resources accounting could bring if an appropriate system is

created. However, this proves to be a hard task since many factors come into play when

assigning certain values on a company’s human asset reserve.

Methodology

A number of literature and experimental human resources accounting systems focus

too much on costs and expenses, leaving the impression that an employee’s value is limited

by the training and selection costs incurred. However, the value of an employee should be

based on the profit and benefits he generates for the company in relation to the expenses. In

order to address this situation, this paper has created a preliminary accounting system that

would tackle the limitations of various literature covered in the previous section of this paper.

Also, for the sake of understanding more about current accounting methods being used by

various companies in the Philippines, this paper has surveyed 11 corporations/companies and

used these data as basis for analyzing conventional practices and creating an accounting

method for human capital.

Surveys given consisted primarily of questions regarding how companies usually

record expenses and other account titles related to human capital and how much they knew

about human resources accounting which is normally not used in the country. A

hypothesis/presumption for this paper is that most of the interviewed corporations are not

fully aware of the idea of practicing human resource accounting as this system is still not

extensively utilized in the Philippines.

Analysis and Discussion

A variety of corporations were interviewed (trading, manufacturing, real estate etc.) in

order to ensure that their answers will not be too similar. Before the researchers conducted

the survey proper, the interviewees were given a short explanation of what human resources

accounting is first. HR Accounting was briefed to them as a system that deals with costs

incurred by companies to select and train employees as well as judges the economic value of

the laborers to the organization by seeing them as assets in their book of accounts. Questions

that were asked involved how these corporations view their employees in their accounting

system, how they treat the wages workers, and the account titles they use to handle their

human capital. Below is a summary of the results of the survey:


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Recruitment Costs:

Acquisition/Recruitment Expense XXX

Cash XXX

When admitting a new employee, there are certain recruitment costs that will be

incurred, but these costs will not be capitalized because they are regarded as small, short-term

expenses that only help a company acquire or select a pool of people. While some may argue

that they can be seen as an investment, for the sake of simplification, developing human

capital will start after the acquisition and not during or before it.

Nude Value of Employee (Increase in Human Capital):

Admission of Employee:

(Individual) Human Asset, Nude Value XXX Starting Salary

(Individual) Human Capital, Nude Value XXX Starting Salary

Nude Value describes the base worth of an employee when he is admitted. As he is

admitted, he brings along all that he knows and all that is personal to him such as education,

health, socio-economic background, work experience, and so on. In other words, the Nude

Value pertains to the value of an employee at the time that he enters the company, and this is

approximated by the company through a starting salary. There can be many ways to assign a

base worth for an employee, but using a starting salary would have a better grasp on

determining the value of the employee in relation to his job description. For example, an

employee’s educational background plays a big role in determining salary level because

normally, a person who has gone through higher education is more intelligible than someone

who has not (Ganta & Geddam, 2014). While there are exceptions to this (such as natural

talent), it is generally accepted as an indicator of valuable employees.

The Nude Value is not amortized across the working life of the employee because it

represents his base worth. Amortizing it would mean that his KSAs for example, diminishes

across his life which is not necessarily the case. Even if a person is completely unproductive

and brings no benefit to the company, he must at the very least have a certain level of worth.

Salary Investments (Decrease in Human Capital):

Start of Work:

Salary Investment XXX*

Salary Investment Payable XXX*

* Annual worth of salary

Payment of Salary:


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Salary Expense XXX

Cash XXX

Salary Investment Payable XXX

Salary Investment XXX

Salary or wage is conventionally recognized as an expense to the company, but as

argued by numerous literature, it should not be. Salaries are incentives and motivations for an

employee to perform well in his job, thus these have to be recognized as an investment in

human capital.

However, eliminating salary expenses would come out to be an unpopular choice if

ever this method will be adapted since doing so will increase net income and report higher tax

expenses for the company; thus, in order to minimize the effects on the income statement,

this preliminary system will retain the expense entry, but add an additional entry that relate to

investment.

At the start of the year, a salary investment contra-equity account is opened. This

salary investment will be the average annual earnings of the employee. As salary investment

is debited, a salary investment payable is credited. The logic behind this is that an employee

works for a company, expecting to be paid and an obligation on the part of the company

arises. At each salary payment, the salary investment payable and salary investment accountis decreased, eventually reaching a net of zero at the end of the year, but refreshed anew at

the start of the next fiscal year.

Rather than accumulating the earnings of an employee for his entire stay in the

company, this system has opted to work on an annual basis due to two main reasons: 1) it is

much easier to account for salary investments in shorter periods and 2) starting with an

extremely large liability and contra-equity value will misrepresent financial reports.

Step 2: Training Stage

Training Costs:

(Individual) Human Capital, Learning Cost XXX

(Individual) Human Asset, Learning Cost XXX

Training Expense XXX

Cash XXX

Training equips employees with the right skills and knowledge to do their job. Seen asa contra-equity account, this means that it is a cost to human capital. Increase in productivity


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will then be the offsetting figure in order to raise human capital since it is logical to expect

higher productivity with more training. Training expenses will still be recognized.

Regarding amortization, there are two different implications: 1) that the effects of

learning expire within a long period and 2) that the effects of the learning stay with the

employee forever as he assimilates whatever he has learned. In the first case, amortization is

encouraged, but in the latter case, it would be otherwise. For this preliminary system, learning

costs will not be amortized on the ground that these costs are permanent in effect and are

accumulated in order to track the difference or the return on these learning costs.

Other Benefits:

Benefits Expense XXX

Cash XXX

(Individual) Human Asset, Benefits XXX

(Individual) Human Capital, Benefits XXX

Similarly for benefits/welfare costs, additional entries will be made to recognize these

expenses as investments. Benefits are regarded as an investment to improve the performance

of the human asset. Depending on the type of benefit, this will be amortized according to its

“useful life” as shown below. Health benefits for example, will be amortized in accordance to

the working life of the employee.

Expended/Amortized (Ex: If health benefits, amortized through working life):



Maternity/Paternity/Vacation/Sick Leaves:

(Individual) Human Capital, Productivity XXX

(Individual) Human Asset, Productivity XXX

*Amortized according to days of leave

Amortization




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(Individual) Human Capital, Nude Value XXX (Salary)

Salary Investment Payable XXX (Remaining)

Salary Investment XXX (Remaining)

Salary Investment XXX (New Salary)

Salary Investment Payable XXX (New Salary)

Raises and promotions are signs of exemplary performance of employees. In these

journal entries, the remaining Nude Value is brought to zero and is renewed with the new

Nude Value, the new salary of the employee. In effect, getting a promotion or a raise is as if

the company is renewing the employee and recognizing him as a newly developed asset of

the company. Likewise, the Salary Investment accounts are also renewed at the new annual

earnings of the employee.

Step 5: Retiring/Resigning Employee

Close all books related to employee

(Individual) Human Capital, Nude Value XXX



(Individual) Human Asset, Learning Cost XXX

Salary Investment Payable XXX if applicable*

(Individual) Human Asset, Nude Value XXX



(Individual) Human Capital, Learning Cost XXX

Salary Investment XXX if applicable*

*If not at the end of year

All amortizations are in straight-line.

For a leaving employee, all books will be closed and the entire human asset/capital

will be written off in the book of accounts.

Example:

Vbarra Inc. just started last January 1, 2016. She admits one employee, Rodolfo Ang

as her assistant. Venus Ibarra estimated Rodolfo’s “worth” to be P20,000, which is his

starting salary (he pays salaries at the end of the month). To train him in his new job, Venus

Ibarra brought him to a seminar and other training sessions to better equip him with the skills

that he needs on the same day. Training costs are calculated to be P5,000. Rodolfo is


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expected to stay in the company for 10 years. On April 1, 2016, because of Rodolfo’s

consistent performance, he is given a P2,000 raise. On July 1 2016, Rodolfo was able to seal

a deal of P 50,000, to Venus’s surprise. Impact of project was known to last for 5 years for

the company because the deal would be able to help Vbarra Inc. with its expansion. Sadly

however, he has been offered a Dean position in Ateneo de Manila Graduate School, thus he

decides to resign on February 28, 2017. Venus closes her books annually at the end of the

calendar year. Out of kindness, Rodolfo Ang, now Dean Ang, will not get his salary for the

month of February.

Admission

Jan 1 Rodolfo Ang, Human Asset, Nude Value 20,000

Rodolfo Ang, Human Capital, Nude Value 20,000

Rodolfo Ang, Salary Investment 240,000

Salary Investment Payable 240,000

Training Costs

Jan 1 Rodolfo Ang, Human Capital, Learning Cost 5,000

Rodolfo Ang, Human Asset, Learning Cost 5,000

Training Expense 5,000

Cash 5,000

Payment of Salary

Jan 31 Salaries Expense 20,000

Cash 20,000



Raise

Mar 1 Rodolfo Ang, Human Capital, Nude Value 20,000

Rodolfo Ang, Human Asset, Nude Value 20,000


Rodolfo Ang, Human Capital, Nude Value 22,000






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*For ease, the new salary is multiplied by the remaining 10 months of the year.

Starting point will always be the calendar year of the company

Productivity

July 1 Rodolfo Ang, Human Asset, Productivity 50,000

Rodolfo Ang, Human Capital, Productivity 50,000

Close Books at End of Year

Dec 31 Rodolfo Ang, Human Capital, Productivity 5,000


Rodolfo Ang, Human Asset, Productivity 5,000


Salary Expense 22,000

Cash 22,000

Resignation

Feb 28 Rodolfo Ang, Human Capital, Nude Value 22,000

Rodolfo Ang, Human Capital, Productivity 43,333

Rodolfo Ang, Human Asset, Learning Cost 5,000



Rodolfo Ang, Human Asset, Productivity 43,333

Rodolfo Ang, Human Capital, Learning Cost 5,000


Vbarra Inc.

Partial Balance Sheet

As of December 31, 2016

ASSET

Human Asset

Rodolfo Ang

Nude Value P 22,000

Productivity 45,000

Less: Learning Costs (5,000)

Total Human Capital P62,000

EQUITY

Human Capital

Rodolfo Ang

Nude Value P 22,000

Productivity 45,000


Salary Investment (0) Total Human Capital P62,000


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Salary investment at the end of the year is brought to zero which means that at the end

of the year, the employee’s value is at his Nude Value plus Productivity less Learning Costs.

Salary is seen as a motivation (investment) and at the same time an expense of the company.

Below is a sample balance sheet at the start of the year to show the effects of salary

investment on the company:

Company Name

Balance Sheet

As of January 1, XXXX

ASSETS

Current Assets

Cash P 100,000

Accounts Receivable 500,000

Merchandise Inventory 250,000

Total Current Assets 850,000

Fixed Assets

Machinery & Equipment P 650,000

Less: Accumulated Depreciation (100,000)

Total Fixed Assets 550,000

Human Assets

Nude Value 20,000

Benefits 25,000

Productivity 60,000


Total Human Assets 100,000

Total Assets P 1,500,000

LIABILITIES

Current Liabilities

Accounts Payable P 100,000


Total Current Liabilities 340,000

Long-term Liabilities

8% Bonds Payable 500,000

Total Liabilities 840,000

EQUITY

Contributed Capital

P5 par, Common Stock (50,000 shares) P 500,000

Retained Earnings 300,000

Total Contributed Capital 800,000

Human Capital


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Nude Value 20,000

Benefits 25,000

Productivity 60,000


Salary Investment (240,000)

*Total Human Capital (140,000)

Total Liabilities & Equity P 1,500,000

This balance sheet at the start of a fiscal year reports a negative balance for human

capital but a positive value for human asset. At the start of the year, an employee is expected

to perform his best in order to bring benefit to the company and he expects that he will be

paid for his hard work through the form of salary. At this point, the productivity level of the

employees is at a rather low level because salary, a cost to the company, is invested in the

employee but no significant return has been made to offset the investment of the company

yet, thus a negative balance. As salary investment reaches zero at the end of the year, human

capital equals human asset and the value of the employee (as depicted by his productivity

plus other benefits shouldered by company to improve the employee) is at its barest value. It

can also be viewed as a salary investment that has worn off at the end of the year.

Limitations and Recommendations

There are various limitations to this preliminary system (hence, preliminary). The

objective of this paper is not to provide a rigid accounting system to be adapted by

practitioners and CPAs, but to show a particular facet of human resources accounting and to

attempt to incorporate human resources in financial statements for external and internal users.

The accounts are straight-forward and reflect the productivity and cost value of employees.

This preliminary accounting system is rather flexible since it can be gauged at an

individual level or at a departmental/group level, depending on the company.

However, there are multiple repetitions in the template provided by this paper such as

the amortization processes and the accounting for raises and promotions of employees.

Training expenses can also be better improved by identifying specific learning costs because

there are some expenses that might not be as direct or relevant to an employee’s learning

experience. Also, another way to view learning costs is that whatever training an employee

receives increases his worth by equipping his with new skills and knowledge. This will be in

contrast to the system created since the system assumes learning costs as a cost to human

capital and as an investment on employee productivity rather than an added value to the

human asset.


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The salary investment portion of this template could also be improved further and

other possible ratios can be made such as the rate of return of employees against their salaries

in order to provide a better view on how productive employees are and to eliminate possible

biases in the way companies measure their employees. Journal entries for salary here were

done twice: one for expense (income statement) and another as an investment (balance sheet).

This can be improved by looking for a way to reconcile these two into one single entry.

Limitations of the preliminary system primarily lies in its simplification of human

assets. Better ways to account for salaries, benefits and other related expenses or revenue

could be created. The system created in this paper serves only to translate human resources

perspectives and definitions to accounting terms and methods.

Conclusion

Human resources accounting is no doubt a developing discipline in the field of

accounting. More accurate ways to quantify human capital for financial reporting will be

beneficial to internal and external users of companies. As society becomes more knowledge-

based, more firms are keeping an eye on their human capital, investing in employee

recruitment and training. Reviewing several literature that emphasize on the significance of

human resource accounting in the gradual transformation of how companies operate, this

paper has provided a simple framework for incorporating human asset/capital in conventional

accounting methods. Several entries and account titles were added to recognize the

investment aspect of costs or expenses. Moreover, productivity of employees were also taken

into account in approximating the value of employees.

This template is a straightforward answer to the literature covered in the paper as it

provides a recommendation to the prevailing problems in human resources accounting.

Interpreting the human resources accounts introduced in the system would require a

juxtaposition of human asset reserve, the value of the employee and the human capital which

shows the investing activities in human resources. The differences between these two serve to

give management and investors an idea of how human resources activities are contributing to

the development of human assets.

There are still various limitations to this system; however, it can still be improved by

expounding more on the different costs incurred and value generated by the department.

Nevertheless, the system discussed here serves as a preliminary to possible groundwork for a

more rigid accounting system in the future.


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seminars and special trainings as it is still starting up and is not financially stable and ready to

do so.

1. Salaries and Wages- for salaries and allowances (as expense)

2. Employee benefits- for uniforms, meals, medical, etc. (as expense)

3. Direct Labor- for salaries of factory employees which are directly involved inmanufacturing and production process, will be capitalized as part of inventories (asset)

FASTPACE- TRADING CORPORATION

Person contacted: Ria Ang (Manager)

Costs with regards to employees are treated as expenses in the book of accounts.

Laborers who contribute to the company’s growth and success are valued by giving

promotions, additional allowances, incentives or salary increments based on their

performances after thorough evaluation. Workers are also sent to seminars and special

trainings to develop their competence as the corporation’s employees.

1. Salaries and wages- for salaries and allowances (as expense)


3. Training and seminars- for trainings and/or schooling (as expense)

POWERTRAC- TRADING CORPORATION

Person contacted: Lito Uy (Manager)

Employee wages are treated as expenses in the book of accounts. Since the corporation deals

with heavy equipment such as backhoes, forklifts and trucks, the workers, especially

mechanics, are highly encouraged to attend special trainings to better their technical skills.

Moreover, sales agents of Powertrac are also sent to marketing seminars. Laborers are nottreated as assets in the corporation’s accounting system.




JLU HOLDINGS INCORPORATED

Person contacted: Johnny Uy (Chairman)

Since the company focuses more on investing and acquiring properties, it has very few

employees. The salaries of these laborers are still treated as expenses and are not capitalized

as assets. JLU Holdings Inc. does not see the need to send its employees to seminars yet.



JALMINELLE- REAL ESTATE CORPORATION

Person contacted: Ronald Lim (President)

Jalminelle is a leasing company and thus it does not have many employees. The only workers

the corporation accounts for are the people who manage their residential and commercial

units for rent. The wages of the laborers are treated as expenses and the employees are not

treated as assets in the company’s book of accounts.


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STO. NINO PROSPERITY- FARMING CORPORATION

Person contacted: Reynaldo Bosque (Manager)The workers’ salaries are regarded as expenses in their income statement. As for the training

costs, the laborers of the farm were initially taught proper sanitation, waste disposal, and

specific animal care. The employees are not treated as assets in the corporation’s book of

accounts.



3. Training and seminars- for trainings (as expense)

CENTRON ENERGY SAVINGS- TRADING CORPORATION

Person contacted: Leonard Cabusas (Accounting Head)

In its accounting, salaries are considered as expenses. With regards to trainings, the

employees attend team building seminars per department. The corporation does not see its

workers as assets in its financial statements.




TOMKIMCO AUTO SUPPLY- TRADING CORPORATION

Person contacted: Noel Bautista (Manager)Wages of their employees such as salesmen and secretaries and costs incurred to

provide benefits to their laborers are treated as expenses in the company’s book of accounts.

Tomkimco Auto Supply does not deal with training costs (there are no seminars or special

training sessions for their workers) and the organization does not view its employees as assets

in their accounting system.



NEWEST INSURANCE AGENCY- INSURANCE CORPORATION

Person contacted: Houston Ng (President)

The salaries of the corporation’s laborers are treated as expenses in the company’s

accounting. The organization also conducts seminars for all the employees (especially

secretaries) often in order to improve their competence and interpersonal skills. The workers

are not seen as assets in the corporation’s book of accounts.


2. Employee benefits- for medical, etc. (as expense)

3. Training- for seminars and the like (as expense)

CARMEN’S BEST ICE CREAM

Person contacted: Veronica Pedrasa


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Their HR Department handles all human resource related accounting. It has the total

manpower of the company, including the salaries, allowances and other benefits given to the

employees. They do not regard employees as assets in their company’s book of accounts.

They use the following accounts:

Salaries and OT - Salaries and WagesAllowances - Allowances

Other benefits - Employees benefits

Seminars - Trainings and seminars

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