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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): 

    (Individual) Human Capital, Benefits XXX 

    (Individual) Human Asset, Benefits XXX 

     Maternity/Paternity/Vacation/Sick Leaves: 

    (Individual) Human Capital, Productivity XXX 

    (Individual) Human Asset, Productivity XXX 

    *Amortized according to days of leave 

     Amortization 

    (Individual) Human Asset, Productivity XXX 

    (Individual) Human Capital, Productivity XXX 

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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 Capital, Productivity XXX 

    (Individual) Human Capital, Benefits XXX

    (Individual) Human Asset, Learning Cost XXX 

    Salary Investment Payable XXX if applicable* 

    (Individual) Human Asset, Nude Value XXX 

    (Individual) Human Asset, Productivity XXX 

    (Individual) Human Asset, Benefits 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 

    Salary Investment Payable 20,000 

    Rodolfo Ang, Salary Investment 20,000 

    Raise 

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

    Rodolfo Ang, Human Asset, Nude Value 20,000 

    Rodolfo Ang, Human Asset, Nude Value 22,000 

    Rodolfo Ang, Human Capital, Nude Value 22,000 

    Salary Investment Payable 200,000 

    Rodolfo Ang, Salary Investment 200,000 

    Rodolfo Ang, Salary Investment 220,000 

    Salary Investment Payable 220,000 

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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 

    Salary Investment Payable 22,000 

    Rodolfo Ang, Human Asset, Productivity 5,000 

    Rodolfo Ang, Salary Investment 22,000 

    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 

    Salary Investment Payable 242,000 

    Rodolfo Ang, Human Asset, Nude Value 22,000 

    Rodolfo Ang, Human Asset, Productivity 43,333 

    Rodolfo Ang, Human Capital, Learning Cost 5,000 

    Rodolfo Ang, Salary Investment 242,000 

    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 

    Less: Learning Costs (5,000)

    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

    Less: Learning Costs (5,000)

    Total Human Assets 100,000

    Total Assets P 1,500,000 

    LIABILITIES 

    Current Liabilities 

    Accounts Payable P 100,000 

    Salary Investment Payable 240,000 

    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 

    Less: Learning Costs (5,000)

    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)

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

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

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

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

    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.

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

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

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

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

    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.

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

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

    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.

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

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

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

    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.

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

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

     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.

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

    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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