Human Resources should be

1. Human Resources should be Included in the F/S AC4304 Financial Reporting Theory

2. Human Resource should be included in the F/S Agenda • Introduction • Human Resource Accounting fulfils the definition of asset • Changing Society • Economic Structure • Cost Measurement • Accounting Concept • Business Strategy AC4304 Financial Reporting Theory

3. Human Resource should be included in the F/S Agenda • Usefulness of HR info for different users • Internal Users • External Users • Distort F/S without HR info • Example • Conclusion AC4304 Financial Reporting Theory

4. Introduction • Becoming an information based economy, requiring “high-tech services” from highly-trained & educated people AC4304 Financial Reporting Theory

5. Definition of HRA • Report of American Accounting Association’s Committee on Human Resource Accounting: • Human resource accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties AC4304 Financial Reporting Theory

6. Poem Though your balance sheet’s a model of what balance sheets should be. Typed and ruled with great precision in a type that all can see; Though the grouping of the assets is commendable and clear, And the details which are given more than usually appear; Though investments have been valued at the sale price of the day, And the auditor’s certificate show everything O.K.; One asset is omitted – and its worth I want to know, The asset is the value of the men who run the show. AC4304 Financial Reporting Theory

7. Human Resources • The quality of management varies between companies – the better the quality, the higher the value • Employees possess education and experience which translate to skills – the better the skills the higher the value • The more stable a workforce the less the turnover & hence the need for recruitment, hiring and training costs • Management and other employees are valuable assets- they have future benefits and the entity has exclusive rights to their services • But balance sheets do not reveal these values AC4304 Financial Reporting Theory

8. HR fulfills the Definition of Asset • An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. • An asset is a resource: • controlled by an enterprise as a result of past events; & • from which future economic benefits are expected to flow to the enterprise • measured reliably AC4304 Financial Reporting Theory

9. HR fulfills the Definition of Asset • Services people are expected to provide to an organization comprise the asset • The skill asset value formula Skill asset value = (cost of skills ) x (average years of service) x (retention rate) • where: • the cost of skills is taken as the total pay-roll cost for the relevant accounting period; • the average years of service is taken as the average number of months service of all employees employed at the end of the period, expressed in years; • the retention rate is equal to 100 per cent minus the number of staff who have voluntarily left the business as a percentage of the average number of staff employed in the accounting period. AC4304 Financial Reporting Theory

10. Changing Society: Economic structure • Thedore Schultz, Nobel Prize Winner • Laborers have become capitalists not from a diffusion of the ownership of corporation stocks as folklore would have it, bit from the acquisition of knowledge and skill that have economic value

11. Changing Society – Economic Structure • Past: agricultural & industrial economic structure where the extent of human capital was significantly less, emphasis on physical capital, like properties, equipments • Now: increasing importance of human capital to the economy, e.g. computer technicians, engineers, lawyers, university professors. And the society is increasingly composed of white collar, technical personnel => HR is not shown in F/S AC4304 Financial Reporting Theory

12. Changing Society – Cost Measurement • Past: HR is difficult to value • Now : Have actuary to value HR cost, and many measurement is developed, e.g. Original Cost, Replacement Cost, Opportunity Cost Method (methods measuring costs on recruiting, hiring and training human resources) – is the methods appropriate for our presentations, Amanda??? • Put methods into Flash AC4304 Financial Reporting Theory

13. Changing Society – Accounting Concept • Past: emphasis on Prudence principle (Prudence is the first priority among all principles) • Now: True and Fair view (assurance) AC4304 Financial Reporting Theory

14. Usefulness of HR info for Different users – Internal Users • HR info help management plan and control the use of human resources effectively and efficiently (provide useful info), e.g. questions like …. (next slide). By providing numerical information, it will help managers for better decision making AC4304 Financial Reporting Theory

15. Usefulness of HR info for Different users – Internal Users • How to optimal user of human resources? • Whether the firm should hire people from the outside only at the entry level and then advance them gradually to higher levels? • Whether the firm should lay off personnel during recession or retain them to protect company’s human assets? • How much to invest in human resource development? AC4304 Financial Reporting Theory

16. Usefulness of HR info for Different users – Internal Users • Example: • Lay off during recession: => reduction in payroll costs => However, when economy recovers -> hire people -> invest in training people -> hidden replacement cost & affect its name • HR numerical info => analyze the effect AC4304 Financial Reporting Theory

17. Usefulness of HR info for Different users – External Users • Investors would like to know the value of a firm’s human assets • Assist in making decisions to acquire, retain, or dispose of stock • E.g. Great human asset value for an R&D company => good potential => acquire shares AC4304 Financial Reporting Theory

18. Usefulness of HR info for Different users – External Users • + EXAMPLE (PDF) AC4304 Financial Reporting Theory

19. Distort F/S without HR info • Expense HR cost rather than capitalize => distort P/L and B/S, and ratios => produce relatively lower reported current earnings -> appear to be doing poorly when it is actually doing well (distortion) => conflict between the long-run interests of the organization and the short-run interests of management AC4304 Financial Reporting Theory

20. Distort F/S without HR info • P/L: “net income” is distorted because accountants all expenditures made to acquire or develop human resources as expenses during the period incurred, rather than capitalizing and amortizing them over expected service life • B/S: “total assets” is distorted because it does not include the organization’s human assets • Ratios: Rate of Return = Net income / Total assets AC4304 Financial Reporting Theory

21. Example – Manchester United • A company of playing Soccer • (Refer to P/L and Notes to account) • P/L: separate column into “operations excluding player amortization and trading” and “player amortization and trading” • B/S: Cost of players’ registrations is put as the intangible fixed assets in B/S AC4304 Financial Reporting Theory

22. Conclusion • Human Capital is an asset • Changing Society show that the HR become more important than in the past • Many users found that the HR info is useful for decision making • Distort F/S without HR info • Some companies add Human Capital value into F/S => HR should be included in the F/S AC4304 Financial Reporting Theory