1 Introduction of human resource accounting(HRM) Ku-Jun Lin Associate Professor Tam Kang University

2 What is human resource accounting? To record, report and analysis human resource related figures through accounting system The result can be use for decision making purpose

3 What is the value of human? Human is priceless. Human capital can be counted. –How do you calculate the value of an employee in the company? Minimum value = The present value of her(his) salary in the future, by considering the possibility of early absence.

4 Why human resource accounting? Human capital becomes the most important asset in the corporation to extract value Present accounting system ignores the importance of human resource value Managers lack information about the effectiveness and efficiency of human resource investment

5 Human capital becomes the most important asset in the corporation More service(human intelligence) oriented company than before –Higher Tobin ’ s Q(Price/Equity) –Higher Return on Assets(ROE) The importance of capital shifts from financial capital to intellectual capital

6 Intellectual capital including –human capital, –organizational capital Relation capital(outside) Customer capital(outside) Process capital(inside) Learning and development capital(inside)

7 Characteristics of Human capital –Hard to imitate –Causal ambiguous –Cannot duplicate in a short time

8 Present accounting system ignores the importance of human resource value Generally Accepted Accounting Principle(GAAP) treats most human capital related costs as expenses, instead of assets The more the company invests in human capital, the less the current net income Revenue-Expense(including HR)=Net Income

9 Financial ratios, based on financial statements, provide little or bias human capital profitability information, for example –ROA: based on hard asset –Return on Investment(ROI): The “ I ” represents the investment on hard assets –Assets Turnover: Sales/Total “ hard ” assets

10 Reasons why GAAP does not allow human capital investment becomes assets –Future benefit uncertainty –Conservatism –Ethical issue

11 Managers lack information about the effectiveness and efficiency of human resource investment Lay off decisions –Does the lost training cost and future orientation cost be considered? –Short term, immediate positive impact on current net income VS effect on long term profit –Impacts on employee ’ s feeling which may negatively influence company income

12 Investment in human capital decisions –Where is the beef? –What is the relationship between human capital investment and operation result? –The communication of company human capital to investors.

13 The Human capital Architecture The classification of Human capital (Please see Figure 1 on P.125) –Not all employees are classified as human capital –Value VS Uniqueness(Lepak & Snell, 1999) –High value Employees can be considered as human capital –Human capital in quadrant 1are most valuable 123

14 Costs related to human capital 1. Formation and acquisition costs at the early stage of development, eg. Recruiting cost 2. Learning costs in the middle stage of development, eg, Training cost 3. Replacement costs at the final stages of development, eg, discharge cost

15 Human resource factors that may have influence on operation result Financial(human resource accounting, use accounting system to collect data) Non financial(use questionnaire) –Personal background, such as age, gender, education, experiences and licenses. –Personal characteristics, such and personal traits

16 My research summary If we consider human capital cost as the only variable, usually it does not show significant influence on operation result in most companies. However, if we use an intermediate variable, such as customer capital between human capital and operation result, usually human capital would demonstrate significant influence on operating result through the intermediate variable.

17 Some personal background and personal characteristic, together with human capital cost, do have significant influences on operating results Capitalizing human capital cost may improve the quality of earning.

18 The Limitation Hard to find specific human resource data Case study rather than general study

19 Future development The influence of mark to market value accounting(such as the evaluation of investments) on human resource accounting R & D cost also faces the future benefit uncertainty problem, does the accounting treatment for R & D provide any guidance for human resource cost?

20 Thank you for listening Q & A