Human Resource Accounting and the Importance of
Human Capital Assets
Human Resource Accounting Essay
The success and failure of an entity will depend on how effectively it utilizes its available resources. Managers must attempt to optimize the acquisition, allocation and development of the assets of the firm. Managers always equate assets to the physical and financial assets of the firm and often ignore the most important and the key element to the success of the organization – its employees. In service related businesses tangible assets contribute far less to the value of the service than do the intangible assets. These intangible assets are represented by the accumulated and current knowledge of the entity’s past and present employees. The abilities of all the employees of an organization at all the levels – management, supervisory and ordinary – to produce value from their knowledge and capabilities of their mind are known as HUMAN CAPITAL ASSETS.
THE IMPORTANCE OF HUMAN CAPITAL ASSETS
Value is created when intangible resources are deployed and degrades when they remain unused. Today knowledge or more colloquially, intelligence and brainpower have become the key determinant for the economic and business success. The key success factor of an individual business enterprise is no longer its sheer size or the number of tangible assets it controls – It is its Human Capital.
The importance of the human resources of a company can be illustrated in several ways. The market prices of corporate securities often reflect values substantially different from those indicated by the recorded values of the individual assets. Obviously, a number of intangible assets including human resources continue to remain unrecorded. Early evidence suggested that the replacement costs of human resources are quite substantial. In a survey, five hundred corporate presidents were asked about the cost of replacing their entire workforce. The estimates ranged from three to five times of the annual payroll of the company. If an organization pays Rs. 500 million
The success and failure of an entity will depend on how effectively it utilizes its available resources. Managers must attempt to optimize the acquisition, allocation and development of the assets of the firm. Managers always equate assets to the physical and financial assets of the firm and often ignore the most important and the key element to the success of the organization – its employees. In service related businesses tangible assets contribute far less to the value of the service than do the intangible assets. These intangible assets are represented by the accumulated and current knowledge of the entity’s past and present employees. The abilities of all the employees of an organization at all the levels – management, supervisory and ordinary – to produce value from their knowledge and capabilities of their mind are known as HUMAN CAPITAL ASSETS.
THE IMPORTANCE OF HUMAN CAPITAL ASSETS
Value is created when intangible resources are deployed and degrades when they remain unused. Today knowledge or more colloquially, intelligence and brainpower have become the key determinant for the economic and business success. The key success factor of an individual business enterprise is no longer its sheer size or the number of tangible assets it controls – It is its Human Capital.
The importance of the human resources of a company can be illustrated in several ways. The market prices of corporate securities often reflect values substantially different from those indicated by the recorded values of the individual assets. Obviously, a number of intangible assets including human resources continue to remain unrecorded. Early evidence suggested that the replacement costs of human resources are quite substantial. In a survey, five hundred corporate presidents were asked about the cost of replacing their entire workforce. The estimates ranged from three to five times of the annual payroll of the company. If an organization pays Rs. 500 million