Recognizing Human Resource as Asset

Dr. D. Mukhopadhyay
Hardly anybody can deny that human resource is not  behind  the  economic success of an organization. In  other words, human resource  is the key driver of  sustainable economic development of  a  country.  The  degree of  economic success of a firm depends on the quality of human resource it possesses in its payroll.  In the terminology of Accountancy,  the resources which  generate  future return are termed as assets. Return on Assets is one of the financial performance indicators of a firm.    It is imperative to state that  human resource which is,   now a days, also known as human capital of an organization plays a prominent role in  the process of generation of future return on investment.  Balance sheet of a  firm  gives a  snap shot of financial position of the organization  on a particular date which is normally the last day of the financial year . A balance sheet  exhibits   liabilities and assets  that  remained under the control of the organization on an even date. In all perspective, human capital  is an intangible asset. Furniture and fixture, equipment,  and even a calculator  is given a room under the  definition of assets but not  the human resource  which is the prime mover of the organization.  In the knowledge industry which is essentially education sector of the economy, human resource  is the only  strength by which intellectual capability  of human being is developed and   they are  made capable of  contributing  to movement of socio-economic wheel of the country from one stage of development to the next stage of development.
But neither core industrial sector nor education sector  has so far given  due consideration or serious thought  to recognize human resource as asset.  Only few organizations that include  Reliance, Tata, Infosys, BHEL, ONGC, NTPC, MMTC, CCI etc are found to be serious  in the perspectives  for treatment of human resources with certain degree of dignity  by giving  certain important information on the possession of human capital in the Annual Reports of the firm. But, not a single  organization in education sector i.e. Universities  in general have ever tried to ponder over the issue of treatment of human resources in the financial statements. More than 75% of the total expense comprises  payment of salary to the teachers by the Universities. The University teachers  are the  part and parcel  of national resources which directly or indirectly  create the environment of  socio-economic well being of the nation but they are kept behind the curtain. It is therefore essential to give a serious thought  for considering  human resource as asset and  be given a prominent room in the balance sheet of the organization and it is so necessary  for the education sector. N. R. Narayana Murthy says  while highlighting  the importance human resource in Infosys, “In a knowledge intensive company like Infosys, our main assets are our people. Out assets walk out in the evening and it is the company’s responsibility to make sure  they came back fresh, enthusiastic and energetic   the next morning”. It is therefore , crystal clear that  people of  an  organization highly deserve to be recognized as assets. Assets only generate return  and it is the human capital that plan, organize, mobilize, combine and allocate  other resources  and make production and distribution system  possible and workable in order to achieve the organizational objectives. Intellect is the primary ingredient  that  makes strategy and takes appropriate decisions  under different situations  and make  an organization navigate at the proper harbour.  Human Resource Accounting , a new Branch of Accountancy has emerged to  be of  great help in recognizing human resources as Asset.
Human Resource Accounting  is the process  that  recognizes  and measures costs  associated and involved  in recruiting,  hiring, training and developing, retaining the employees.  Human Resource Accounting  is a mechanism  that  scientifically generates and furnishes information on the costs involved in acquisition and retaining people in the organization. Total cost  i.e. historical costs incurred  for recruitment, hiring, training, induction and development of human capital  and costs associated and involved with replacement of  unserviceable people at the expiry of useful and working life of the people are accounted for. There are various approaches for  Human Resource Accounting and the cost based approach and  the economic value based approach are the popular ones. Human resource Accounting   reports on human capital, knowledge management  and employment strategies so that investors shall be able to know  how human resource contributes to  the process of value creation in an organization.  The ROI on human capital is an important  indication  of the performance of the people in the organization.  Moreover, it  guides the investors.
A revolution on Human Resource Accounting is called for at national level and  human resource should be attributed with the status of ‘Assets”  and the same must be disclosed  on the face of the balance sheet of an organization irrespective  of its belongingness  i. e.  whether it is core industrial sector or health and education sectors.  A  special law is suggested to be  enacted or  suitable provisions may be provided in the existing Company Law with regard to treatment , accounting and disclosure of human resources in the financial statement of the firms. There may be  certain legal  problems  in treating human resource as an asset since  no entity can own  its employees and it is one of the basic requirements that   something  to be recognized as asset should  be owned.  Currently, there is no generally accepted  techniques for valuation of human resources. Many organization think in many different manner. Moreover, employees of a firm are not active  to be considered to be an asset by the organization where they are employed. However, these are  not  very serious issues  and  the same can  be  treated  with fairness and  within the four walls of the law of the land. The experts  for  developing   an acceptable methodology of human resource accounting and treating human resource as an asset are the Professional Accountants like CAs and  CMAs and other social scientists who  can suitably help the decision makers in  formulating suitable legislations and  implementation of the same .
It may not be out of place to mention that Denmark Government  has already made it a  point  in the law of the country that  all the companies registered in Denmark  are required to disclose  relevant information on human capital in  the Annual Reports of the companies. Moreover, a projection on the requirement of  future human capital and the current status of the same  must be  disclosed.  The principles of 3Es  i.e. Effectiveness, Efficiency and Economy  are the  norms of  judicious management of an organization and these three aspects are  architected by the human capital only.  It is worth mentioning  that proper accounting of human resource leading to treating  it as an asset and disclosing the same in the balance sheet enhances the value and reputation of the firms. This is also expected to motivate people  working in the organization that they are legally recognized as asset under the principles of generally accepted accounting principles. Many countries in the world are pondering over the issues  for treating human resource as  an asset and they have already started to disclose the same in the face of the balance sheet of the firms and giving adequate disclosure in the Annual Reports.
However, the picture in India is quite different from those countries. Only few companies in the core industrial sector are found to be serious  about  furnishing   necessary disclosure   on the issues concerning   human resources in the Annual Reports.
The  author of this write up proposes that  financial value attributable to human resource to  give it  the status of asset should be  equal to the excess of net present value of a firm with existing staff over the net present value of the same   computed  on the assumption of having an average quality of staff.
Value of human resource of IBM shall be more than an average standard firm. The primary  issue to define  something as asset  is its capability to generate future benefits and the  people who can generate future benefit should be taken into consideration  for  getting recognition as asset. Once the  capitalizing  value is assigned to the existing human resource, then human resource can be recognized as Human Resource Asset or any other suitable term or phrase may be used for it. This would definitely be in the category of intangible assets. The asset can be brought to the books of accounts by passing formal journal entry by debiting Human Resource Assets Account  and crediting  Human Resource Reserve Account . Human Resource Asset shall appear at the Asset side of the balance sheet and Human Resource Reserve  shall be disclosed on the Liability side of the balance sheet.  The accounting process  as mentioned here  is obviously subject to periodic adjustment . India may be one of the pioneers in  framing and formulating methodology   to treat human resource as a asset and disclosing the same in the balance sheet of the organization.
( The author is Professor of Management,  School of Business, Faculty of                      Management, Shri Mata Vaishno Devi                 University, Katra, Jammu & Kashmir)
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