Human Capital Valuation
This query is : Resolved
16 November 2007
Human Resources Accounting in India :
The concept of HRA in India is of recent origin and is struggling for acceptance. In India, HRA has not been introduced so far as a system. The Indian Companies Act does not provide any scope for furnishing any significant information about human
resources in financial statements. But a growing trend towards the measurement and reporting of human resources, partienlarly in the public sector is noticeable during the past few years. BHEL, Cement Corporation of India, ONGC, Engineers India Ltd., National Thermal Power Corporation, Minerals and Metals Trading Corporation, Madras Refineries, Oil India Ltd., Associated Cement Companies. SPIC Metallurgical and Engineering Consultants
India Ltd., Cochin Refineries Ltd. etc.
are some of the organisations which have started disclosing some valuable information regarding human resources in their financial statements.
Identifying and measuring the value of human capital can be a process worth investing.
The concept of value has essentially two different meanings. 'Value' expresses the utility or service of a particular resource (e.g. the future use of a capital asset) and the purchasing power of the resource (e.g. money, securities). If an object is not capable of rendering future economic services in the form of utility to the possessor, no value can be attached to it.
Employees are the most valuable resources of comparison in the service (software, banking, management consultancy, etc.) sector. Like all other resources of the company, the employees possess value because of providing future services.
"Human Resource Valuation means identifying and measuring value of human resources and communicating the information to the interested parties."
The need to meet the increasing business opportunities of future, and simultaneously maintain or improve upon the current level of performance, has made organisations to look consciously into the manpower as the future leverage for success. Coupled with the above mentioned situation, adopting a 'prudent and comprehensive disclosure policy' has become the key differentiating agent among players in the same industry.
Several models have been developed to try to quantify the intangible and specifically the human component.
**Cost models (Brummet, Flamholtz and Pyle) are based on the acquisition cost, including replacement and training costs and opportunity cost of human asset
***The Lev & Schwartz model, more monetary-centric, is based on the likely future earnings of an employee till his retirement
Instead of basing a model on age till retirement, it is recommended base a model on turnover rate and capitalizing salary expenditures. Therefore, to compute the value of human capital multiply the number of employees by their salaries; multiplied by the average length of tenure per employee; multiplied by the average increase in wages per year; all discounted back to year one. The resulting figure represents the human capital value of the firm.
However, it is not the absolute value of human capital that is critical; but more its significance as an indicator of the importance that management should pay to it. Employees have moved from being a cost to becoming a resource and today they are considered to be an asset or a capital. Any careful management must take care of its assets and try to maximize the return on them.
Valuation methodologies:
**Historical cost method
**Replacement cost method
**Opportunity cost method
**Behavioural model
The concept of HRA in India is of recent origin and is struggling for acceptance. In India, HRA has not been introduced so far as a system. The Indian Companies Act does not provide any scope for furnishing any significant information about human
resources in financial statements. But a growing trend towards the measurement and reporting of human resources, partienlarly in the public sector is noticeable during the past few years. BHEL, Cement Corporation of India, ONGC, Engineers India Ltd., National Thermal Power Corporation, Minerals and Metals Trading Corporation, Madras Refineries, Oil India Ltd., Associated Cement Companies. SPIC Metallurgical and Engineering Consultants
India Ltd., Cochin Refineries Ltd. etc.
are some of the organisations which have started disclosing some valuable information regarding human resources in their financial statements.
Identifying and measuring the value of human capital can be a process worth investing.
The concept of value has essentially two different meanings. 'Value' expresses the utility or service of a particular resource (e.g. the future use of a capital asset) and the purchasing power of the resource (e.g. money, securities). If an object is not capable of rendering future economic services in the form of utility to the possessor, no value can be attached to it.
Employees are the most valuable resources of comparison in the service (software, banking, management consultancy, etc.) sector. Like all other resources of the company, the employees possess value because of providing future services.
"Human Resource Valuation means identifying and measuring value of human resources and communicating the information to the interested parties."
The need to meet the increasing business opportunities of future, and simultaneously maintain or improve upon the current level of performance, has made organisations to look consciously into the manpower as the future leverage for success. Coupled with the above mentioned situation, adopting a 'prudent and comprehensive disclosure policy' has become the key differentiating agent among players in the same industry.
Several models have been developed to try to quantify the intangible and specifically the human component.
**Cost models (Brummet, Flamholtz and Pyle) are based on the acquisition cost, including replacement and training costs and opportunity cost of human asset
***The Lev & Schwartz model, more monetary-centric, is based on the likely future earnings of an employee till his retirement
Instead of basing a model on age till retirement, it is recommended base a model on turnover rate and capitalizing salary expenditures. Therefore, to compute the value of human capital multiply the number of employees by their salaries; multiplied by the average length of tenure per employee; multiplied by the average increase in wages per year; all discounted back to year one. The resulting figure represents the human capital value of the firm.
However, it is not the absolute value of human capital that is critical; but more its significance as an indicator of the importance that management should pay to it. Employees have moved from being a cost to becoming a resource and today they are considered to be an asset or a capital. Any careful management must take care of its assets and try to maximize the return on them.
Valuation methodologies:
**Historical cost method
**Replacement cost method
**Opportunity cost method
**Behavioural model
16 November 2007
HCV book published by wiley. Website wiley.com. You can read Chapter 1 on Net. If I will be able to get the copy with CD I will post on the Net. Good Luck.
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