CALIFORNIA STATE UNIVERSITY, NORTHRIDGE
THE UTILITY OF HUMAN
\\
RESOURCE ACCOUNTING TO CREDITORS
A thesis submitted in partial satisfaction of the
requirements for the degree of' }laster of Science in
Business Administration
by
Shirley L. Radant
June, 1979
The Thesis of Shirley L. Radant is approved:
Dhia fi. fiHashilli, Ph.D.
DOnald L. Anderson, Ph.D.
California State University, Northridge
ii
CONTENTS
Page
ABSTRACT • • • • • • • • • • • • • • • • • • • • • • • • • • • • •
T
CHAPTER.
I. INTRODUCTION • • • • • • • • • • • •• • • • • •
n.
• • • • • •
• • • • • • • • • • • • • • • • • • • • • • • 14
Definition of Human Resources a3 Assets • • • • • • • • .1.4
BASIC ISSUES •
Behavioral Effects on Workers
Measurement- of
"
. . . .. . . .
• • •••
• 17
Resources • • • • • • • • • • • • • • 21
Human
Non-Monetary Measurement • • • • • •
f'
•
•
•
•
• • • • • 22
• • • • • • • • • • • • • • 25
Monetary Measurement:
Cost
Monetary Measurement:
Value • • • • • • •• • • • • • • 29
Monetary Measurement:
Expected Realizable Value " •• .. 33
A Stochastic Valuation Model • • • • • • • • • • • • •
8'*~
III.
1
••••••••••••••••••••••••
• 37
• 51
• • • • .. 53
UTILITY OF HUMAN RESOURCE ACCOUNTING ., • • • •
Prerequisites for Implementing Human Reaource Accounting • 53
Benefits of
Human
Limitations of
Resource Accounting
Human
•
•
•
•
•
Resource Accounting • • • •
•
0
•
•
• 55
•
•
•
<e
• 60
• • • • • • • • •• 63
• • • • • • • • • • • • • • • • • • • • • 64
• • • • • • • • • • • • • • • • • • • .. 64
• • • • • • • • • • • • • • •
IV. iMPIRICAL RESEARCH
Introduction • •
Methodology
.
• • • • • • • • • • • • • • • • • • • • • • • 66
Results of the Survey
• • • • • • • • • • • • • • • •
iii
•• 69
CHAPTER
Page
An~.lysis
Statistical
. . . . . . . . . . . . . . . . . . . . . . . . . 73
~~
V•
• • • • • • • • • • • • • • • •
CONCLUSIONS
APPENDIX
~
•
BIBLIOGRAPHY
• • • • • • • • • • • • • • • • • • • 71
. . . . .. .
• • 15
• • • • • • • • • • • • • • • • • • • • • • 79
• • • • • • • • • • • • • • • • • • ••• • • • • • • 90
0
•
•
•
•
iv
.ABSTRACT
THE UTILITY OF HUMAN
RESOURCE ACCOUNTDIG TO CREDITORS
by
Shirley L. Radant
Master of Science in Business Administration
Human resource accounting is the process of identifying and
measuring data about human resources and communicating this information
to interested parties--internal users (managers) of financial state-
-
ments and external users (investors and creditors).
A number of
controversial issues are inherent to the concept of measuring the
value of workers and communicating these measurements on financial
statements.
Basic problems focus on the definition of human resources
as assets, the effect of measurement ori workers, and the implementation
cf a measurement system.
The stochastic valuation model suggested in
this thesis offers an economic valuation which could be utilized to
evaluate the development and conservation of human resources.
T
The major benefits to be gained from human resource accounting
center on more accurate decision making by all users of the financial
statements.
Although at this time the cost/benefit ratio may reflect a
negative balance, this empirical study reveals that the inclusion of
hmnan resource measurements on the financial statements can affect the
decision making process of creditors.
If all other factors are equal,
favorable human resource data may result in a decision for the firm
with increasing investments in its people.
vi
CHAPTER I
INTRODUCTION
The theory of human resource accounting was first developed in
1964 by Roger H. Hermanson, but it has not been accepted as a standard
element of published financial statements.
It suggests that workers
are as much a resource to an entity as are physical and financial
assets. Although a number of firms have adopted a measurement basis
and have included valuations for the human element as an integral part
of their statements, or have expressed human resource valuations in
separate statements, the practice is by no means commonplace nor
spread.
The reasons are varied but perhaps
th~
w~de
most important springs
from conceptual problems related to measurement valuation and verifiability.
Furthermore some finns do not have a strong appreciation for
the utility, or relevance, of the data.
If both internal and external
users of financial statements were convinced of the need for, and the
practical benefits from, human resource accounting, it would not be
long before standard measurement procedures would be promulgated by
governing bodies.
At the present time, the cost involved and the
primitive state of the art in conceptualizing the utility from human
resource data have combined to create a vacuum in the implementation
et human resource accounting systems.
Before examining some empirical research directed to measure
utility to creditors, a review of the definition and objectives of
accounting and an attempt to evaluate the problems inherent to the
1
inclusion of human resource valuations on the financial statements
will be helpful.
Accounting was defined in 1953 by the American Ins·tiitute of
Certified Public Accountants in Accounting Terminology Bulletin No. 1
(page 9) as "the art of recording, classifying, and summarizing in a
significant manner, and in terms of money, transactions and events
which are, in part at least, of a financial character, and
interpreting the results thereof.n 1
In 1964, Richard Mattessich defined accounting as •a
discipline concerned with the quantitative description and projection
of the income circulation and of wealth aggregates b,y means of a
method based on the following set of assumptions: • • • monetary
val.uation; time; structure (accounting as a closed system); duality
(double-entry); aggregation (algebraic operations); economic objects
(scarce resources); inequity of monetary claims (stability of the
measuring unit); economic agents (human actors); entities (social
institutions); economic transactions (movements of values); valuation
(operational rules for measuring movements of values); realization
(opera-tional rules for measuring income); classification (operational
rules for analyzing movements of values); data input (operating rules
tor bookkeeping); duration (operating rules for
relati-~
entities to
/
time); extension (operating rules for
1
consolidatL~g
entity accounts);
Maurice Moonitz, The Basic Postulates of Accounting,
Accounting Research study, No. l (New York: American Institute
of Certified Public Accountants, 1961), P• 23.
3
materiality (operating rules for identifYing data); and allocation
(operating rules for imputing values to parts of entities).n 2
The Accounting Principles Board issued Statement No.
1970,
October,
activity.
in which paragraph
4 in
40 defines accounting as a service
"Its fUnction is to provide quantitative information,
primarily financial in nature, about economic entities that is in-
tended to be useful in making economic decisions-in making reasoned
choices among alternative courses of action.
Accounting includes
several branches 1 for example, financial accounting, managerial
accounting, and governmental accounting. n3
Most simply states that "accounting is the solution of
problems using accounts; the definition directs us to the types of
.
.
problem amenable to this form of solution and to the methodology
used by accountants."4
Sterling adopts an economic approach suggesting economic
concepts of asset valuation and income measurement be available • .5
In addition to these definitions, various approaches have
been advanced for developing accounting theory.
2
Kermeth
s.
The deductive method ·
Most, Accounting Theo:rz (Columbus:
Grid, Inc.,
1977), PP• 52-53.
.
)Financial Accounting Standards Board, Financial Account~
Standards (Stamford: Financial Accounting Standards Board, 1975~
P•
447.
~ost, Accounting
5Ibid., P• 53.
Theory, p. 2.
h
begins with objectives and postulates from which logical principles
which provide the bases for practical applications are d.erived.
The
inductive approach draws generalized conclusions from observations and
measurements.
An emphasis on the concepts of justice, impartiality,
truth, and fairness is the foundation of the ethical approach.
The
communication theory approach views accounting as an integrated system
of the caromunication process involving a determination of what
~
formation should be gathered, how it should be interpreted, and the
best method of communication.
How accounting information is used for
decision making by firms, individuals, and governments and how these
people react to the data depicts the behavioral approach.
The
sociological avenue is broader than the behavioral approach, reporting
the effects of business operations on all related groups in society
whether or not they are direct users of the information.
economic approach is broader
still~
The macro-
It is directed toward the imple-
mentation of specific national economic policies, such as national
economic objectives which may require accounting reports that will
permit and/or encourage higher dividends and larger capital expenditures during slack economic periods and discourage inves-tments during
inflationary periods.
The pragmatic approach involves the selection
of accounting concepts and techniques based on their utility:
Do they
accomplish the objectives of management or help ot,her users to meet
specific objectives? All of these approaches are pervasive in the
definition of accounting; they are not independent of each other.
6EJ.don s. Hendriksen, Accounting Theory (Homewood:
Irwin, Inc., 1970), PP• 3-16.
:
6
Richard D.
Human resource accounting could be important to these
approaches.
But the traditional accountant asks:
•Are transactions
and events involving human resources of a financial character?•
Should they be included in an interpretation of the results thereof?
The increasing role human capital
make
exer~s
on
~e
gross national product
these relevant questions.
In 1960, compensation of
~ployees,
including private and
government wages and salaries and supplements to wages and sS.:aries
equaled 58% of the gross national product.
In 1977, it was 61%.7
Compensation of employees accounted for more than 76% of total
8
national income in 1977.
Investment in human resources rather than
in physical means of production, generates a distinct form of capital.
Investments in people are becoming of central importance to the
econo~
and to society in general.
Much of the increase in United States productivity is the
direct result of formal education and on-the-job training which pro-
.
duces an improved
Labor is expected to become a main
source of future productivity gains in the u. s. economy. 9 Consetechnology~
quently the business community is making increasing investments in
people, with the economic worth of h'wnan beings to the production of
7The World Almanac and Book of Facts 1979 (New York:
Newspaper Enterprise Association, Inc., 1978,, P• 97.
8Ibid.
9Edward H. Caplan and Stephen Landekich, Human Resource
Accounting: Past, Present, and Future (New York: National
lssociation of Accountants, l97h), P• 11.
6
10
goods and services constituting a significant value to most mltities.
However, productivity is inextricably related to all factors of
production~
Human assets represent an extension of traditional accounting
measurements, and this relationship between productivity and changes
in the value of a firm 1 s human resources points to the utility of
these additional data.
The inclusion of human capital in calculations
of economic growth will show that the stock of human capital has been
rising proportiol'l..ately faster than the stock of
pr~ducer
goods. 11
A prime objective of financial accounting is the presentation
of t:imely data which enable users of financial statements to make
their o-wn predictions rega.rdiDg the continuity and profitability of a
firm.
Completeness of information which is relevant, understandable,
verifiable, timely, and comparable over time is important.
Conservatism is a powerfUl constraint on the dissemination of
accounting infonnation, frequently inhibiting the presentation of
reliable and relevant data.
It is one method of treating uncertainty
in valuations and income tending to control rm.y overstatement of
profit and offset any over-optimism of owners and managers.
However,
the objective of financial information should be to provide enough
data £or users to make their o'Wll valid decisions in terms o£ the risks
involved.
10R. Lee Brummet, "Accounting £or Human Resources," ~
Journal of Accountancz, Vol. 130 (December 1970), p. 62.
11caplan and Landekich, Human Resource Accounting, P•
15.
7
The Accounting Principles Board Statement No.
4 ranked
relevance as the primary qualitative objective of financial accounting
inasmuch as information not related to decision making is useless.
12
Yet standard accounting practice today does not include the very
relevant human resources, even though they represent a materially
significan,t segment, especially in people-intensive industries.
A partial explanation for this deficiency lies in the lack of
understandability on the part of users • Human resources have been
de£ined as "the energies, skills, talent and knowledge of people which
are, or lllhich potentially can, or should be, applied to the production
of goods or the rendering of useful servicesn.1 3 Human resource
accounting is defined by the American Accounting Association Committee
on Human Resources as "the process of identifying and measuring data
about
huw~
resources and communicating this information to interested
parties.nlh Heman resource accounting, when correlated wi4h the
definition and objectives of financial accounting, will facilitate
understanding of the :importance of the worker in the minds of the
users.
The
American Accounting Association in A Statement of Basic
!ccounting Theo!l enumerated four accounting objectives: 15
l2wa1ter Be Meigs, et al., Intermediate Accounting~ 3d edo,
McGraw-Hill Book Company, 1974), Po 10.
(New York:
l3Caplan and Landekich, Human Resource Accormting~ p. 18.
~id~, p. 2.
l5American Accounting Association, A Statement of Basic
Accounting TheoiX {Sarasota: American Accounting Association, 1966),
P• 4.
a
1.
!Qe first use for accounting information is to make decisions concerning
the use of limited resources, including
the identification of crucial decision
areas and determination of objectives
and goals.
Human resources play a part in many crucial decision areas
because they represent a significant component of the entity.
In-
elusion of a measurement of their worth on the financial statements
vill provide increased comparability over time and completeness of
data for the
decision~aking
process.
Ratio analysis {rate of return
on investment, etc.) will be more accurate and distortions on the
.financial statements due to mismatching hnman asset expenditures with
human asset generated revenues will be elimj nated.
The inclusion of
hwnan resources should enable creditors to more accurately determine
future financial position and debt paying capability.
Less than
optimal decision making may oeeur when human resources are not considered, because the long ter.m effects of decisions involving workers
are inadequately regarded.
For example, some managerial decisions may
cause changes in attitudes and loyalty; they may cause inadequate and
inaccurate dissemination of information; and they may cause job dissatisfaction.16
The result is a liquidation of human assets, a
limited resource, of which management may be totally unaware.
16Eric Flamholtz, "A Model for Human Resource Valuation:
Stochastic Process with Service Rewards, 11 The Accounting Review,
Vol. 46 (April, 1971), P• 254.
A
9
2.
A second objective of accounting
data is to effectively direct and
control an organization's human
and material resources.
Increased awareness by managerial personnel due to a measurement for human resources should produce a substantial improvement in
direction and control.
In fact, Likert reasoned that changes in be-
havioral variables would only come to management's attention if they
were presented in the monetary quantification terms with which managers
were accusto.med.17
Therefore, the quantification of data as a means
of directing and controlling an organization's human resources was
suggested to maximize managerial effectiveness •
.3. A third goal of financial accounting
is to maintain and report on the
custodianship of resources.
Some businessmen have assumed that people are an important
resource of any organization and that without them an accounting
entity would be non-existent as would be the need for financial
statements.
1'hough your balance sheet 1 s a model of what balance sheets should
be,
T,yped 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;
'!'hough investments have been valued at the sale price of the day,
And the auditor's certificate shows everything O.K.,
l7Jerry Dermer and Jacob P. Siegel, "The Role of Behavioral
Measures in Accormting for Human Resources, n The Accormting Review,
Vol. 49 (January, 1974), P• 90.
1e
One asset is omitted-a.nd its worth I want to lmow,
The asset is the value of the men who run the show •
18
Sir Matthew Webster Jenkinson
It is difficult to maintain and report on the custodianship of
the human assets.
Yet, to hide one's face in the sand because of
dif:ficulty lacks creativity and responsibility.
How can human resource
maintenance be evaluated, apart from some method of reporting"l
primary objective of human resource accounting is
A
to develop the
capability for measurement and reporting which reflects organizational
performance over time, and to develop the means for utilizing these
data to improve over-all corporate effectiveness. 19
4.
Lastly, accounting information should
facilitate social functions and controls.
foday's equaJ.-opportunity directives by the federal government
in the form of affirmative action programs combined with the social
responsibility of the business community to develop the fthard-core
unemployed" as well as females and other underdeveloped human resources
provide incentives to develop human resource accounting as a means of
facilitating social functionso
Addition~
the Internal Revenue
Service has introduced tax incentives designed to encourage corporations in the area of increasing the value of the under employed such
18Eric Flamholtz, ~ Resource Accounting (Belmont:
Dickenson Publishing Company, Inc., 1974), P• 17 •
l9Dermer and Siegel, "The Role of Behavioral Measures in
Accounting .for Human Resources, 11 P• 89 •
ll
as New Jobs Credit, \fiN Credit, and Ta.rgetsd Jobs Tax Credit.
A
concern with the quaJ.i ty of .life permeat.es much of society today and
human resource accounting could be an important element in the area of
employee development and satisfaction.
Patterns of organization and managerial leadership styles
represent attitudes toward people, their motivations, and behavior.
Some sociBJ. scientists believe that increased long range productivity
results when organizational goals and employee goals complement each
other.
Thus managers should be aware that one of their prime tasks
is the development of people.
Human resource accounting provides
verifiability to all users of the financial statements of the extent
to which this goal is being accomplished. However, i f management does
not accept the responsibility to cultivate and ·maximize human ·potential
human resource accounting may be irrelevant for its users.
20
In 1972
Marrow observed that "what most execntives seem to miss is that
business can best begin discharging its social responsibility by
humanizing its management practices.n
21
This can be accomplished when
human resource accounting focuses management's attention on the
significance of their employees and provides data useful for measuring,
evaluating, and improving the human condition of the organization•
.Apart from the lack of understandability, several basic issues
emerge when an attempt is made to include human resources on financial
20
Caplan and Landekich, Human Resource Accon-~tin~, PP•
21
lb"d
~ .,
P• 19 •
34-35.
12
statements. An immediate problem appears from the definition of an
asset as promulgated by Sprouse and Moonitz in Accounti.Ag Research
Study No.
l=
fiAssets represent expected future economic benefits,
rights to which have been acquired by the enterprise as a result o:f
some current or past transaction.n 22 Do hwnan resources represent
expected future economic benefits in an accounting sense? Does a
business entity acquire 0 rightstr to employee services? Ylliat is the
rationale for capitalizing costs associated with the human
organization?
Another problem arises :from the behavioral effects on workers
as a result of being measured or "valuetr quantified.
The possibility
· exists that the very collection and publication of such information
produces behavioral changes in attitude, motivation, production levels,
etc.
The most imposing problem, however, deals with the theory of
measurement and the actual quantification of human resources. Are nonmonetar,y rankings adequate? If not, should some :form of cost be
reported or should an economic concept of value, as suggested by the
definition of an asset, be calculated? How should human resources be
amortized?
The benefits of including a measurement for people on the
.financial statements is discussed, as well as the l:ilni tations o:f so
22Robert R. Sprouse and Maurice Moonitz, A Tentative Set of
Broad Accounting Principles for Business Enterprises; Accounting.
Research Study, No. 3 (New York: American Institute of Certified
PUblic Accountants, 1962), p. 20.
13
doing.
The hypothesis promulgated is that the inclusion of a valuation
for human resources does aftect the decisions of creditors, and an
empirical study of this issue is made.
]'inaJ Jy1 conclusions are drawn
.trom the study regarding the utility of human resource accounting.
CHAPTER ll
BASIC ISSUES
Definition Qf Human Resources as Assets
If human resources are to be included on the financial state-
ments, they will be valued 'Wi. th the assets, as an asset.
Therefore
the question immediately arises, are people assets in the traditional
accounting sense?
One of the first definitions of an asset was set
forth by Canning in 1929 in his book, The Economics of Accountancy.
"An asset is ro:ry future service in money or any .future service con-
vertible into money (except those services arising from contracts ·the
two sides of which are proportionately unperformed) the beneficial
interest in which is legally or equitably secured to some person or
set of persons.
Such a service is an asset
of persons to wham it runs • a
~
to that person or set
1
The Committee on Terminology of the America.."l. Institute of
Accountants defined an asset in 1953 in Accounting
Terminolo~
Bulletin No. 1 as "Something represented by a debit balance that is
or would be properly carried forward upon a closing of books of account
according to the rules or principles of accounting (provided such
debit balance is not in effect a negative balance applicable to a
liability), on the basis that it represents either a property right
or value acquired, or an expenditure made which has created a property
~endriksen, Accounting Theo:ry~ p. 252.
right or is properly applicable to the future.
Thus, plant, accounts
receivable, inventory, and a deferred charge are all assets in balance
sheet classification.u
2
In 1957 the Committee on Concepts and Standards of the American
Accounting Association stated that "assets are economic resources
devoted to business purposes within a specific accounting entity; they
are aggregates of service potentials available for or beneficial to,
expected operations.a3
•Assets represent expected future economic benefits, rights to
which have been acquired by the enterprise as a result of some current
or past transactiontt, according to Sprouse and Moonitz. 4
Four basic characteristics of assets evolve from these
definitions.
The first is that assets entail specific rights to
:tuture economic benefits.
Second, these rights belong exclusively to
a specific firm or individual.
Third, according to the early
definition, these rights must be legally enforceable.
Fourth, assets
mnst possess a basis for valuation; that is, they must be measurable.
Do human resources meet these criteria for assets?
Employees
do represent future positive economic benefits to their employersc
Haman resources benefit a business entity in much the same ma.rmer as
do financial and physical
resources~
'When a finn purchases a conven-
tional asset, it anticipates that the asset will generate value of
2
Ibid.
3Ibid., p. 253.
4Sprouse and Moonitz, A Tentative Set of Broad Accounting
p. 20.
Principles~
I
16
econondc benefit in excess of its cost.
The same is true of a human
resource; it contr:tbutes to the future productivity of the enterprise.
Do these rights belong exclusively to a specific finn. or
individual? In an operational. sense, the services generated by people
d~~
the hours of their employment do belong exclusively to their
employer.
Hendricksen and others, however, also believe that there
must be a legally enforceable claim to these rights or services.
In
i'act Hendricksen states that "services that can be wi thdra'Wll at will
by some other firm or individual or by the government without compensation, should not be included as assetsn.S Patton and Chambers agree
in believing that people are not assets.
However, not everyone agrees
with this concept of a legally enforceable claim to the rights or
services of assets.
Same interpret 0 the right to receive benefits 0
as an operational right, or a right to control, such as long ter.m
leases 'Ullder sale and lease back agreements.
•sUbstance" over 0 for.m 0 •
The question hinges on
With the exception of specific educational
or athletic contracts, employers do not have a legal right to receive
economic benefits from employees over a specific time period.
are not owned property as they were in the days of slavery.
People
However,
the ttsubsta.nce" of a satisfactory employer-employee relationship wouJ.d
dictate a continuing process in which the employee increases his
economic worth at the same time the employer increases his economic
benefit from the human resource.
>Hendriksen, Accounting
Theory~
P• 253.
17
Conventioruil accounting recognizes a similar situation when
~he
legal title of a property subject to a chattel mortgage is held
by the mortgagor although the economic benefits are flowing to the
mortgagee.
The economic reality of the situation prevails, for the
property is recorded as an asset on the books of the mortgagee without
benefit of legal mmership.
legal, concept of
0 righta
6 Thus
1
i f an operational, rather than a
is employed, human resources meet this
criteria.
A fourth eharacteristic is that assets are measurable.
The
valuation of assets introduces some complex problems, not only for
human· resources, but for all assets.
be discussed later.
The problem of measurement will
However, suffice it herewith to say that re-
searchers have designed various systems to measure the costs and
benefits of human resources, both as individuals and as groups •
To
date no standardizations have been adopted, but the problem of
measurement of human resources could be resolved, at least as well as
it has been for other assets, if the utility of the information was
imperative to userso
Behavioral Effects on Workers
The expectancy theory of motivation may well become operative
when employees are aware of a valuation basis for their serviceso
Patterns of behavior are determined by the needs a person brings into
a job situation (internal to the personality) as well as by the
6caplan and Landekich, Human Resource Accounting, P• 4.
18
characteristics of the external environment, including opportunities
to satisfy his needs.
Ex:pectancy theory states that at the same tlln.e,
people are both emotional, seeking satisfaction of their needs, and
reasonable, determining what alternative actions will satisfY those
needs. 7 We try to predict results of our alternative actions.
"If I
do this, it rdll lead to that result." According to this theory, we
are motivated by the expectations of the results of our
actio~~.
It
can be a powerful way of understanding and controlling individual
behavior.
This theory may come into play when hmnan resource accounting
is operational.
Either positive or negative results may be produced
i f an individual fu.lfills his needs by responding to inaccurate
expectations of himself or another.
Thus, a person may either over-
achieve or underachieve because he has been so labeled by a manager
and now "expects" that result from his actions.
To counteract
negative effects from individual valuation procedures, group valuation
measurements may be used.
These are preferable to individual secret
measurements which foster a lack of openness and trust within the
organization.
Valuations of individuals may have a negative effect on
organizational climate and individual attitudes i f they are used to
exercise autocratic control and to manipulate employee behavior.
7David R~ Hampton, Charles E. Summer, and Ross A. Webber,
Or anizational Behavior and the Practice of Man ement (Palo Alto:
Scott, Fbres.man and Company, 197 , PP• 22-2 •
To
19
avoid resentment, an individual's salary and his resource value will
need to artioul,ate and his valuation will be related to that of other
members of his organization.
However, care must be taken to avoid a
circular process which could continue inequities between value and
salary stemming from the relationship between salary and hllli18Jl resource
_,, .8
Vet.J.Ue•
Other negative effects on workers may result from measurement
procedures when an employee realizes his worth to the firm is below
that of his co-workers.
If his productivity contribution is below par,
he 'Will be forced to face the reality of his tenuous position.
This
will encourage him to either bring his level of protluction up to
normal standards or seek emplo]Illent elsewhere.
If there is no action
on the part of the worker, his supervisor will.be made aware of a
situation detrimental to the firm and can initiate remedial action.
The behavioral effects on people being measured by human
resource accounting systems have led to conflicting
views~
For
example, Likert states "All employees fear measurement devices used
for policying purposes.
to favor themselves.
Therefore they are motivated to distort data
Widespread distortion for protection at every
hierarchical level has been demonstrated in many studies (Argyris,
1953; Argyris, 1959; Roethlisberger and Dickson, 1939;
1955.)" 9
w.
F. Whyte,
8Caplan and Landekich, Human Resource Accounting, P• 124.
9Rensis Likert, New Patterns of Management (New York:
Hill Book Company, 1961), P• 208.
McGraw-
l'
20
However, when the purpose of human resource accounting becomes
self-guidance rather than policying, the motivation to distort is removed.
arn this situation, people recognize that they need accurate
information.
protect them.
Any distortion now is likely to hurt them rather than
Under these conditions, the motivation is to strive for
accurate measurements.
Moreover new kinds of measurements and better
methods of obtaining them are .much more likely to be suggested, wel10
comed, and used, rather than feared and resisted.n
"As the members
of an organization acquire experience in the use of this new kind of
measurement and learn how to interpret and apply it, we find that they
want to get it regularly and they want to have more variables measured.
Their experience in using the new measurements gives them insights
into what can be measured and how this new information can help them
to do their jobs more effectively.n
11
Marvin Weiss supports this same
Tiew when he suggests that a human resource accounting system would
probably be accompanied by improvements in internal reporting and
leadership methods that would improve, rather than dampen, morale. 12
These findings emphasize the fact that great care must be
exercised in gathering and measuring human resource data.
purpose needs to be emphasized.
A positive
Studies have shown that people respond
in a more confident manner when measured against standards than when
compared with one another.
Human resource accounting can set standards
10
Ibid., P• 209.
11
Ibid., p. 221.
12Marvin Weiss, "Human Resource Accounting--A Neglected Area,•
The CPA Journal, Vol. 42.(September, 1972), P• 739.
21
against which workers can measure themselves and thereby receive their
own feedback on performance.
Improved understandability of human
resource accounting and its purpose is necessary if it is to become
a usei"ul tool.
Measurement of Human Resources
The purpose of measurement is to make data more informative
by comparison and precision.
Measurement detects differences, and
units of measurement allow a general comparison of objectso
The use
of numbers permits a higher degree of precision than verbal classifications.
Since measurements take place under different conditions,
it is important to describe the general conditions surrourAting
measurement.
Lord Kelvin, a celebrated physicist, once said, "When
you can measure what you are speaking about and express it in numbers,
you know something about it, but when you cannot measure it, your
knowledge is of a meager and unsatisfactory kind.n1 3
The way i terns are measured connotes value to them.
The word
"valuen comes from the French work "valoirn meaning "to be wortha.
Thus, the term "value" involves respect and esteem and an appreciation
of intrinsic merit or worth.
In accounting,
0
value" is the represen-
tation of anything of worth in terms of a quantity represented by a
symbol or a figure.
Monetary valuation attaches a dollar symbol or
figure whereas non-monetary valuation involves a ranking or a comparison to represent the worth of an item in relationship to other items.14
11Most, Accounting Theo£L, P• 151.
~id.,
P• 142.
22
Valuation symbols arise when one is forced to sacrifice one
good in order to obtain or maintain another good.
tinuous activity with a forward looking attribute.
Thus it is a conAll valuations
contain a subjec,ive element based on present choice and measured by
comparison with the next best alternative.
Thus value judgments
frequently change over time and with diffe~g circumstances.15
Because of this a creditor needs to determine how the passage of time
will affect asset valuation and measurement of income.
He also needs
to lalow the value, or worth, of the hmnan resources, in relation to
other resources, of a potential borrower, and if the investment in
htnnan resources is increasing or decreasing over time.
pen-Monetary Measurement
Non-monetary measurement uses ratings and rankings, appraisals
by management, psychometric tests, capability inventories, and
attitude questionnaires and surveys to deter.mine the usefulness or
utility of human resources.
Same have suggested that workers should
be measured only in terms of non-monetary symbols.
Variables which
determine a person's worth to the organization must be identified and
interrelated through rankings and comparisons • Although non-monetary
techniques are highly subjective and do not provide precision, they
are the starting place for developing a human resource accounting
system and they are useful for predictive purposes and as a surrogate
23
for monetary measures.
rsnldngs
16
) or paired
Thus, ratings (simple or alternative
co~parisons
(eaeh person is compared with
every other person) can be employed for capability inventories,
performance evaluations, assessments of potential, and attitude
· measurements •1 7
Non-monetary systems can measure management functions
and the effectiveness of each management position and f'wlction, as
well as trends in managerial strengths and weaknesses.
18
Among the non-monetary measurement systems which have been
developed, perhaps the most complete is that proposed by Rensis Likert
and Bowers, in which they postulated measurements of performance for
indiYiduaJ.s and groups based on causal, intervening, and end-result
variables. 19
Causal variables include managerial behavior, styles
of leadership, and organizational structure.
Managerial behavior was
described in tenns of support (behavior that enhances someone else's
feelings of personal worth and importance), team building (behavior
that encourages members of the group to develop JIIUtually satisfying
relationships), goal emphasis (behavior that stimulates enthusiasm
for meeting group goals or achieving excellent performance) and work
facilitation (behavior that helps achieve goal attainment by such
16
Alternative rankings list the person with highest value,
then the one with lowest value; then second highest value, second
lowest value, and so on.
l7Flamholtz, Human Resource
Accountin~, P• 152.
18
H. c. Eggers, nThe E"laluation of Human Assets," Management
Accounting, Vol. 53 (November, 1971), p. 29.
l9Brummet, UAccounting for Human Resources,n P• 65.
24
activities as scheduling, co-ordinating, planning, and by providing
20
resources such as tools, materials, and teChnical knowledge).
Organizational structure refers to the relationships between
levels of leadership and the amount of control exerted by management.
An organization may be formally, or highly structured, with a great
deal of control exercised; or loosely, or informally structured, with
minimum control.
Non~netary
measurements have also been developed for the
intervening variables which include work group process (planning,
group cohesiveness, co-ordinating, decision-making techniques, problem
solving, and information sharing); peer leadership
behav~or
(by sub-
ordinates toward subordinates); organizational climate (the social
and psychological climate which people perceive about an organization);
motivation as it relates to satisfactions (salary, advancement
opportunities, supervisor, peer group, company); and the relationships
between these variables~
21
Causal and intervening variables combine to produce end-result
variables, or the total productive efficiency of the entity which
includes earnings, market share, return on investment, etc.
Non~onetary
measurements, analysis of the data obtained
therefrom, and the interpretation of that data are complex procedures
and should be undertaken only with the help of professional social
scientists with much experience and training in this area.
20
F.lamholtz, Human Resource Accounting, P• 129.
2
lrbid., P• 130.
Not
infrequentl.Y companies draw incorrect conclusions and concentrate on
variables which may have little importance or meaning.
Sometimes
efforts to improve a situation may actually affect motivation
adversely as a result of error in measurement analysis.
22
An enterprise's success is influenced by technological,
economic, and human factors.
Likert believed that satisfaction
determined performance, but Siegel and Bowen held the reverse, that
perfo:rmance determined satisfaction. 23 . Contradictory results have
been produced by social scientists .as to what extP..nt behavioral
conditions determine profitability.
If it were known that hmnan
resources were of primary importance at all times, and under every
condition, human resource accounting would be
Monet::;g Measurement:
a~
accomnli.
Cost
The exchange value, or purchasing power, of resources can be
measured by means of cost.
11
Cost is an exchange price, a forgoing, a
2
sacrifice to secure benefiton 4 A past exchange price (historical or
acquisition cost) is the measurement used to record most assets on the
financial statements (land, buildings, equipment, etc.).
However, current exchange price may also be used on financial
statements.
Investments in marketable securities 'Which will be
converted into cash by resale rather than by redemption at maturity
22
Likert, New Patterns of
l-1an~ement, P• 196.
2
3nermer and Siegel, "The Role of Behavioral Measures in
Accounting for Human Resources, 11 p. 91.
2
4sprouse and Moonitz, A Tentative Set of Broad Accounting
Principles, P• 25.
26
may be vaJ.ued on the statements at a current exchange price.
25
Current value may be employed for recording inventories at lower of
eost or market.
If one resource is exchanged for another resource
(not money), the recorded valuation of the new resource is the fair
market value of the resource given up, a current exchange price.
A future exchange price (anticipated selling price) may be
applied to inventories when net realizable value (selling price less
cost to complete and sell) is lower than cost, frequently employed for
damaged or obsolete goods.
Although most users of the financial state-
ments think of asset valuation in terms of historical cost, these
other methods of measurement are acceptable under certain conditions.
Furthermore, a potential liability, of uncerttin amount, is
recognized at the highest estimate in a range of possible values,
under the influence of the doctrine of conservatism.
Depreciation
expense and bad debt expense are subjective appraisals, not historic
costs.
Then too some costs are expensed rather than capitalized even
though they benefit future periods.
Examples are expenditures for
advertising to create goodwill, research and development costs, and
the expenditures for acquiring and developing human resources.
Economic value is the present or discounted value of future
economic benefits.
Creditors are specifically interested in the
future of a firm and in its ability to repay the loan.
Thus they
27
would be more interested in an economic valuation system than in an
accounting cost measurement.
However, historical cost for h'Ol!lan resoul'ces is easier to
develop and it is consistent with conventional accounting practice.
It includes the costs of recruiting,
t~ring,
training, sub-standard
performance during training, and concomitant opportunity costs of
trainers.
Historical cost includes health services provided by the
employer as well as for.mal educational expenditures and other employee
benefits with future advantage to the enterprise.
A method for
amortization of this investment would be developed, based on expected\
length of employment and useful life of the skills provided by the
employer.
Write-offs for abrupt skill obsolescence, unexpected
termination, and health deterioration would need to be available. 26
Historical cost is readily understood by users of financial
statements and the accumulation of cost data is less threatening
psychologically to an employee than is an economic valuation measurement.
But past costs are not necessarily relevant to decisions about
the present and future.
Also, a distinction needs to be made between
which costs are to be capitalized and which are to be expensed.
An
awareness of the fact that the unamortized balance in an employee • s
account is not a valid measure of his future potential to the firm
would need to be established.
Although historical cost measurements would be easiest to
generate, and would be objective and verifiable, conceptually, other
26Brummet, "Accounting for Human Resources," p.
64.
' 28
cost measurements would be preferable because tb.ey better reflect
economic value.
Chambers has stated that current cost is the market's estimate
2
of economic value. 7
Therefore, some believe that replacement cost is
a surrogate of economic value.
Replacement cost, or current cost,
depicts the cost that would have to be incurred in order to replace
an individual with someone else possessing the sr;;:ue capabilities and
level of technical proficiency and familiarity 7:rith the firm and its
operations.
Replacement cost reflects changed
p~ice
levels, changed
market conditions, and changed investment requir ',::'l.ents for past
training and experience.
28
It is relevant to
th~
creditor and
presumably standards of objectivity and verifiability could be
developed, but replacement cost is difficult to rietermine and,
standards would be liable to subjectivity.
An ind.ividual t s loyalties
and over-all expertise may not be accurately assessed.
A group
measurement may be more valid than individual val:t:tations.
Managers
have estimated total replacement cost of human resources to be three
to five times the annual payroll of the firm, or anywhere from fifteen
to thirty times annual earnings. 29
A future-oriented measurement technique,
value, has been developed by Eric Flamholtz)0
2
realizable
l'li could best be
7FJ.muholtz, Human Resource Accounting, :p,. 173.
28
2
~~ected
Brummet, "Accounting for Human Resources," P•
9caplan and Landekich,
65.
~Resource Acco~ting, p. 74.
30Flamholtz, Human Resource Accounting, PP• 114-127.
29
adapted where expected future services of an individual could be
directly related to his contribution to firm income, such as in an
accounting concern or other people-intensive organization where hourly
charge rates have been established.
Monetary Measurement:
IIfisher
Value
has defined value as present value; that is, the sum
of a series of expected cash flow discounted by the time value of
money• u31
This definition requires lmowledge of total future net cash
receipts, the periods of time with which they are associated, and a
discount or interest
rate~
A normative economic valuation model for
human resources would include a monetary representation o! expected
future services (the amount of cash receipts expected to be generated
by the individual or group); the expected service life or valuation
period {dependent on life expectancy, physical and emotional health,
organizational retirement policies, and interorganizational mobility);
and the discount or interest factor applicable to the time frame. 32
Economic value, or present worth of future benefits, is the
best measurement, theoretically, of human resources and the one which
creditors would prefer since it evaluates potential cash flow
generated by hmnan resources.
However, this valuation is difficult
to verifY because it involves a projection of the value of future
services, an estimate of the amount of future services, and the
·application of a subjective discount or lllterest rate.
31.lost, Accounting Theory, p.
32
144.
Flamholtz, "A Model for Human Resource Valuation," P•
259.
30
Nevertheless, several models of human resource measurement
using economic valuation have been developed.
Human resource valuation may be either individual or organiza.tional~
It is hypothesized that individual values can be aggregated
to determine group valuation. However that process does not allow for
synergism (co-operative action such that the total effect is greater
than the sum of individual effects assessed independe..'ltly) or the
dynamic aspects of organizational phenomena.
An individual 1 s worth is his perceived ahili ty to render
future economic utility, benefits, or services.33 The individual,
the group, and the organization, each, has a value • .34 .Although
theoretically individual values can be summed to obtain group worth,
which in turn can be aggregated to determine
orga~zational
value, the
organizational value of human resources can also be determined using
other methods.
Modes of valuation for profit center groups include the
economic value approach and the unpurchased goodwill method.
economic value approach forecasts and discounts expected
organizational earningso
The
fu~are
An allocation of this discounted future
income is then made between human resources and other resources.
33Eric Flamh.oltz, 11 Towa.rd a Theory of Human Resource Value in
Formal Organizations," The Accounting Review, Vol. 47 (October, 1972)
P• 667.
. .
3hv.J.amholtz, Human Resource
Accountin~, p. 114.
Human asset value can then be allocated between groups and also
between individuals if desired. J5
Unpurchased goodwill may be utilized to determine the value of
human assets.
The ratio of net income to total assets for
&~
entity
is compared with the same ratio .for the industry, and the difference
is applied to the total assets o.f the entity•
This excess (or
detriment) is then capitalized at the industry ratio of income to
assets to determine unpurchased goodwill which amount some believe
represents the efficiency of the
organization~
hUDUL~
asset component o.f the
This measurement, however, is an understatement of the
total valuation o.f human resources since it only measures differences
between an individual firm and industry averages •
However 1 it is
objective and compatible with current accounting practice.36
Purchased goodwill may not be utilized in the same manner.
If it were, there would be a duplication o.f charges:
(1) the write-
off of various costs incurred to build and maintain current goodwill,
and (2) the periodic amortization of purchased goodwill.
Expense-center groups can be valued through capitalization of
compensation, replacement cost valuation, or group historical cost
valuation.
The adjusted present value technique utilizes a forecast
of annual salary payments for five years into the future.
The present
value of these estimated salary payments is discounted applying a
normal rate of return.
35Ibid.,
An "average efficiency ratio" is determined
P• 179.
36·Caplan and Landekich, Human Resource Accounting, P• 79.
32
by dividing actual earnings of the firm for each of the past five
years by normal industry earnings; then averaging these resuJ.ts.
This
aaverage efficiency ratio" is applied to the present value of future
salary forecasts to obtain the present value of human resources.
This
amount is recorded as a debit to "Investment in Human Resources" and a
credit is made to "Future Wages Payable" in the amount of the present
value of forecasted salary payments, and to "Owner's Equity" for ·~e
excess worth created by human ~esources.37
A criticism of using any compensation measure to determine
value is that it may not bear significant relationships to the present
worth of expected future services. When value and compensation become
interrelated, the resuJ.t may become distorted due to the circuJ.arity
of the procedure and their mutual dependence.
A price-earnings multiplier method of determining human
resource value was developed by Giles and Robinson in 1972~ 38
"Based
on a sample of companies with similar characteristics 1 an average
price-earnings multiplier is computed and then adjusted to arrive at
the multiple applicable to the firm by providing for (deducting from
the average multiple) the factors that
assets.
are~
related to human
The multiple is further adjusted as needed for application
to different job categories.
The gross remuneration of employees and
all additional expenditures related to investments in human resources
3?Ibid. 1 P• 80.
38 The price/earnings ratio is the current price of a stock
divided by its earnings per share during the last year.
33
are capitalized by using the appropriate mnltipliers.u39
Monetarr Measurement:
Expected Realizable Value
Eric Flamholtz developed the concept of expected realizable
value which is applicable to either individual or group measurement
although he employed it primarily for individuals.
He hypothesized
that a worker's conditional value to an organization was dependent on
his personal attributes and attitudes, the nature of the role he
occupied in the organization, and the characteristics of the organization itself.40 He calculates an individual's conditional value to
the organization by measuring technical, administrative, and interpersonal skills and activation level (the extent of the release of
stored energy through metabolic activity)o
The employees• cognitive
.
.
abilities and personality traits are also factors of conditional value
as is the relationship between the individual's role in the organization and his rewards from membership. Worker satisfaction is
dependent on the congruence of organizational structure and management
style with individual need satisfactiono
The worker's role may depend
not only upon his own attitudes and abilities, but also on those of
his peers, or the lack of these attributes among his fellow workers.
If there is congruence between individual and organizational goals
{need satisfaction), productivity (performance in his present
position), promotability (expected productivity in higher job
39Caplan and Landekich, Human Resource Accounti!¥}, P• 81.
40
Thid.,
P• 83.
34
classifications), and transferability (expected productivity elsewhere)
result, thus determining the conditional value of the individual to
the entity. hl Conditional
~alue
is defined as the employee's present
worth of potential service if he remains with the firm.
Some organi-
zations (such as accounting firms) are able to apply a "charge" rate
to individual or group services and thus generate a fairly reliable
monetary conditional value.
Billing rate t:ilnes chargeable hours
equals the gross contribution of the employee to the fir.m's profit.
The net contribution is calculated by deducting employee salary and
indirect employee costs from his gross contribution.42
Expected service life in each service state (a position in
which an individual is expected to render a specified quantity of
service during a specific time period) can be measured and aggregated
over time to de·termine total conditional value.
Conditional value must be adjusted by the probability of the
individual's remaining with the organization (the complement of the
turnover rate).
This rate is frequently directly proportional to the
degree of satisfaction experienced by the individual with regard to
his role in the firm and the satisfaction of his needso According to
Maslow's hierarchy of needs, man has five levels of satisfaction:
physiological, safety, love, esteem, and self-actualization.43 The
hl.namholtz,
Human
h2'
.
Resource Accounting, PP• 115-117.
Ibid., P• 172.
43Hampton, Summer, and Webber, Organizational Behavior, P• 6o
greater the congruence between individual satisfaction and organizational needs, the greater
t~e
Dfit" between worker and entity, result-
ing in a greater monetary representation of expected future services,
or amount of cash receipts expected to be generated by the individual;
and an increased expected service life.
Although the Flamholtz model is designed primarily for
individual valuations, it can be used for group valuation with the
limitations mentioned earlier.
Criticism of Flamholtz' s model centers around the reliability
of the data required to construct it, since probabilities must be
assigned arbitrarily for each individual.
Furthermore, its con-
struction is costly for the benefits derived and it is subject to the
criticimn of all economic valuations; namely, there is too much subjectivity involved in predicting future economic benefit and in
assigning a discount factor.
The Flamholtz model is a refinement and continuation of an
earlier model developed by Lev and Schwartz which did not take into
account the loss of organizational membership for causes other than
death and retirement, nor did it include the important variables of
career movements within the firm.44 As a result, that model
overstates human resource value.45
4~ikki Jaggi and Hon-Shiang tau, "Toward a Model for Human
Resource Valuation," The Accounting Review, Vol. 49 (April, 1974)
P• 322.
h5Eric G. Flamholtz, "On the Use of the Economic Concept of
Human Capital in Financial Statements: A Comment, 11 The Accormting
Review, Vol. 47 (January, 1972) P• 149.
A model using a homogeneous group of employees within a finn
as a basis for valuation and the Markovian chain technique to determine expected quantity of services was developed by Bikki Jaggi and
Hon-Shian Lau. 46 Matrix operations were employed to
dete~e
expected economic value for groups of employees based on output goals
(profits, revenues, share of market, etc.) over time.
The model is
rigorous and thorough, but its practicality depends upon the availability of the input data.
A group valuation concept allows a more
accurate prediction of the career movements of employees within a
firm and their chances of leaving at any time.47
Standards useful in evaluating economic measurement models
include the extent to which important and pertinent variables relating
to the problem are included; its operational capabilities; and its
utility to users, including its reliability.
The stochastic human
valuation mode148 proposed by Bikki Jaggi and Hon-Shiang Lau appear
to meet all three standards.
By
employing group valuation techniques
rather than individual valuations, smaller variw1ces should be
obtained, thus increasing the usef·u.lness of the datao
46 "The
Markovian assumption is that the probability of occupying a specified state is a function of the state currently occupied
and is not dependent upon the states previously occupied."
(Flamholtz, Human Resource Accounting, P• 156.)
47Jaggi and Lau, "Toward a Model for Human Resource
Valuation," PP• 323-329.
4B"A stochastic process is a process of movement or transition
of people among organizational roles. An individual generates value
for an organization as he moves among organizational roles and renders
services." (Flamholtz, Human Resource Accounting, P• 168.)
37
A Stochastic Human Valuation Model
Having discussed a variety of possible measurement techniques
which have been developed since the inception of human resource
accounting, we shall now consider which valuation model would be most
applicable tc the needs of creditors.
Although non-monetary systems
express relative measurements among human resources within a fir.m, a
non-monetary system cannot adequately compare human resources with
physical and/or financial assets.
Therefore, although one must begin
by gathering data which could be used for non-monetary purposes, any
enterprise seriously interested in accounting for human factors would
need to develop a monetary system of measurement.
The creditor would
not be interested in a non-monetary system because he would be unable
to determine the present value of future benefits from human resources
t.o the firm.
He would be unable to compare a non-monetary measurement
with valuations for other resources within the organization; and he
would be unable to compare that measurement with human resource
valuations of other firms.
A creditor would be interested in a measurement which
represents the present worth of future economic benefits to be
received from the human resources.
He is concerned primarily with
the enterprise's continuity, which directly affects its ability to
repay the loan.
The creditor would especially be interested in a
measurement of human assets if the borrower were a large, peopleintensive firm, since its future would depend to a large extent on
the quality of its workers.
The creditor would be very interested
in knowing if the firm were liquidating its human resources to show
profitability in order to obtain the loan, or if the finn were
investing in its human assets to insure long-term productivity and
profitability.
The creditor would not be interested in a measurement system
based upon historical cost because past costs are not necessarily
relevant to decisions about the present and future.
does not provide for price-level adjustments.
Historical cost
Furthermore, it is
highly unlikely that an individual 1 s unamortized "value", as determined on the historical cost basis, would reflect a valid measure of
his potential contribution to the firm, which is what the creditor
wants to know.
The lender would not be interested in an opportunity cost
measurement (the value of an asset in an alternative use) in which a
firm would carry on an internal bargaining process to determine a ·
monetary value for each employee.
This system relates value only to
that firm, not to the general market, and it does not disclose future
benefit.
The creditor would not be interested in a measurement system
based on salary, or compensation measures, such as efficiency ratio
systems or adjusted present value systems discussed earlier.
These
measurements do not relate present worth of expected future services
adequately inasmuch as they tend to confuse value and salary, making
each dependent upon the other and terminating in circularity.
The creditor would not be interested in a measurement system
based upon earnings--such as the unpurchased goodwill method; the
39
income method or economic value approach; or a price-earnings
mliltiplier--all of which utilize earnings in the valuation process.
Current price of stock, its earnings per share, and company earnings
may be a reflection of market fluctuations, inflationary trends,
technological advances, or other factors unrelated to the value of
its human resources as they affect the success or failure of the
enterprise.
The creditor would
no~
be interested in current cost or
replacement cost of human resources, although these do reflect
current market value of human assets and might be used as a surrogate
for economic value inasmuch as they do reflect the market's estimate
of worth at one point in time.
However, replacement cost does not
depict the total knowledge, expertise, or potential of individuals,
nor does it reveal employee loyalties.
How then should human resources be measured in the eyes of. a
creditor? A loan agent would be interested in a measurement system
which represents the present or discounted worth of future economic
benefit to be received from the human resources of the firm as a
whole.
He is interested in knowing the value or worth of the human
assets as they relate to the other assets within the firm and as they
relate to measurements of human assets for other firms of similar
size within the same industry.
He is interested in knowing if the
valuation is increasing, or being depleted, and to what degree human
resources affect productivity and earnings and the continuity of the
firm.
40
Thus only an economic valuation measurement, a determination
of the present or discounted value of future benefits, would fulfill
the needs of a creditor.
Some economic models utilize an employee's
discomi"t.ed .future expected earnings to represent the value of his
services.
Others do not include career movements within the firm or
the possibility of exit before retirement or death.
A somewhat
sophisticated model has been developed by Jaggi and Lau which I
believe meets the needs of creditors.
I am indebted to them for the
concepts and examples which follow.49
The model proposed is a group valuation rather than one based
on individual measurements.
Creditors are not particularly interested
in the individuals 'Within an organization, at least not in the same
manner which internal users of financial statements would be.
Creditors are primarily concerned about a valuation for the human
resources as a whole.
Thus a model employing group valuation rather
than individual measurement fulfills their requirements.
ftQroupn in this instance refers to a homogeneous group of
workers, not a division or a department.
More meaningful data can be
produced utilizing group measurements since they produce smaller
statistical variances than individual valuations.
Group calculations
have been successfully employed by actuaries in the insurance industry
for a long time.
The reliability of predictions concerning rate of
occurrences of accidents or deaths for a homogeneous group of policy
49Jaggi and Lau, "Toward a Model for Human Resource
Valuation,~
PP• 32l-329o
-----
"'
-~--
hl
holders has been well established.
This same concept can be carried
over to determine valuation of human resources.
It can be applied to
the promotability, productivity, and transferability of a homogeneous
group of
~ployees.
Probability of maintaining membership in the
organization can also be accurately predicted.
Thus this model can reliably predict career movements and
turnover for the enterprise as a whole unless
extraordin~~
circum-
stances intervene. .And if a known set of unusual occurrences is
anticipated, the model can be adjusted accordingly.
The following illustrates the reliability of a homogeneous
group valuation as opposed to an individual valuation.
Let "x"
represent the expected worth of an individual employee to a fir.m in
dollars per year, and "T" his actual length of stay.
Assume the
probabilities of 0 T0 are:
P(T ~ 1) = 0.8
P{T~ 2) = o.6
P(T~3) = 0.4
P(T!:.4) = 0.3
If the valuation period being measured is four years (and values after
the fourth year are ignored) the expected value of the individual
employee to the finn, undiscounted, will be
E(V)
= o.8x
+ o.6x + o.4x + o.3x
= 2.1x
But the actual value of that employee could vary from 0 to 4x.
And
the probability of realizing each of the actual values, assuming that
•Tn can assume only integer values, will be
P('l'=l) = P(T ~ 1)
P(T=2) = P(T~ 2)
P(T=3) = P(T ~ 3)
P('l'=4} = P(T~ 4)
- P(TZ 2)
- P(T~ 3)
- P(T ~ 4)
- P(T~ 5)
= 0.8
= 0.6
=
=
0.4 0.3 -
0.6 = 0.2
0.4 = 0.2
0.3 = 0.1
o.o = 0.3
.'
The standard deviation between actual value and expected value is
thus:
(0.2
X
2
1 ) + (0.2
X
2
. 2
2 ) + (0.1 X 3 ) + (0e3
X
42 ) - 2el2
-J6.7 - 4.41
-
1.51
Although the expected value of the employee was 2.1x, his actual
realized value could va:ry from 0 to 4x.
For the range of .! 50% of the
expected value of 2.1x (the range from lx to Jx}, the
confide~·ee
of the actual value falling within this range is only 50%.
level
That means
that using an expected valuation of 2.1x, one can only be 50% sure
that the individual's actual worth realized lies between lx and 3x.
But, if there are one hundred employees in the same homogeneous group, the expected value of the group will be 210x (100
employees times 2.lx} and the standard deviation of the total realized
value will be:
J1oo
x 1.51x = 15.lx
This standard deviation is only 7.2% of the expected value of 210x. ·
Since the actual realized human resource values for the group will be
normally distributed, at a confidence level of 95% the actual human
resource value for the group will not vary more than 14.1% (1.96 times
7 .2%) from the expected value of 210x.
Thus it is evident that expected values for a homogeneous
group are infinitely more accurate and reliable than are expected
values for individuals.
Using the group basis, we now develop a model using the
stochastic process, which takes into consid~ration the promotability
h3
and transferability of employees as well as their duration of employment and productivity. We are assuming that the probability of an
individual's occupying a specific state is a function of the state
currently occupied, and is not dependent upon the states previously
occupied, a Markovian assumption.
We first construct a "Rank Transition Matrix" which is built
.
.
on the assumption that all employees have equal chances to move upwards
into all job levels.
We
carmo~
know which individual will be promoted
or transferred, or when; nor do we know how long each individual will
remain with the firm.
However, we can estimate the career movements of
the homogeneous group by assigning probabilities based on actuarial
estimates.
MATRIX T
Probabilities of Career Movements
of a Homogeneous Group
End of Period
Lowest
Middle
.Rank
Rank
{1)
Highest
Rank
{2)
{3)
Exit
Firm
{4)
Beginnin~
of Period
Rank
{1)
~
{0.4)
~2
(0.4)
-
(2)
0
a22 (0.5)
(3)
0
0
(4)
0
0
~3
(0.1)
~4
(0.1)
a23 (0.4)
..
a (0.8)
33
0
~4
(0.1)
a34 (0.2)
a44 (1.0)
The probability of a worker's occupying rank "i" at the beginning of
the time period and attaining rank "j u by the end of the period is
represented by na. ·"•
~J
Thus the probability of an individual in the
lowest rank at the beginning of the time period remaining at that
lowest rank until the end of the period is
0.4.
The probability of an
individual's being promoted to the middle rank during the time period
is
0.4.
The probability of an individual 1 s being promoted to the
highest rank is 0.1 and the probability of the employee lear.....ng the
firm is 0.1.
equals one.
The sum of the probabilities for each time period always
Assuming there are no demotions, we can conclude that in
a homogeneous group of one hundred employees in the lowest rank at the
beginning of Year 1, forty will remain in the lowest rank at the end
of the time period, forty will be promoted to the middle level, ten
will be promoted to the highest rank, and ten w"ill exit from the firmo
A further assumption is that the economic value of the
employees to the enterprise is dependent upon the rank occupied at the
end of the time periode
If promotions occur more or less frequently
than once a year, the time period can be adjusted up or do'Wil, to whatever is
app~icable
to the firm.
It can be three months, six months,
or two years or more.
If the economic value of an employee of the lowest rank is
denoted by Vl' and the economic value of the middle rank by v2 , and
_the economic value of the highest rank by
v3,
the expected value of
one hundred employees occupying the lowest rank at the beginning of
the period for one period can be expressed as:
Since the economic value of rank 4 (exit the firm) will always be zero,
the last value can be ignored.
However, the total expected economic value of these employees
depends on future career movements.
Thus the model should predict
career probabilities of these employees for 0 n° periods.
Since
Matrix T represented the transitional probabilities for one period of
time, the Matrix ~ will represent transitional probabilities after
•nn time periods.
The values of the elements in this matrix can be
determined by matrix multiplication.
The expected economic value of
these one hundred employees for the nth period will then be:
lOO{a-~ (n)v + a- (n)v + a- (n)v )
~
1
~2
. 2
~3
3
The total expected economic value for all future periods becomes:
oP
100
~ (~ (n)vl
+
~2 (n)v2
+
~3 (n)VJ)
m'"l
This expression takes into consideration all promotion and exit
possibilities of the one hundred employees occupying rank 1 at time
zero.
To determine the expected present value of the total services
of these one hundred individuals. for all future periods, the discount
rate "r" can be applied, and the expression becomes:
c:;tO
100
< rn(a-~~ {n)v1
(._
+ a- (n)v + a., (n)v }
.!.2
2
..t.3
3
'1'\=1
The Stmmlation here is carried to n= <P
•
However, i f a .. represents
~J
the probability of a worker occupying rank "i" at the beginning of the
time period and attaining rank
"j"
by the end of the period, the
-·-
--
--
--
- - -"' --
-
-
-
-
-
-
--
-
46
values of a .. (n) decrease with rtn11 and it is unlikely that the
~J
g~e~ter
probability of a .. (n) will be
~J
than zero when n=40.
In addition, the decrease of period economic value with "n"
is speeded up by the factor "rn.,, with the possibility of making . the
summation series even shorter.
If N equals the number of employees in rank "in the total
1
expected economic value at time zero of N. employees in rank "i"
~
equals:
QI:J
TVi
where [ SiJ
= NiL 2_ a1.. (n)rnv.
~~~ JES·
'"
J
J
is the set of all ranks that employees in rank "in can
attain sometime in the future.
If there are °K 11 different ranks in the firm, the total
economic values of each rank of employees by the UK" element vector
can be denoted by:
[TV]
can thus be evaluated:
?='
(TV] = [N] • ~ [T}n[v]
1>\" I
Where (N] is the vector [ N1 N2 • • • •
employees in rank Ilia at time
11
t
0
°
1\.1,
"Ni n being the number of
and a ve~to~
[A] •
be:
Discounting .future values to ttr%11 per period, we have:
o/0
[TV] = (N] •2_
I"\"'- I
rn
[T]n[v]
[B]is taken to
47
Thus to determine the value of total human resources within an enterprise, the values of each rank of employees (represented by K-element
vector (Tv] ) are aggregated.
A numerical example of this measurement valuation model will
prove helpful.
Assume a hypothetical firm with one hundred employees
N1 = 100, N2 = 100, N = 100. Expected value
3
to the fir.m for the lowest rank, vl, = $1,000; for the middle rank,
in each of three ranks:
v2,
= $2,000;
= o.
for the highest rank, v3,
= $3,000;
and for exit, v4,
What is the total expected economic value of the human resources
at time zero?
MATRIX T
Probabilities of Career Movements
of a Homogeneous Group
End of Period
Lowest Rank
v1
(1)
Middle Rank
(2)
v 2 ... $2,ooo
(3)
v3 = $3,ooo
(4)
v4 = $0oo
o.4
o.o
o.o
o.o
o.4
o.5
o.o
o.o
o.1
o.4
o.a
o.o
o.l
...
$l,ooo
Highest Rank
Ex:it Firm
Be~innin~
of Period
Rank
(1)
(2)
(3)
(4)
o.1
o.2
1.0
48
The expected value of the original one hundred employees at rank 1 in
the first period equals:
100 ((0.4){$11 000) + (0.4)($2 1 000)
.
.
+
= $150 1 000
(0.1)($3 1 000))
.
.
Using matrix operations, the expected values of each of the ranks for
the first period is:
100
o.h
0~4
o.1
o.1
$1,000
100
o.o
o.5
o.1
$2,000
o.o
o.o
o.o
o.h
o.e
o.o
o.2
$3,000
1.0
000
100
X
0
o.o
=
~~o,ooo]
$220,000
$240,000
.
000
A discount factor would be applied to each rank.
For the second year, probabilities would be:
[T)2
2
o.h
o.h
o.1
o.1
0
o.5
o.1
0
0
Ooh
o.e
0
0
0
1.0
0.16
0.28
0.2
0
o.52
0.23
0.2
0
0
o.64
o.36
0
0
0
1.0
~
.
49
The expected economic valuation for the original rank 1 employees for
the second period is:
100 ((0.16)($1,000) + (0.36)($2,000) + (0.28)($3,000))
.
-
~
.·
..
= $172,000
.
.
Using matrix operations, the expected values of each of the ranks for
the second period equals:
100
0.16
o.36
0.26
0.2
$1,000
0
0.25
o.52
0.23
$2,000
100
0
0
.0.64
0.36
$3,000
0
0
0
1.0
$ 000
100
X
...
0
r2,000 J
$206,000
$192,000
000
A discount factor would be applied to each rank.
Thus, the total value 'Without the discount factor for the
first two periods for each rank is:
$150,000
$220,000
$240,000
$172,000
+
$206,000
$192,000
$322,000
=
$426,000
$432,000
If this procedure is repeated for forty periods, the expected total
economic valuation without the discount factor for each rank for the
next .forty periods is:
$1,383,000
$1,400,000
$1,200,000
$3,983,000
50
Thus, the total expected value without the discount factor of all
employees based on a forty period horizon is $3,983,000.
This
computation can be executed on a computer in less than one second.
Flamholtz has postulated that elements of conditional value
include promotability, productivity, and transferability as well as
the employee's satisfaction with the organization.
The model just
described is a function of the value of the employee within a specific
rank and takes into consideration the elements of promotability,
transferability, and exit probability.
However, the matri."'t could be
expanded to include additional gradations of rank to include productivity with accompanying gradations in expected value to the firm.
For example, each rank could include three performance levels:
poor (Pl), average (Al), and excellent (El) with concomitant expected
values.
Retaining "E" for exit, we now have a 10 x 10 matrix rather
than a 4 x 4 matrix.
Thus this model provides adequate flexi.bili ty to
meet user needs.
Input data dealing with employee rank and mobility should be
readily obtainable from personnel records.
The determination of
expected value for each rank and gradation of rank could be made by
estimating the employee's contribution to the firm's profits, revenues,
or other output measurements.
A weighted sum of various output goals
such as share of the market, after-tax profit, total
be ·calculated, depending upon the industry.
s~es,
etc. could
Regression analysis might
be used to determine the relationship between employee contributions
at a particular rank, and output goals.
51
A major disadvantage of this model is the subjectivity connected "With all economic valuations.
The probabilities of career
movement within the firm and exiting before death or retirement can
be estimated from historical data.
Earlier we discussed the improved
reliability of these probabilities when related to homogeneous groups
rather than to individuals.
Another subjective decision is the imposition of a discount
factor to determine present
or expected values.
wo~th
of these expected future benefits,
Because the economy is experiencing a high rate
o! inflation, the discount factor would need to be adjusted at least
annually when using this model.
But if this were an accepted method
of valuation, perhaps an official body would issue a standard discount
rate to be applied on an annual basis to human resource valuations.
A third problem area is the subjective assignment of value to
each rank or service state.
Perhaps a determination of which factors
to include when estimating expected value for each rank could be
standardized by industry •
No model will be without some disadvantages.
But if this Rank
Transitional Matrix model as devised by Jaggi and Lau were put into
operation, refinements would surely be forthcoming and creditors and
other users of financial statements would benefit from the information.
Summary
Three basic problem areas surround huma.""l. resource accounting.
The first is, do human resources meet the criteria of assets as
defined by the accounting profession? A second concern involves the
effects of measurement on the behavior of workers.
issue is the development of a measurement model.
The third basic
Measurement concepts
considered were non-monetary systems and monetary systems using cost
concepts, value concepts, and expected realizable value.
A stochastic
valuation model was suggested as being most useful to creditors.
CHAPTER TII
UTILITY OF HUM!N RESOURCE ACCOUNTING
Prerequisites for Implementing Human Resource
Accounti~
·Bot every enterprise will discover utility from human resource
accounting.
However, if a fir.m is investing significant expenditures
to acquire and develop its human resources, and if most of the
benefits from those costs are expected to occur in subsequent years,
then capitalization of human resource investment will yield materially
different information on the financial statements, and human resource
accounting would provide a more accurate portrayal of the condition
of the enterprise.
I f the expected useful life of a firm 1 s investment in human
resources is greater than one year, and if the entity is reasonably
certain that technological obsolescence will not occur before that
time, then human resource accounting may be a valuable tool.
Studies
have shown a sizeable lead time between incurrence of human resource
expenditures and their benefits to organizational performance.
In
some instances, end results of managerial development programs did not
begin to occur until one year after training was given. 1 The degree
of employee mobility within the firm (a benefit) and outside the firm.
(a negative impact on the investor) also affects the utility of human
resource accounting.
l
.
Caplan and Landekich, Human Resource Accounting, PP• 62-65.
S3
54
The larger the organization over five hundred employees, the
greater is the degree of decentralization, and the greater is the need
for human resource accounting. 2 However, the fir.m must have the
capability for generating reliable data, such as describing chargeable
time (hours billed to clients as a direct contribution to profit),
investment time {hours devoted to building human resources), and
maintenance time (time used for current operations with no future
service potential). 3 Well developed personnel policies and procedures
regarding performance evaluation and compensation are a prerequisite
to implementation of a human resource accounting system.
People-intensive organizations with a substantial investment
in high salaried employees will obtain the most benefit from human
resource accounting.
Such fir.ms are to be found in aerospace, air
travel, accounting, athletics, research, consulting, management,
advertising, entertainment, education, electronics, banking,
insurance, and retailing.
A human resource accounting system is most feasible in a
dynamic, loosely structured organization with a participative management stylee
Such fir.ms typically employ many self-actualized people
who would not be intimidated by human resource accounting, but who
would welcome its use to benefit the enterpr-lse.
Top management must
have a strong commitment to modern organizational philosophy and
2Flamholtz, Human Resource Accounting, p. 276.
3Ibid., p.
78.
.55
practice, and it must be willing to devote considerable time and
effort toward the development and implementation of a human resource
accountL~g system.4
Benefits of Human Resource
Acco\U~ting
.
Creditors are interested in a firm t s ability to repa.y the
loan.
How does a measurement for human resources improve the
evaluation of an enterprise's position? Human resource accounting
enables a creditor to better assess managerial effectiveness
potential continuity of the firm.
~
the
It facilitates better matching of
expense and revenue and produces economic and social benefits.
People are a vital element in achieving organizational objectives,
but their value is rarely considered in the decision making process.
The core of any business is the capability and efficiency of
its management and human resource accounting enables creditors to
evaluate these attributes.
A manager is a linking pin, according to
Likert, a connector between subordinates and superiors.5 His influence is exerted vertically as well as horizontally. Managerial
leadership frequently determines organizational climate, which has an
affect on peer leadership and group process (how a group works
together).
Human resource accounting generates data useful not only
to management, but also to external users of the financial statements
who evaluate managerial expertise.
4caplan and Landekich, Human Resource Accounting, p. 131.
,Ibid., p. 30.
56
Creditors are interested in long ter.m profitability and therefore are concerned with how well personnel costs are measured and
controlled.
Have standard costs been developed for recruiting,
hiring, training, developing? Standard costs for personnel procedures
provide a basis for control and a normalized measure for decision
making.
Is it more efficient to recruit from the outside of a firm
or to develop skilled personnel internally? Are manpower requirements
forecasted accurately? Are available human resources allocated to
obtain the most efficient and profitable utilization of existing
skills? 'fne best development of potential capabilities? The
increasing satisfaction of worker needs?
Human resource accounting
assists management in all of these areas and offers creditors the
opport1tnity to evaluate management's utilization of the data
generated.
Turnover costs are extremely high, especially in organizations
employing skilled technical workers.
A human resource accounting
system measures and controls these costs and forecasts expected
turnover.
Relocation of a firm could have a significant effect upon
turnover.
A valuation for the liquidation of human assets due to
relocation could be an important factor in assessing all the costa
of moving when applied to the decision making process.
Human resource accounting can develop criteria for determining
the optimum magnitude and mix of human capital expenditures.
"If we
can measure and assess the changing condition of skills, attitudes,
and working relationships among people, we can predict the nature
57
of their performance and take action to prevent substandard
6
productivity."
Human resource accounting uncovers weaknesses in basic
organizational structure as well as highlighting strengths and
weaknesses of individual executives in management functionso
A
meaningful measure of growth of individuals and of management is
inherent to the system.
It determines training needs in a scientific
manner and in the proper order of priority, thus conserving human
resources and avoiding liquidation through obsolescenceo
Creditors
should know whether a firm is appreciating, maintaining, or depleting
the value of its employees.
Human resource accounting is a tool for
projected improvements, and is useful in promotion plans and salary
reviews. 7 It promotes an awareness of leadership styles and
an
awareness Bmong managers of the importance of the human resource
and his development to the long range productivity of the business.
Creditors are interested in the continuity of a firm and its
continuing profitability.
Human resource accounting enables the
creditor to evaluate whether an organization is manipulating its
earnings by depleting its human assets to achieve short term profitability, or whether it is investing in them to preserve long term
productivity o Past trends of the entity regarding investment in
employees need to be assessed as a prediction of future earning
6Brummet, "Accounting for Human Resources," P• 64.
7"Eggers, "The Evaluation of Human Assets, 11 P• 28.
58
potential.
This regenerative capacity of the organization contributes
to its continuity.
Present accounting methods motivate management to
disregard long term results and emphasize short term productivity,
8
thus encouraging the postponement of human resource investment.
The National Association of Accountants Committee on
Management .Accounting Practices (1972) stated:
11 The
accrual basis
of accounting requires that expenditures be identified with specific
periods of time--the present or the fUture.
Identification of the
appropriate period in lihich to charge the cost to expense is then the
determinant of whether the cost is capitalized (identified with
future periods) or charged off to expense (identified with the
current period).
Identification of such appropriate period is
generally determined by whether an expenditure is intended to benefit
the current period or future periods.a 9
Thus, accounting income is
determined on the basis of matching expenses with revenues in the
same time period.
Yet large
outl~s
for human resources expected to
benefit many future periods are currently expensed and charged
against current income.
This results in distorted financial state-
ments since the balance sheet does not include the capitalization of
human asset expenditures.
Income statements are understated during
a period of heavy investment in human resources and future income is
overstated"
8F.lamholtz, Human Resource Accounting, pp. 17-18.
9caplan and Landekich, Human Resource Accounting, p. 59.
These distorted financial statements lead to distorted ratio
analysis.
Rate of return on investment, a crucial variable to
creditors, does not take into account expenditures for acquiring and
developing human assets. 10 Statements without human resource valuations lack the completeness and comparability between firms and over
time which creditors need to enable them to make accurate decisions
about present and future profitability.
The amortization of goodwill is not a deductible expense for
tax purposes. Many believe that unpurchased goodwill (profits in
excess of industry average) represents the result of greater
efficiency and productivity of workers.
If unpurchased goodwill were
capitalized and amortized over the useful life of the employees as are
other assets, and this depreciation allowed as a business expense,
there would be a tax saving.
Human resource accounting is a vehicle to communicate a
firm's belief that people are valuable resources.
It is an attention-
directing function. 11 It encourages management to be aware of the
basic leadership styles described by Likert as authoritarian-exploitive; authoritarian--benevolent; consultive; and participative!2
Human resource accounting would reward management for using the most
effective and efficient leadership style.
The congruence between
10
Fl.amholtz, Human Resource Accountinfi, P• 291.
ll
Ibid., P• 250.
12"
Caplan and Landekich, Human Resource Accounting, P• 49.
60
worker satisfaction and organizational goals could be evaluated and
adjusted for increased productivity.1 3
Economic benefits of human resource accounting include
increased productivity and efficiency resulting from improved
managerial effectiveness and personnel planning.
budgeting decisions would occur.
Improved capital
"A quantitative valuation of human
resouxces allows explicit planning of investments in people and
per.wits meaningful choices between human investments and investments
in other assets", according to James Hekimian and Curtis Jones in
their article "Put People on Your Balance Sheet".
(Harvard Business
Rev:i.ew, January-February, 1967, p. 106.)14
Human resource accounting provides benefits to society in
general, in that it is a vehicle for upgrading underdeveloped workers.
It can help discover the most effective means of helping disadvantaged
people.
It can provide data regarding costs and benefits of
implementation of equal opportunity and affirmative action programs. 15
However, human resource accounting also has limitations.
Limitations of Human Resource Accounting
The basic issues or problems involved wi. th implementing a
human resource accounting system were discussed earlier.
The question
of whether or not human resources are assets in the accounting sense
1
~ampton, Summer, and Webber, Organizational Behavior, p. 313.
~oltz,
A Model for Human Resource Valuation," P• 254.
11
l5Caplan and Landekich, Human Resource Accounting, P• 121.
61
was exmnined.
Although people are not legally owned, they are
operationally controlled during working hours by the entities which
employ them and therefore I believe they can be described as assets.
They provide .future economic benefits.
A second issue dealt with the impact of human resource
accounting on employees.
Conflicting views have been expressed.
Cultural constraints and taboos most certainly do exist with regard
to labeling a human being with a monetary valuation. However, I believe this limitation can be overcome by following the prerequisites
mentioned earlier.
Also as users develop greater understandability
of human resource accounting and learn to appreciate the benefits
provided therefrom, workers will overcome prejudices and morale will
be improved.
Measurement valuations and their reliability may be the
greatest limitation to human resource accounting systems.
processes and models were described in detail earlier.
Various
However, if a
standard measurement system were adopted, even if that model were
based on historical cost (not the most effective for the long term
creditor but objective and verifiable), the data generated would be
more useful to all users than no information at all.
The
~~~~"_()f
implementing a human resource accounting system
is also a monumental limitation and may explain why at the present
time {1979) no such systems are in use.
A poor cost/benefit relation-
ship reflects the magnitude of detail involved in opposition to
62
unproven economic benefits derived.
16
No standardized procedures
exist as to which costs are to be expensed, which are to be
capitalized, what amortization plan is to be used, and when human
assets are to be "written off" •1 7
Manipulation of earnings due to uncertainty of future benefits
is another possible limitation.18 Research and development costs were
used in this manner at one time, which resulted in their being totally
expensed in the year in which the cost was incurred.
However, the
possibility of manipulation of earnings exists, as mentioned earlier,
under the present situation of no human resource accounting, wherein
human asseta are liquidated to obtain high short term profitability.
The transitory
nature of people is a 1imitation inasmuch as it
- ·..-;...;;;,;;;;..-....
~~"-"""'"H'
< -•-
contributes to uncertainty with regard to the return on investment in
human resources. 19
A visibility bias against human investment occurs.
If a
machine or piece of equipment is acquired or repaired, employees are
aware of the cost; but when an executive takes a management class, few
workers are aware of the investment being made in himo 20
16Eggers, liThe Evaluation of Human Assets," P• 28.
17
.
-
Flamholtz, Human Resource Accounting, p. 298.
18
Ibid., P• 291.
19'Caplan and Landekich, Human Resource Accounting, P• 61.
20
Brummet, "Accounting for Homan Resources," P• 63.
6J
FinaJ.ly1 there is no dependable, quantifiable, evidence as to
the relationship between behavior variables and profitability and
21
productivity.
However, there is no question that better cost
accumulations and more efficient allocations of human resources
influence both internal and external users of the data generated.
Although a human resource system may warrant careful scrutiny due to
its limitations, the concept should not be eliminated, but rather
considered a challenge to accountants and social scientists to make
it beneficially operational.
Human resource accounting systems will benefit large, peopleintensive firms which invest significant amounts to acquire and
develop human assets beneficial to the corporation for more than one
year.
Evaluation of the capability and efficiency of management in
determining long term profitability is an important benefit of human
resource accounting.
Another benefit is the development of criteria
for the optimum mix between financial and human capital expenditures.
Human resource accounting also provides a vehicle for upgrading underdeveloped workers.
Limitations of human resource accounting center
on an adequate measurement model and on the cost/benefit relationship
of implementing a human resource accounting system.
21nermer and Siegel, "The Role of Behavioral Measures in
Accounting for Human Resources," PP• 96-97.
CHAPTER IV
EMPIRICAL RESEARCH
Introduction
The definition and objectives of financial accounting as well
as those of human resource accounting have been discussed and related.
The basic issues surrounding the implementation of ·human resource
accounting ha-ve been examined, as bas the utility of the information.
In recent years, the concept of valuing people as scarce
resources (especially highly trained, technologically-oriented people)
has been advanced by those advocating human resource accounting.
The
process of identifYing a fir.m 1 s most valuable employees, measuring
their worth, and communicating such information to permit informed
judgments and decisions by both internal and external users of
accounting information might enhance decision making at all levelsQ
However, human resource accounting is a relatively new concept and
has not been adopted by the profession.
If human resource valuations are included as an integral part
of financial statements 1 ho-vr much influence 1dll they exert on users
of the information? Perhaps users will eliminate these valuations
and recalculate the statements to include only objective, verifiable
statistics.
The question of utility to investors was explored by Nabil
Elias and described in his article
0
The Effects of Human Asset
Statements on the Investment Decision:
64
An Experiment", published
originally in Empirical Research in Accounting:
Selected Studies,
~ {a supplement to the Journal of Accounting Research).1 He
researched the question:
"W~ll
the reporting of human assets in the
£inancial statements on the historical cost basis cause investment
decisions to be different?"
The question of utility to creditors has not been researched.
Although creditors and investors have much in common, an important
consideration for the lender is the fixed nature of his rewardso
He
is limited contractually to a fixed rate of interest i f the firm
prospers, but if the entity experiences adversity, the creditor's
principal as well as interest may be in jeopardy.
This uneven nature
of the creditor 1 s risk-reward ratio causes him to analyze every
borrower with scrutiny.
2
The lender is concertJed with the specific
security provisions of his loan, with projections of future cash flow,
and with the reliability and stability of such cash flows.
Thus,
creditors are generally more conservative than investors and rely more
heavily on financial statement analysis which reassures them of the
borrower's ability to repay the loan.
return on investment is noted.
Ratio analysis is applied and
The profitability of the entity is of
primary importance as is the capital structure of the enterprise.
The
relationship of equity capital to debt is an indicator of the adequacy
of equity capital.
Asset values are evaluated in the context of a
1
FJ..amholtz, Human Resource Accounting, P• 340.
2
Leopold A. Bernstein, Financial Statement Anal~sis:
Richard
A~lication, and Interyretation\Homewood:
l 8), P• 42.
n.rwrn,
Theory;,
LJ.c.,
66
going concern.
Liquidation values may be desirable, but only in an
extreme situatio~ would these be applied.3
This chapter will explore the effects of the inclusion of
human resource valuations on the decision making process of creditors.
Specifically, the chapter is concerned with the following question:
Will the reporting of human assets on the financial statements on the
historical cost basis, cause creditor decisions to be different?
Methodology
One hundred forty-four questionnaires were mailed to loan
officers of banks, savings and loans, and investment organizations
asking them to make a decision as to their willingness to grant a
loan by ranking two firms, the DBG Corporation and the RGS Corporation
(see Figure 1).
Conventional financial statements indicated the firms
were similar, but when human resource valuations were incorporated
into the statements, significant disparities were revealed.
Three
different sets of data were mailed, forty-eight questionnaires in each
set.
Sample No. 1 contained conventional financial statements with
comparative balance sheets for 1975, 1976 and 1977, and comparative
income statements for the years ended December 31, 1976, and December
31, 1977 (see Figure 2).
valuations.
These statements ignored human asset
They were conventional financial statements.
A second set of forty-eight questionnaires, Sample No. 2,
incorporated human resources within the statements.
Historical cost
67
valuations for human resources were used.
Any other measurement
system might have caused confusion since users of financial statements
are accustomed to the presentation of asset valuations in this form.
In Sample No. 2 (see Figure 3) assets included "Net
Inves~nents in
Human Resources", and owner's equity included an "Appropriation for
Human Resources" within the retained earnings section of stockholder's
equity.
"Adjusted Income before Taxes" on the income statement
.
.
.
included a net increase (decrease) attributable to human resource
investment.
The user of these statements would be required to
consider human assets in the decision making process or else
consciously eliminate those valuations.
The net investment in human resources was intentionally
structltred as a material component of total assets, and its movement
over time (that is, the increase or decrease in the investment) was
also of a material amount in relation to total assets.
Both DBG and
RGS had the same human resource investment in 1975 (the first year),
but by 1977 the investment at DBG Corporation had declined from
$100 1 000 to $65,000 whereas the investment at RGS Corporation had
increased to $140,000, a significant range with a major impact on
adjusted net income.
The human asset valuations in Elias• study, referred to
earlier, did not appear to be significant enough to seriously affect
the investment decision.
Furthermore, the increase in human asset
investment in Elias• XYZ Company was more sizeable than the decrease
in his ABC Company.
In the comparative financial statements used in
this thesis experiment, all factors, other than human resources,
68
remained the same so that the effect of the human resource investment
could be isolated and the
re~ults
of the survey attributable to that
one factor.
A third set of forty-eight questionnaires (Sample No. 3)
included both sets of financial statements:
without, human asset valuations (see Figure
those with, and those
4).
To those receiving
this third set, it was very clear exactly what effect human asset
valuations could have on the financial statements.
In each ease the respondent was asked to rank the two
corporations according to his priority for granting a loan.
The DBG
Corporation recorded total assets of $200,000 in 1975, $240,000 in
1976, and $280,000 in 1977 on conventional balance sheets (Figure 2-A).
Income before taxes was $25,000 in 1976 and
$28~000
in 1977.
The RGS
Corporation showed assets of $200,000 in 1975, $230,000 in 1976, and
$260,000 in 1977 with income at $22,000 in 1976 and $25,000 in 1977 on
the conventional statements (Figure 2-B).
The two companies were
intentionally structured to be similar before the inclusion of the
human resource factor.
Although RGS Corporation had a lower return on
investment and dollar values slightly below DBG Corporation, the
percentage increase in net income before taxes was 13.6% for RGS and
only 12% for DBG.
It was assumed that both companies would qualify
equally for a loan.
Those lenders receiving conventional financial data only
(Sample No. 1) provided a benchmark for measuring the responses from
Samples 2 and 3.
69
Results of the Survey
0£ the one hundred forty-four questionnaires mailed, fortyeight were returned with six o£ the forty-eight stating the firm did
not make commercial loans and therefore they could not complete the
£orm.
Eight additional respondents disqualified themselves as being
unable to complete the form.
It was impossible to determine from
which sample four other replies belonged, since the reply was not
returned on the form sent (see Figure
5).
Of the sixteen respondents who received Sample No. 2 (human
resource valuations integrated with financial statements), two stated
they did not make commercial loans and therefore refused to rank.
Eight of the remaining fourteen, or
first.
57.1% ranked RGS Corporation
RGS had an increasing investment in human resources.
Although
RGS and DBG appeared as equal risks on financial statements in Sample
No. 1, a large disparity in net income between the two firms (as a
result of human asset inclusion) was shown on the financial statements
included with Sample No. 2.
This difference was shown in an attempt
to determine the extent that creditors would rely on the human asset
data (see Figures 3-A and 3-B).
Of those who received Sample No. 2, two lenders ranked both
companies equally and one lender refused to rank.
One of the lenders
who ranked both equally eliminated the human asset valuations,
marking them "intangible" and not utilizing them; and on the basis of
the remaining financial data, ranked the two firms equally.
company stated that it needed additional dat.a.
Another
Thus, there was an
'[0
unwillingness on the part of these three firms to make any decisions
based on the data provided.
0! the three creditors ranking the DBG Corporation first, one
included the following note:
"Good oonservative banking practice
removes intangibles from the net worth; therefore these statements
would need re-evaluation to make a loan decision.
Your approach is
interesting--for lending purposes you are ahead of your time.r.
Thus
it would appear that six of the fourteen firms, or 42.9% were unwilling
to include human resource accounting in their decision making process.
The remaining 57.1% of the respondents did consider human assets a
viable factor.
The third set of financial statements, mailed to forty-eight
firms, included both conventional financial statements without human
resource valuations and statements which included measurements for
human assets (see Figures 4-A, 4-B, 4-C, and 4-D).
responded.
One firm stated:
Only eight fir.ms
"The information • • • is not complete
enough to make a loan decision."
Of the seven remaining firms, four
gave the RGS Corporation first priority and none gave the DBG
Corporation first priority.
One firm refused to rank and two firms
ranked both companies equally.
It is significant, however, that four
out of seven, or 57.1% gave priority to RGS Corporation--the same
percentage of respondents as gave RGS Corporation priority in Sample
No. 2.
The consistency of results is interesting.
Six lenders replied in a separate letter without indicating
·-
which set of data they had received.
Two of the six disqualified
71
themselves.
Of the remaining four, one stated:
"I do not consider
human resource assets in analysis of the capitalization of companies
that request financing assistance from our bank.
I would rank DBG
Corporation slightly ahead of RGS Corporation only because it is
slightly more profitable.n Another lender stated:
"I would be unable
to use statements submitted which capitalize the human assets of the
corporation.
Your effort to quantify this intangible is creditable,
but unfortunately, unacceptable.
My confidence in the company's
management and staff is, however,
a subjective
decision Wld as SUCh
cannot be expressed in terms of capitalization of a human asset."
The other two firms declined to rank on the basis of the information
supplied.
Statistical Analvsis
To determine statistically the value creditors placed on the
inclusion of human resource data, replies to Questionnaire No. 1
(Sample No. 1) were tested against replies to Questionnaire No. 2
(Sample No. 2) and also against replies to Questionnaire No. 3
(Sample No.
3).
If creditors placed no value on the additional
infonuation supplied by human resource accounting, it is assumed that
they would rank the DBG Corporation and the RGS Corporation equally,
or refuse to rank at all.
If lenders utilized human resource
accounting, they would rank RGS Corporation first.
This assumption
is analyzed statistically by a test of proportions between the two
populations.
72
The null hypothesis statement is that the proportion of
companies ranking RGS (increasing investment in human resources)
first, should be the same for both samples.
If replies are
essenticl.ly the same in both samples, it can be interpreted that
creditors did not utilize the human resource accounting datao
The a.lternative hypothesis is that there will be a difference
in the response pattern, indicating that lenders did utilize the
additional information.
The null hypothesis will be rejected "'.f the
results of Sample No. 2 are not the same as the results from Sample
No. 1 regarding the priority of lending to the RGS Corporation.
Sample No. 1, the control questionnaire, had nine respondents,
and one ranked RGS first.
priority to RGS is .111.
The proportion of lenders giving first
In Sample No. 2 with fourteen respondents,
{questionnaire containing human resource data) the proportion ranking
RGS first is .571.
The validity of the null hypothesis was tested
in
terms of the results of the two samples and was statistically rejected
with a 97% confidence level.
This means that there was only a 3%
probability that the differences between the samples was due to
chance, assuming the samples thffinselves possess statistical validity
(see Figure 6)o
Sample No. 3 which contained both conventional financial
statements and human resource valuations, was also statistically
analyzed against control Questionnaire No. 1.
The proportion of
creditors ranking RGS (increasing investment in human assets) is .571
with a sample size of seven.
The validity of the null hypothesis
73
(that there vas no difference between the proportions of the two
samples) was tested and rejected with a
was only a
95% confidence level. There
5% probability that the difference between these two sample
proportions was due to chance.
The assumption that creditors did
utilize human resource accounting in making a choice of borrower
between RGS Corporation and DBG Corporation is borne cut statistically.
A third analysis was performed by combining Sample No. 2 with
Sample No. 3 and comparing it with Sample No. 1.
null hypothesis was rejected with a
In this case the
98% confidence level.
A Chi Square analysis was also performed using all three
samples.
Results showed that the differences were not significant
enough to reject the null hypothesis.
In other words, the three
samples together do not show significant differences.
This was to
be expected since Samples No. 2 and No. 3 are so strongly correlated
~th
one another.
The samples were much smaller than anticipated. Although
one hundred forty-four questionnaires were mailed, the response rate
was only 19% for Sample No. 1, 29% for Sample No. 2, and 15% for
Sample No. 3.
The response rate was highest to Sample No. 2 in which
human resource data were included without comparable conventional
statements.
Su:mmarz
The usable responses to the questionnaire revealed a bias
toward human resource accounting information.
However, in view of the
small response rate, it is difficult to reliably assess the impact of
74
human resource accounting from the questionnaire procedure used as
part of this thesis study.
As in the case of the Elias study
involving investors, 4 there is an indication that the inclusion of
human resource valuations on the financial statements can affect the
decision making process of creditors, and if all other factors are
equal, favorable human resource data may result in a decision for
the firm with increasing investments in its people.
4Flmnholtz, Human Resource Accounting, PP• 344-345.
CHAPTER V
CONCLUSIONS
The theory of human resource accounting was first advanced in
1964 but little attention was given to it until 1969. During the
following five years it received considerable attention.
But in 1974
the Committee on Accounting for Human Resources announced that few
companies were ready to establish a system because no financial
benefits had been demonstrated.
and measurement.
1
Problems centered on allocation
R. G. Barry, who had initiated a human resource
accounting system in 1966 and had reported on its results in proforma statements from 1969 through 1973, discontinued the system in
1974 because "the fir.m did not possess the resources necessary to
accomplish the continued development required for human resource
accounting to become an effective management tool at the operating
2
level."
The Treasurer of R. G. Barry, Mr. Richard Burrell, believes
the concept is valid, but the basic theory must be more clearly
stated, the measurement problem must be resolved, and the information
generated must be proven to be more reliable. 3
1
Jacob B. Paperman, "Financial Statements: The Current Status
of Human Resource Accounting," The Woman CPA, Vol. 39 (January, 1977)
·p. 21.
2
Ibid., P• 22.
3ibid.
75
76
The accounting profession has not Jruruie a concerted effort to
resolve the problems of human resource accounting.
American Institute of Certified Public
Account~.nts
Neither the
nor the Canadian
Institute of Certified Accountants has studied its possible
applications in
publish~
financial statements.
Dr. Jacob B. Pape:rman, in his article in The Woman CPA,
cites measurement as the primary obstacle to an effective application
of
human resource
accounting.
He believes that none of the cost
models available are in conformity with economic valuation concepts,
and none of the economic models are acceptable under generally
accepted accounting principles.
Furthermore, the reliability and
usefulness of all the models need further testing.4
The measurement problem could be resolved, at least as
adequately as the measurement problems surrounding other assets
have been solved.
A more difficult area is the cost/benefit ratio.
Admittedly the costs of generating objective, verifiable, useful
measurements are high, even with the employment of computers; and
unless the economic benefits received exceed the cost, human resource
accounting has no .future.
The only national CPA firm to establish a policy on human
resources is Arthur Andersen and Company, and they recommend the
exclusion of human resources as assets due to their lack of
exchangeability.' Individuals from other CPA firms have found human
77
resource accounting unacceptable under APB Opinion No. 17, "Intangible
Assets".
Their rejection stems from paragraph 24 which states:
"Costs of developing, maintaining, or restoring inta.llgible assets
which are not specifically identifiable, have indeterminate lives,
or are inherent to a continuing business and related to an enterprise
as a whole-such as goodwill-should be deducted from income when
incurred• .,6 However, APB Opinion's can and have been, revised a..~d/or
amended.
From the present state of the art, it appears that the value
of human resource accounting is not essential to the business
community.
The focus of much of the literature rotates around the
basic problems covered in Chapter II.
Questions surrounding the
definition of human resources as assets relate. to right of control
and
meas1xre~ent.
Various valuation models have been suggested with
theoretical measurement concepts and cost of implementation the chief
drawbacks.
However, the stochastic valuation model presented in this
thesis offers an economic valuation which could be put on a computer
and utilized to evaluate the long range efficiency of management in
developing and conserving human resources as elements of continuity
and profitability.
As discussed in Chapter III, because management determines
present return on investment and influences predictions of future
earnings and cash flow; and because management determines the amount
6FinanciaJ.. Accounting Standards Board, Financial Accounting
Standards, P• 270.
of protection given to capital equity, some prediction of management's
long term effectiveness would enable lenders to more accurately
evaluate the status of the finu's future.
Human resource accounting
provides additional information, not presently available to external
users of the financial statements, to measure managerial efficiency
and effectiveness and to improve the accuracy of ratio analysis.
The utility of human resource accounting was demonstrated in
the empirical study described in Chapter IV in which it was shovm that
the inclusion of human resource v3luations on the financial
can affect the decision making process of creditors.
stat~~ents
There was some
indication that favorable human resource data may result in a decision
favorable to a firm with increasing investments in human resources.
Therefore human resource accounting could well be utilized to produce
greater accuracy in the evaluation of credit risks by lenders.
However, additional research involving cost/benefit analysis is
extremely important for the implementation of a specific decision
model.
79
Figurel
Questionnaire
Attention:
3633 Green Vista Drive
Encino, California 91436
~ovember_28, 1978
Loan Officer
Dear Sir:
.A3 a graduate student at California State University, Northridge, I am
investigating the importance to creditors of human resource accounting
on financial statements.
HUman resource accounting has been defined as the process of identifying and measuring data about people within an organization and communicating this information to interested parties. Historical cost, used
for measuring financial and physical resources, has been employed as a
surrogate valuation for human resources on some of the attached fina.."'lcial statements. Human asset valuation on the balance sheet represents
the unexpired portion of the historical costs of recruitment, selection,
hiring, placement, orientation, and on-the-job training of personnel.
Simplified statements for two companies in the same industry are
attached. Both stocks currently sell at the same price. The number of
shares issued and outstanding is the same for bpth comp~tes. The
basis of accounting for both firms is the same. Please ignore SEC
requirements of disclosure in evaluating these two hypothetical corporations. Although you may feel that you need more information to
make a loan decision, further information has been withheld to isolate
the impact of human resource accounting on decisions of creditors.
Please assume that each firm requests a $100,000 loan to purchase new
equipment. You have exactly that amount. available to loan. On the
basis of the attached financial statements, please rank the two
corporations:
(1) First priority. You will grant the loan.
· (2) Second priority. You may or may not grant the loan
in the future.
THE DBG CORPORATION
THE RGS CORPORATION - - - If it is not in your business practice to make loans of this nature or
size, further assume for purposes of this research, that you are able
to make this type of loan in the amount requested.
· Please indicate your ranking above and return this letter to me as
soon as possible in the enclosed, stamped, self-addressed envelope.
Thank you very much for your help.
Sincerely,
s.
G. Radant
80
Flgure 2-A
Sample No. 1:
Financial Statements Only
THE DBG CORPORATION
COMPARATivE BALANCE. SHEETS
DECEMBER 31
Assets
1976
1975
Total Current Assets
Net Property, Plant, and Equipment
Total Assets
!J11.
$ 5o,ooo $ 80,000 $100,000
.150 2 000 .160 2000 180.z000
$200,000 $240,22Q. $280,000
Liabilities and Stockholders' Equity
Total Current Liabilities
Long Term Debt
Total Liabilities
$ 20,000 $ 35,000 $ 47,000
30.z000
~0 1 000
30.z000
$ 50,000 ~ 65,000 $ 77,000
Stockholders' Equity:
Capital Stock
R,etained Earnings
Total Stockholders• Equity
$llo,ooo $110,000 $110,000
65 2000
4Q.aOOO
93 2000
$150,000 $175,000 $203,000
Total Liabilities and Stockholders'
$200,000 $240,000 $28o,ooo
Equity
THE DBG CORPORATION
COMPARATIVE TI~COHE STATEHENTS
:fQR .THE YEAR. ENDED DECEMBER 31
-
-
23.z000
32.z000
1976
1977
Net Sales
Cost of Sales
Gross Profit
$100,000 $122,000
. ~o,ooo . 60.z000
$ o,ooo $ 62,000
Selling, General, and Administrative Expenses
Operating Income
$ 27,000 $ 30,000
Interest Expense
Income before Taxes
2000
2 000
$ 2s:ooo } 28!ooo
81
Sample No. 1:
Figure 2-B
Financial Statements Only
THE RGS CORPORATION
COMPARATIVE BALANCE SHEETS
... DECElmER 31
,,
Assets
...
-...
-
1976
1977
$ 70,000 $ 90,000
1975
Total Current Assets
Net Property, Plant, and Equipment
Total Assets
$ 50,000
.150 202£ .160 2000
~2oo 2 ooq, $230 2 ooo
170 200£
~0 2 000
Liabilities and Stockholders• E!Juitz
Total Liabilities
$ 20,000 $ 28,000 $ 33,000
30 2000
30 2000
30zO.Q.Q.
$ 50,000 $ 58,000 $ 63,~000
stockholders' Equity:
Capital Stock
Retained .. Earnings
Total Stockholders' Equity
$110,000 $110,000 $110,000
4o,~ooo . 62,~000
87zOOO
~150,~000 ~172 2 000 $1972000
Total Liabilities and Stockholders•
Equity
$200,000
Total Current Liabilities
Long Term Debt
$230,00_£ $260,000
THE RGS CORPORATION
COMPARATIVE TI~CO}lli STATN1ENTS
FOR... 'PIE. YEAR. ENDED DECE:1BER 31
-
1976
-
1977
Net Sales
Cost of Sales
Gross Profit
$100,000 $120,000
6o 2ooo
. 52 1000
$ 4B,ooo ~ 60,000
Selling, General, and Administrative Expenses
Operating Income
24 2000
33 2 000
$ 24,ooo $ 27,000
Interest Expense
Income before Taxes
$
2 000
22 000
22!ooo $ is,ooo
82
Sample No. 2:
Figure 3-A
Financial and Human Resources Statements
THE DBG CORPORATION
COMPARATIVE B.A.LA.NCE SHEETS
___ . . .DEC»>DER 31
Assets
Total Current Assets
Net Property, Plant, and Equipmen~
Net Investments in Human Resources
Total Assets
Liabilities ar1d Stockholders' Eauitz
Total Current Liabilities
Long Tenn Debt
Total Liabilities
stoCkholders' Equity:
Capital Stock
Retained Earnings:
F.inancial
Appropriation for
Homan Resources
Total Stocldlolders' Equity
Total Liabilities and Stockholders'
. Equity
-
-
-
1976
1975
1977
$ 50,000 $ 80,000 $100,000
'150,000 . 160,000 . 180,000
100 2000
85 2ooo
65 2000
!2_oo 2ooo. $325 2000 $345 2000
$ 20,000 $ 35,000 $ 1·7 ,ooo
30,~000
!
30~000
20 2000 ~ 65~000
30~0C2Q
~
Z7 1 000
$llO,OOO $llO,OOO $llO,OOO
40,000
65,000
93,000
lOO.zOOO
g5o 2000
85 2000
65 2000
$268 2000
$260,~000
!300 2000 $325 2000 $345 2000
THE DBG CORPORATION
COMPARATIVE INCONE STATU1ENTS
FOR THE.!EAR ENDED DECEMBER. 31
1976
1977
$100,000 $122,000
Net Sales
Cost of" Sales
6o 2ooo
. 50z000
Gross Profit
$ 5o,oo5 $ 62,000
Selling, General, and Administrative Expenses
23 2000
32 2000
Operating Income
$ 27,000 $ 30,000
Interest Expense
· 2,~000
2,000
Income before Taxes
$ 25,000 $ 28,000
Net Decrease in Human Resource Investment
· 15 000
20,000
_ Adjusted Income before Taxes
$ io!oo5 $ 82560
1
.Buman resources on the balance· sheet are defined as the unexpired
portion of the original costs of recruitment, selection, hiring,
placement, orientation, and on-the-job training of personnel. Two
sources of change affect human resources, (1) amortization based on
expected service life of personnel, and (2) additional investments
in human resources.
83
Sample No. 2:
Figure 3-B
Financial and Human Resources Statements
THE RGS CORPORATION
COMPARATIVE BALANCE SHEETS
DECEMBER 31
Assets
1976
1975
m1
Total Current Assets
$ 50,000 $ 70,000 $ 90,000
Net Property, Plant, and Equipment
.150,000 . 160,000 170,000
Net Investments in Human Resources 1
100,:000 115 2 000 140.zOOQ_
Total Assets
~300.z000 $345,:000 $400 2000
Liabilities and Stockholders' F£1uitz
Total Current Liabilities
Long Term Debt
Total Liabilities
Stockholders 1 Equity:
Capital Stock
~etained Earnings:
Financial
Appropriation for Human
Resources
Total Stockholders' Equity
Total Liabilities and Stockholders'
&}uity
$ 20,000 $ 28,000 $ 33,000
30,000
30,:000
30zOOO
~ 50,:<222, $ 58:000 ~ 63.z000
$110,000 $110,000 $110,000
40,000
62,000
87,000
100.z000 115,zOOO 140,:000
!250.z000 $287 2000 $337.z000
$300,000 $345,000
~400,000
THE RGS CORPORATION
COMPARATIVE INCOME STATEMENTS
FQR THE. YEAR. ENDED DECEMBER 31
1976
1977
$100,000 $120,000
Net Sales
Cost of Sales
. 52,z000
602000
Gross Profit
$ 48,ooo $ 6o,ooo
. 24,zOOO
Selling, General, and Administrative Expenses
33.z000
Operating Income
$ 24,ooo $ 27,000
Interest Expense
21 000
2,000
Income before Taxes
$ 22,ooo $ 25,ooo
Net Increase in Human Resource Investment
· 15 000 · 25,000
.
Adjusted Income before Taxes
$ 37!ooo ~ 5o,ooo
1 Human resources on the balance sheet are defined as the unexpired
portion of the original costs of recruitment, selection, hiring,
placement, orientation, and on-the-job training of personnel. Two
sources of change affect human resources, (1) amortization based on
expected service life of personnel, and (2) additional investments
in human resources.
~
.
84
Sample No. 3:
Figure 4-A
Financial and Human Resources Statements
THE DBG CORPORATION
COMPARATIVE B.A.IJU'ICE SHEETS
DECl!l1BER 31
Assets
1976
1977
1975
Total Current Assets
$ 50,000 $ so,ooo $100,000
Net Property, Plant, and Equipment1
.150,000 . 160,000 180,000
Net Investments in Human Resources
100 2 000
85 2 000
65.zOOO
Total Assets
~300 2 ooo $325zOOO $3h5 2 000
-
Liabilities and Stockholders' Equit;};:
Total Current Liabilities
Long Tenn Debt_
Total Liabilities
Stockholders t Equity:
Capital Stock
Retained Earnings:
Financial
Appropriation for
Haman Resources
Total Stockholders' Equity
Total Liabilities and Stockholders'
' Equity
-
-
$ 20,000 $ 35,000 $ 47,000
30 2 000
30 2 000
30,a000
$ 50zooo $ 65,000 $ 7?,000
$110,000 $110,000 $110,000
40,000
65,000
93,000
85 2000 _65zOOO
lOO,aOOO
$250zOOO
~260 2 000
$300 2000
$325,000 $345,000
~268 2 000
THE DBG CORPORATION
COMPARATIVE D~COHE STATEHENTS
FOR THE. YEAR ENDED DECEMBER 31
1976
1977
$100,000 $122,000
Net Sales
6o 2ooo
Cost of Sales
. 50..l000
Gross Profit
$
$ 62,000
Selling, General, and Administrative Expenses
23 2000
32 2 ooo
Operating Income
$ 27,000 $ 30,000
Interest Expense
· 2,000
2,000
Income before Taxes
$ 2$,000 $ 2"8"; 000
Net Decrease in Human Resource Investment
· 15 000 · 20,000
Adjusted Income before Taxes
$ 1o!ooo $ ~,ooo
1 Human resources on the balance sheet are defined as the uneXpired
portion of the original costs of recruitment, selection, hiring,
placement, orientation, and on-the-job training of personnel. Two
sources of change affect human resources~ (1) amortization based on
expected service life of personnel, and ~2) additional investments
in human resources.
:so;ooo
65
Sample No. 3:
Figure 4-B
Financial and Human Resources Statements
THE RGS CORPORATION
COMPARATIVE BALANCE SHEETS
DECEMBER 31
Assets
1976
1975
1211.
Total Current Assets
$ 50,000 $ 70,000 $ 90,000
Net Property, Plant, and Equipment
.150,000 . 160,000 . 170,000
Net Investments in Human Resources1
100,~000
115 2000 ~4o 2 ooo
Total Assets
!300,~000 $345 2000 $400,z000
Liabilities and Stockholders' E!luitz
Total Current Liabilities
Long Term Debt .
Total Liabilities
Stockholders' Equity:
Capital Stock
Retained Earnings:
Financial
Appropriation for Human
Resources
Total Stockholders' Equity
·····-TotaL LiabiMties -and--Stockholders'Equity
$ 20,000 $ 28,000 $ 33,000
30,~000
30.z000
30.z000
i 50.z000 $ 58zOOO $ 63.z000
$110,000 $110,000 $110,000
40,000
62,000
87,000
1oo 2ooo
115 2000
140.z000
!250.z000 ~287.z000 ~337.z000
----
$300,000
- - - - - -.'.
----
$345,000 $400,000
THE RGS CORPORATION
COMPARATIVE INCOHE STATEt1ENTS
FOR THE. YEAR ENDED DEC:El-lBER 31
-
-
1976
1977
$100,000 $120,000
Net Sales
Cost of Sales
6o 2ooo
52,~000
Gross Profit
$ 48,ooo $ 6o,ooo
Selling, General, and Administrative Expenses
24,~000
33.z000
Operating Income
$ 24,ooo $ 21,ooo
Interest Expense
2 2000
2,000
Income before Taxes
$ 22,000 $ 25,ooo
Net Increase in Human Resource Investment
15,000 · 25 000
. Adjusted Income before Taxes
$ 37 2000 $ 5o:ooo
1 Human resources on the balance sheet are defined as the w1expired
portion of the original costs of recruitment, selection, hir:i.ng,
placement, orientation, and on-the-job training of personnel. Two
sources of change affect human resources, (1) amortization based on
expected service life of personnel, and (2) additional investments
in human resources.
---------------
86
Sample No. 3:
Figure 4-c
Financial Statements Only
THE DBG CORPORATION
BALANCE. SHEETS
COMPARATIVE
._DECEMBER 31
Assets
-
$
1976
1975
Total Current Assets
)let Pr<?perty1 Plant, and Equipment
Total Assets -
-
1977
50,000 $ 80,000 $100,000
. 150.z000 . 160.z000 - 180~000
$200,000 $240,000 $280,000
Liabilities and Stockholders• Equity
·-
Total Current Liabilities
Long Term Debt_
Total Liabilities
.
$ 20,000 $ 35,000 $ 47,000
30.z000
$ 50.z000
30 2000
30,z000
$ 65 2000
$ 77 ,OO.Q
..
StocYJlolders 1 Equity:
Capital Stock
Retained Earnings
Total Stockholders' Equity
$110,000 $110,000 $110,000
93 2000
. 40.z000 - 65:000
$150,000 $175,000 $203,000
Total Liabilities and Stockholders•
- Equity
$200 2000 ,!P240,000 $280,000
THE DBG CORPORATION
COMPARATIVE ll~COME STAT:El1ENTS
FOR .THE. YEA.R ENDED DEC:ElvffiER 31
1976
1977
$100,000 $122,000
Net Sales
Cost of Sales
Gross Profit
$
SeJljng, General, and Administrative Expenses
Operating Income
$ 27,000 $ 30,000
Interest Expense
Income before Taxes
. 50.z000
$
. 60.2000
so,ooo
$ 62,000
. 23 2000
32.z000
2 000
. 22000
$
28,ooo
2s!ooo
87
Figure
Sample No. 3:
4-D
financial .Statements Only
THE RGS CORPORATION
COMPARATIVE BALANCE SHEETS
DECEMBER 31
Assets
Total Current Assets
Net Property, Plant, and Equipnent
Total Assets
-
1976
1975
1977
$ 50,000 $ 70,000 $ 90,000
.150 2000
. 160.z000
170.z000
12oo1 ooo $230.2-ooq, $260.z000
Liabilities and Stockholders 1 F.oui ty
Total Current Liabilities
Debt .
Total Liabilities
Long Tf;)nn
.
$ 20,000 $ 28,000 $ 33,000
302000
$ 5o 2ooo
30.z000
30.z000
$ 58,000 $ 63,000
..
stockholders' Equity:
Capital Stock
Retained_Earnings
Total Stockholders' Equity
$110,000 $110,000 $110,000
. 40 2000
62 2 000
87.z000
~150,000 $172.z000 :£197,000
Total Liabilities and Stockholders'
. Equity
$200,000 $230,000 $260.z000
THE RGS CORPORATION
COMPARATIVE INCOHE STATEHENTS
~:R.. ':rilE. YEAR. ENDED DECEHBER. 31
-
1976
"d:211.
Net Sales
Cost of Sales
Gross Profit
$100,000 $120,000
. 52,~000
60.z000
$ 48,ooo $ 6o,ooo
Selling, General, and Administrative Expenses
Operating Income
f'"'24; 000 $
27,000
2 000
22!ooo
2 000
2s!ooQ
Interest Expense
Income before Taxes
24 2 000
$
$
33,~000
88
Figure 5
Responses to Questionnaire
Sampli
No• 1
Sampl~
No. 2
Samp}b
No. 3
****
Unknmm
Respondent Ranked Both
Companies Equally, or
Refused to Ra...llk
6
3
3
3
Respondent Ranked DBG
Corporation First
Priority (Decreasing
Investment in Human
Resources)
2
3
0
1
Respondent Ranked RGS
Corporation First
Prior-1 ty (Increasing
Investment in Human
Resources)
1
6
4
0
Respondent Disqualified
Self {Incapable of
Responding)
3
2
1
2
9
14
7
4
19%
29%
15%
Total Useable
Responses
Response Rate for
Useable Responses
*Conventional statements only attached to questionnaire.
**Financial statements which included human resources attached to
.. questionnaire.
iHHt-Two sets of financial statements attached to questionnaire:
conventional statements only and statements which included
human resources.
~~Unknown which attachments were received.
89
Figure 6
Calculations
1. Test No. 1 between Sample No. 1 and Sample No. 2:
n:t = 9
n2 ... 14
pl = 1/9 a .lll
p2 .. 8/14 = .571
~· ... ll:J.Pl
+
~ +
n2p2 = (9)(.lll~ : ft4)(.571)
n2
&:.
A
sd
= JZ.<rr(l- '1'1"
... .lll - .571
d
PJ_-P2
z=
d - 0
p
;d.
J(.39)(.61)(1/9
=
)(1/~ + 1/~)
= •39
.208
= .460
6
= ~
= 2.. 21
.20o
(.9728)
= .027
(97% confidence level)
2. Test No. 2 between Sample No. 1 and Sample No. 3:
~ =9
n =7
p1 = 1/9 = .lll
p = 4/7
3
3
p
(9)(.1ll)
+
(7)(.571)
9 + 7
sd
d
+ l/14) =
=J ~ (1 -~ )(1/~
pl-p3
l/n3 ) =
J (.31)(.69)(1/9
•
312
+ 1/7)
= .233
.111 - .571 .. .460
..
d z = ;e
~
+
=
= .571
0
460
= ~
.233
= 1.97
(.9512)
= .0488
(95% confidence level)
3• Test No. 3 between Sample No. l and Combined Samples No. 2 and
No. 3:
p4 = 12/21 .. .571
p
~
= ~P1
+ n4p4
~+~
= (9)(.111) + (21)(.571) ..
:d =J*-<1-*-Hl/~
d
pl-P4
9+n
•
433
l/n4 ) =)(.433)(.567)(1/9 + 1/21) = .197
= .lll - .571 = .460
dp - 0
z .. L>o
sd
p = .0198
+
.460
(.9802)
•
(98% confidence level)
= 197 = 2.33
90
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11
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