Human assets accounting

The HRA (IHL; Engl. : Human Asset Accounting ; also: human resource accounting , human capital accounting or human potential into account ) tried the traditional accounting to supplement the economic value of human resources of a company by identifying a value size for the personnel involved.

Historical development

In the mid-1960s, American researchers began to think about how traditional accounting could be expanded to include the human resource component. This area of research was known as Human Resource Accounting . Special attention received u. a. the work of Likert, Brummet, Flamholtz and Pyle. The discussion that arose in the USA was then continued in Germany under the name Human Asset Accounting (HVR). The main subject of the research was the question of the extent to which the elaborated evaluation methods are able to depict the “actual” economic value of human capital . In this context names like Aschoff, Schmidt and Dierkes should be mentioned. Because of theoretical and practical problems in recording and evaluating human assets, the discussion with an anthology edited by Schmidt came to an end. The subject of IHL has been discussed again since the 1990s.

meaning

In times of globalized markets, material goods are freely accessible and exchangeable. Intangible assets - especially committed, motivated and well-trained employees - often become an important success and value creation factor of a company. The view that the value of a company shown in the assets of the commercial balance sheets (e.g. buildings, production facilities) adequately reflects its assets seems to be outdated in times of knowledge- and competence-based economies. The usable performance potential of the employees - that is, the human capital - of a company generates sales and is therefore, in terms of its basic principle, just as much an asset as material production factors . With regard to human capital, however, corporate accounting offers only an insufficient information and decision-making basis for corporate management. The recording and evaluation of human assets by means of IHL is therefore becoming increasingly important for efficient personnel management and thus for the overall economic success of a company.

tasks and goals

The primary goal of IHL is to determine values of the staff working in a company, which can be used both for external communication and for internal control of a company. In addition to the assets listed in the balance sheet, the external reporting of human assets is intended to provide the stakeholders of a company with information about the status of its intangible resources. Since there is a general ban on activating human capital in accordance with the German Commercial Code , information about the value of the work factor of a company is currently only provided on a voluntary basis, e.g. B. on the basis of a detailed group management report . This measure creates transparency about personnel risks and thus trust on the part of the capital market . However, the possibility of comparing companies can only arise if uniform industry standards for measuring human capital are established. The internal IHL serves as a decision-making aid for optimal personnel management. Here, costs and value contribution of past and future personnel investments are carefully weighed against each other. So the IHL z. B. make it clear to what extent a certain personnel development measure can contribute to increasing human capital. The special properties of human work make it difficult to evaluate and generate moral reservations or resistance. Accordingly, the ideal IHL should not only provide reliable information about the quantity, quality and use of human capital, but also meet the needs of employees.

Valuation principles

Relevant evaluation concepts of human wealth accounting (modified from: Fischer-Winkelmann / Hohl (1982): 2639)

With regard to valuation principles, some selected valuation methods are divided into cost and value-based procedures and briefly explained below.

Cost-oriented models (Human Resource Cost Accounting)

Cost-oriented models (also referred to as input-oriented) are characterized by the fact that they do not directly record the effective performance potential of an employee, but rather try to determine this value indirectly - by showing the costs. This is done by recording and measuring all personnel-related corporate expenses (e.g. personnel acquisition or development, costs for replacing an employee).

Valuation with acquisition costs (Brummet / Flamholtz / Pyle 1968)

With this method, the human assets are valued at the actual acquisition costs incurred in the past (acquisition, development, maintenance of employees) and depreciated over the expected useful life. The costs are split into the part that is directly attributable to each employee and the common part. In addition to the immediate difficulty of assigning incurred costs to each employee in a causal manner, it should be noted critically that the method is oriented towards the past. Hence future earnings generated by MA are not taken into account.

Evaluation with opportunity costs (Hekimian / Jones 1967)

The central assumption of this approach is that any asset as a scarce resource only has value if there is an alternative use for this asset. In order to be able to determine the value of an employee, the authors propose to carry out simulated in-house auctions in which different departments compete for individual employees. The addition of the maximum offer prices results in the human assets as a value that depicts the lost benefit of an alternative use ( opportunity costs ) of individual employees. Thus, only those employees who are seen as scarce resources are assessed in this procedure. Employees who can be found on the labor market without difficulty or specialists who cannot change departments at will are not recorded and therefore not assessed.

Valuation with replacement costs (Flamholtz 1974)

Example of determining human capital on the basis of replacement costs (based on Persch (2003): 105):

			recruitment			training	Loss of productivity
Functional area	Number of employees	Average salary of employees p. a. in €	Recruitment costs in%	Recruiting costs per employee	Training costs per employee in €	Starting efficiency in%	It takes months to achieve 100% productivity

marketing	5	50000	10	5000	2000	40	2
distribution	20th	70000	10	7000	5000	60	2
R&D	5	75000	15th	11250	5000	40	3
production	40	40000	5	2000	0	80	1
Administrator	5	50000	12	6000	2000	75	2
management	3	100,000	30th	30000	7000	35	6th

The value of human assets is to be recorded by determining the costs that would arise if an employee had to leave his position and be replaced by a new employee of equal value. The replacement costs can be recorded personally by using the knowledge and skills of the leaving employee as a basis for comparison, or job-related by evaluating the job-specific requirements. The valuation of human assets is based on updated acquisition costs.

Possibilities and limits of IHL using the example of valuation with replacement costs

As mentioned above, this valuation method is based on the consideration that an equivalent MA strain would have to be newly procured on the market. The calculation is based on three cost components:

Costs for recruiting new employees
Training costs for new employees
Cost of productivity loss

Adding these components together calculates the replacement cost of human capital. The recruiting costs are determined as a percentage of the annual salary based on the experience of the HR department. The training costs vary according to functional areas, so it is assumed that the employees in the production area do not need a special training program. It is assumed that the employees do not immediately achieve one hundred percent productivity . The efficiency that was lacking until then is shown in the fictitious loss of productivity. The value of human assets is then calculated from the sum of the costs for recruitment, training and productivity losses. This example shows that the problems with the job-related assessment of human assets are caused by the subjectivity of the data collected. The assessment becomes almost impossible if it is to be carried out on a personal basis. Because how can an MA with its personal knowledge, skills, professional experience and an abundance of psychomotor, cognitive and affective characteristics be recorded and expressed in monetary terms? And - assuming this evaluation problem can be solved - how can the performance potential of the new employee be measured adequately? Due to partially unsolvable evaluation problems and time-consuming data acquisition, Flamholtz's approach was hardly used in practice and not further developed. However, this method can serve as an information system for personnel management by providing data on the monetary advantages and disadvantages of internal or external staffing or on the costs of an unfilled position.

Value-based models (Human Resource Value Accounting)

IHL's value-based approaches relate to the employee's contribution to the organization. Depending on the procedure, the determination of value-based data is based on both past and future time periods. Value-oriented processes are also referred to as output-oriented processes . In addition to the three methods explained below, there are a number of modified and further developed methods for determining human capital. These include u. a. the method of future corporate profits (Brummet / Flamholtz / Pyle), the determination by means of individual and organizational value determinants (Flamholtz) or the concept of workonomics (Strack).

Goodwill method (Hermanson 1964)

This procedure for evaluating human assets is based on the company profits of the past business period and is therefore oriented towards the past. First, the profitability of the company under evaluation is measured. A comparison of this with the average profitability of the industry results in a profit difference, the net present value of which is to be equated with the value of human assets . Human assets are therefore the difference between the balance sheet and actual assets (so-called goodwill) of a company.

Method of behavioral variables (Likert / Bowers 1967)

This model tries to take into account not only the economic but also the social dimension of human capital. The determinants of human capital are subdivided into three groups of variables that are linked to one another in a chain of effects. Causal variables can be determined by corporate management itself (e.g. management style , organizational structure ). The group of intervening variables (e.g. working atmosphere , motivation ) is influenced by the causal variables and in turn influences the so-called result variables (e.g. productivity , market share ). Since this concept does not provide any monetary values, but is based solely on the interpretation of the causal relationships, it is difficult to use in practice.

Method of future performance contributions (Flamholtz 1974)

This evaluation procedure defines human capital as the sum of the evaluated individual future contributions of the workforce of a company to its overall performance. The value of the performance contribution of an employee depends on his position in the company hierarchy, his performance level there and the remaining duration of his activity in each position. Since costs incurred in the past are not considered, but rather the expected future performance of the employees, a large part of the data must be estimated using the probability of occurrence.

Possibilities and limits of IHL using the example of the method of future performance contributions

The method of future performance contributions according to Flamholtz is considered to be the most differentiated approach to date for evaluating a company's human assets. For the first time, this procedure takes into account the double dependency of human assets, i.e. H. The value of an employee is not only determined here from their individual contribution to performance, but is also dependent on the specific circumstances of the respective company. The orientation towards future values is to be assessed positively. Finally, recommendations for action for the future should be derived from an IHL. At the same time, however, there are also major recording problems. Future value determinants cannot be measured directly, but must be estimated using probabilities. The necessary forecasts are fraught with uncertainty. On the one hand, the future output potential of an employee is only partially predictable. On the other hand, there is uncertainty about which part of the actual performance potential of an employee is really available to the company. The possibilities and limits of capturing human capital are also illustrated by the following example. In theory, it makes sense to take future career paths into account: both differences between the performance contributions per employee and limited company affiliation are assumed. In practice, however, these parameters cannot be precisely assessed. According to the approach, the method of future performance contributions provides concrete figures for the value of human assets. In view of the econometric difficulties, however, these can only be classified as pseudo-accurate and can therefore only be used in practice with reservations. The goal of greater transparency for the capital market - at least when it comes to comparing companies ( benchmarking ) - is also missed, as company-specific variables are used almost exclusively.

The social dimension of IHL

The task of IHL is to quantify the employee value of a company. Ethical concerns are often voiced against this concept of treating employees as an asset : the operationalization of human capital runs the risk of degrading employees to costly production factors. The question arises as to who owns the human capital. An employment contract does not make people the property of the company, it merely acquires the right to use their performance potential. The owner of the human capital is always the respective employee. The employer therefore has only limited power of disposal over the human resources of his company. It is up to companies to encourage their employees in such a way that they make the greatest possible contribution to their success. If one looks at IHL from this perspective of employee orientation, ethical concerns can be largely rejected. How much of their performance potential employees actually bring into the company depends largely on the organizational framework conditions surrounding them. These vary from one company to another and depend on a large number of interdependencies (e.g. social networks , company structure, norms , corporate culture ). An employee's environment has a major impact on their performance or willingness to perform. For a comprehensive assessment of human assets, not only the economic key figures of the workforce, but equally so-called soft factors such as their work ethic, social skills , motivation or loyalty would have to be taken into account. The neglect of this social dimension of human capital is one of the most frequent criticisms of IHL methods that have existed to date.

Conclusion

To what extent employees or their performance contributions can be represented in monetary terms and in figures remains questionable despite a large number of theoretical concepts. A fundamental problem is that there is no single definition of what really constitutes the value of human capital. The assessment of human capital can only be meaningful in the context of specific situations and questions. The entrepreneurial success of an IHL depends essentially on the quality of the information obtained. Despite extensive studies, the existing measures for evaluating human assets are far from being sufficient. The above remarks on some special IHL procedures show by way of example that the analysis and measurement of human capital is not possible by means of a simple measure, if one wants to do justice to its complex and dynamic character.

In practice, the IHL procedures are rarely used due to methodological and ethical-moral concerns (employees as “ goods ”) and for reasons of uncertainty about the future value of an employee. However, taking into account the underlying data and the objective of the investigation, the human capital account still provides a large amount of additional information for both internal accounting and external reporting. In view of the high labor costs and the increasing awareness of the value of the workforce within knowledge-based societies, the need to further develop the IHL concept remains undisputed. The author Herbert Schmidt summarizes this in his book on human wealth accounting as follows:

"Business research in this area must not be limited to the development of theoretical models, it must rather work out methods that can be applied without restriction in operational practice and lead to evaluable results."

literature

C. Aschoff: Company human resources. Basics of a human asset accounting . Business Administration Vlg. Dr. Th. Gabler, Wiesbaden 1978.
WF Fischer-Winkelmann, EK Hohl: Concepts and problems of human wealth accounting . In: The company . Vol. 35, H. 51/52, 1982, pp. 2636-2644.
EG Flamholtz: Human resource accounting: advances in concepts, methods and applications . Kluwer Acad. Publ., Boston 1999.
M. Gebauer: Company valuation on the basis of human capital . Josef Eul Vlg., Cologne 2005.
A. Marschlich, J. Menninger: Human capital as a contribution to value reporting . In: Controlling & Management . Vol. 50, H. 3, 2006, pp. 32-41.
OECD : Measuring What People Know. Human Capital Accounting for the Knowledge Economy . OECD, Paris 1996.
OECD: Human Capital Investment. An International Comparison . OECD, Paris 1998.
P.-R. Persch: The evaluation of human capital - a critical analysis . In: University publications on human resources . Ed. TR Hummel et al., Vol. 36, Rainer Hampp Verlag, Munich 2003.
H. Schmidt (Ed.): Human wealth calculation. Tools to complement corporate accounting - concepts and experiences . De Gruyter Vlg., New York 1982.
D. Streich: Value-oriented personnel management: Theoretical concepts and empirical findings for the monetary quantification of company human capital . Lang Vlg., Frankfurt am Main 2006.