Human Capital Handbook 2011

 

Measuring What People Know: Human Capital Accounting for the Knowledge Economy


Produced by Alison Gill

Is human capital accounting theoretically possible and practically feasible? Economists estimate human capital on the basis of years of schooling or formal educational attainment levels, regardless of actual productive capacity. Human capital accounting in a business context is an attempt to place a financial figure on the knowledge and skills of an organization's employees or human capital. To date, there is no legal requirement for firms to report on human capital. Furthermore, financial accounting and reporting ignore even these crude measures, leaving human capital off the balance sheet for want of rules or conventions.

Financial statements provide a valuable but only partial picture of a business, they keep score based on history but they are ill equipped to deal with how a business will perform in the future. Financial statements provide details of ‘assets and liabilities’ and ‘profits and losses’ for ‘accounting purposes’. They do not account for all assets and liabilities nor do they reflect either market values or value created or destroyed. Spurred by the emerging "knowledge economy", government policy makers, human resource managers, financial accountants and educators are developing methods for systematically evaluating and recording knowledge assets acquired through experience, education and training. This steering group hopes to explore what is possible, in terms of economic theory, and what is feasible, from the perspective of accounting practices, to implement new human capital information and decision-making systems.

Crelos’ co-founder, Alison Gill, has joined the steering committee of Human Potential Accounting (HPA)’s Accounting for People 2.0; a body dedicated to changing UK business reporting practice to bring it in to line with the reality of today’s digital economy. Alison hopes that by joining the group she will be able to contribute a substantial body of knowledge from her experience of calculating return on organisational change programmes.

Dr Michael Reddy, Founder of Human Potential Accounting 2.0, is motivated to drive this change agenda following twenty years as Executive Chairman of ICAS (Independent & Advisory Services). During his time as Chairman they took over a million calls from ‘troubled’ employees and audited the mental health status of a variety of organisations, which taught him a lot about what it is like to be an employee in the UK and how UK firms are managed. He describes this as ‘remedial work’ and his experience left him determined to do something more fundamental about the systemic aspects of human capital management. To move from handling the casualties of poor HCM to auditing and transforming the way corporate Britain manages its human capital

The significance of the human capital theory is that it regards people as assets and stresses that investment by organizations in people will generate worthwhile returns. It proposes that sustainable competitive advantage is attained when the firm has a human resource pool that cannot be imitated or substituted by its rivals (Barney, 1991).The concept views workers as key resource managers used to achieve competitive advantage for their companies (Fombrun et al, 1984). Flamholtz, as cited in Rao (2005), defined human resource/capital accounting as accounting for people as an organisational resource. It involves measuring the costs incurred by organisations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organisation. Beer et al (1984) added that there should be a long term perspective in managing people and urged that people should be considered assets rather than merely variable costs. The Accounting for People 2.0 steering committee believe that there is an overwhelming case for evolving methods of valuing human capital as an aid to decision making.

Download the Human Capital Handbook 2011, Accounting for People 2.0 Edition, Autumn/Winter 2010

For further information about this article please contact ali.gill@crelos.com.

Ali Gill CEO and Client Director for the Finance and Banking sectors