Every branch of
management study will inevitably state that Human Resource is the greatest
asset of any business. Even Accountants won’t disagree with this state; except
that we have a very strict definition of the word 'Asset'. This definition of
‘Asset’ according to our Framework for Presentation of Financial Statements
prevents Human Resource from being disclosed in the Balance Sheet of a
business. What a shame?
In this write up,
I want to make an attempt at solving this little problem.
An Introduction
An Asset can be
defined as anything that earns future economic benefit for the business and can
be controlled by the entity. And therein lies the problem, the Human
Resource of a business cannot be controlled by business.
But before we
tackle this situation, let us discuss why it is important to account for Human
Resource and how this will be useful for investors. We have often come across
news of resignation, re-appointment or dismissal of top corporate bosses, and
we also notice that this news is inextricably linked to a report on how the
share price of that company has moved during the day because of such
retirement, re-appointment, etc. Cases of Apple and Infosys could be quoted as
textbook examples for this situation.
This shows that
the investors and concerned about who leads their company. A logical conclusion
of this assessment would mean that the investors will also be concerned about
the lower rungs of the company, i.e., the goings and comings of top performers
in every department at every level of the company. A proper quantitative
disclosure of the Human Resource of a company therefore becomes imperative.
The existing
methods for valuation and disclosure of Human Resource rely on statistical data
and present a bird eye view on the situation. However, these models are
criticized for not taking into consideration the individual capacity of the
employees.
The Thesis
The new idea I
would like to discuss is about actually accounting for the Employee Strength of
an entity just as accounting any other asset, and thereby giving the adequate
disclosure required by any investor. And this can be done by overcoming the
problem of “Control” that an entity does not have over its employee as follows.
Every company has
a consistent internal policy of ranking / rating its employees periodically. These
companies also have a policy to retain their best employees. Recent reports
show that several IT companies want homegrown managers, which means that they
prefer to retain, train and promote the engineers into managers than hiring
externally. All this points to the fact that companies do their best to retain
and control the best performers, i.e., their assets. And one of the Five major
tools used to retain employees is Financial Consideration.
Now let us look
at the scene from a different perspective. Every company has a list of top
performers. In an event that these “most valued employees” put in their papers,
the company has to come up with an offer to retain him/her, an offer that
involves a monetary consideration in the form of pay-hikes, bonuses etc.
Therefore, is it not prudent for the company to create a reserve for the
increased cash outflow in such a situation?
And that
financial consideration which we discussed, will be the amount that has to be
accounted as an Asset on one side, and a reserve on the other. The reserve,
will indicate the amount a company will have to incur to retain its employees.
And the same amount will be accounted as an Asset, for the amount that we have
set aside to retain (control) the employee is his value, and that amount is
indeed the company’s asset.
In order to
prevent the company from inflation of their Balance Sheet, the company policy
must ensure that the amount stated in the Balance Sheet will be utilized if any
of the employees that have been valued tend to leave the organization. The
amounts may be reviewed quarterly and any change in the valuation shall be
disclosed. At the event of utilization of the reserve, Reserve will be debited
against actual cash outflow, and the asset will be written off to P&L.
Advantages
First and
foremost, the amount of Human Resource Asset will become the Masthead of the
company’s balance sheet. Especially for IT companies that heavily depend on
their software engineers, and other industry which requires intensive skilled
labour, the Human Resource Asset, will indicate the value of the employees, the
company’s commitment to retain the employees and also disclose the employee
turnover, and associated risks in the company.
Human Resource
will be measure of leverage for Financial Analysts. Furthermore, statisticians
can use this figure to measure the aggregate development of Human Resource in a
country.
The greatest
advantage of this method is that it measures the value of employees
individually and at the same time, it recognizes a liability that every company
bears, but many might not be aware of. It quantifies the risk that a company
faces, if one of its prominent employee leaves the organization.
Acknowledgement
This project has
been taken up by Mavensmark Consultancy Private Ltd and I would like to thank
its CEO Mr. Deepak for his trust, support and leadership. I would like to thank
CA Revathy Raja for her valuable inputs and for being there with us throughout
the progress of this project. Thank you Prof. CA Ramesh (IIM), for your
guidance, counsel and encouragement. You guys indeed are the pillars of this
write-up.
I am also greatly
thankful to Speridian Technologies, the one company that has truly been a
turning point in developing this model. Thank you Mr. Satish Ganta and Mr.
Nimesh Bhammar for your valuable time and insight. We look for your continued
support in taking this project forward.
Way Ahead
We have discussed
our hypothesis with several persons and found varying opinions on the matter.
The way ahead for the project will be to have more discussions and debate on
the this topic, especially in the accounting and HR community to identify and plug
any flaws that persist in this model. We would also like to try out this model
in major HR Intensive companies and ensure its practicability. We reach out for
support from the entire fraternity for not just this model, but so much more
innovation from Chartered Accountants and CA Students in India.
