*RECORDING OF HUMAN RESOURCE VALUE IN THE
FINANCIAL STATEMENT FOR MALAYSIAN ORGANIZATIONS
Miin Huui Lee
School of Business, Swinburne University of Technology (Sarawak Campus)
Jalan Simpang Tiga, 93576 Kuching, Sarawak Malaysia
[email protected]
Mohammad Saeed
Faculty of Business Administration
Universiti Tun Adbul Razak Universiti
[email protected]
Abstract
The objectives of this paper are to analyze the Disclosures of Human Resource value in
financial statements of Malaysian companies and the advantages attributed by executing
such a practice. The changes in the global economy have transformed traditional industrial
driven practice to a knowledge-based and service based intensive economy. With the
economy being swayed towards a service and knowledge oriented economy, organizations
should realize that Human Resource is a critical asset to their operations.
Introduction
The traditional accounting valuation was viewed as sufficient reflection of organization
tangible assets like building, plant, machinery, and others. The traditional valuation is yet
to recognize the human resource value which has dominated the organization’s total value.
Traditional accounting is not a process, but a collection of processes. Traditional
accounting does not identify major components of economic value and is incomplete.
Traditional accounting does not appropriately measure the values it does identify. It fails to
report shareholder value to the shareholder and it is lacks relevance. It is not oriented
towards decision making. It does not properly inform and is not designed with its principal
end-users in mind. 1
Dzinkowski (2000) had also summarized the standard accounting position as follows in
recognizing the intangible assets which include the human capital: Standard accounting
models were designed for informing organization management and stakeholders on shares
and flows of financial value. Most of these are quantifiable and subject to generally
accepted accounting principles and practices. In contrast, intellectual capital is a relatively
1
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new and enigmatic concept, relating primarily to the intangible, highly mutable assets of
the firm. As such, the current accounting model does not adequately capture their value nor
represent them in a concise, meaningful format.
In view of the function of the accounting system as the key accountability and reporting
stewardship mechanism, this shortcoming has actually misguided organizations and failed
to reflect some of their more valuable intangible asset- human resource. Especially in the
service oriented industry, such as computer software organizations, consultancy firms,
entertainment agencies and higher education institutions, whose main operations is to
provide intellectual enlightenment for their respective clients, it relies very much on the
human resources in the organization’s operation. Circumstantially, to quantify human
resource as a cost in such organization might not be appropriate. Human resource is more
important than the physical assets in this instance; the financial statement should be more
informative with the reflection of the value of the human resource.
Most of the literatures produced to date on human resource recording are mainly from US,
Australia and European Countries such as UK, Sweden and Scandinavia. Limited
literatures have been produced in relation to the recording of human resource value in
Malaysian organizations. Hypothetically it showed that there could be very little
knowledge among organizations in the area of Human Resource Accounting in Malaysia.
The objectives of this paper is to identify current situation of disclosures of recording
human resource value in financial statement of Malaysian companies and identify the
perceptions from the respondents of questionnaire the advantages attributed by executing
such a practice.
Literature Review
There has been growing evidence of the positive correlation between quality of human
resources and good organizational performance. Research evidence by Eliasson &
Braunerhjelm P (1989) on 137 Swedish engineering organizations, and Gratton,(2000)
looked at selected high performing organizations, both showed that financial outcomes of
human resource investment has significant positive correlation between an increase in the
organizations competence share and value added. According to further research among top
UK organizations as well as similar investigation being carried out in the U.S. and other
European countries, it further confirmed that human resource measurement and reporting
can lead to improved profitability and competitiveness of an organization. (Kee F. &
Richard Y 2003)
There is also research showed by Sveiby (1997) that some companies measure their human
resource but do not include the value in the annual report as they see that it is pointless
given the current accounting concepts which as no model, rules and regulations for this
kind of reporting. Furthermore companies also afraid to give away too much information.
John G., Edward E, & Gary L (2001) also stated in their report that the slow development
of the concept of recording of human resource value. It is greatly due to the absence of
demonstrated usefulness in the accounting field. This is further reinforced through the
research by Sveiby (1997), stated that the attempts to convert people or competencies into
financial term, although are theoretically interesting, but it had not proved entirely useful to
managers. According to Sveiby, recording of human resource value in financial statement
should be used of as a set of techniques that provide a more balanced perspective, whereby
it could be used to as a long term drivers of financial success, performance and value. From
the research paper by Wallman S. (1996), it also showed that the primary obstacles of the
area of Human Resource Accounting is related to valuation difficulties, the inherent
uncertainty of the value to be included in the financial statement and ultimately the
potential for fraud in this area.
Nevertheless, with some of the problem faced in recording human resource value, there
were also research shows that there has been a revived interest in the concept in the 90’s.
Further with the consultation paper by the UK Government, Accounting for People, it has
required view on which the human resource and human capital management could be
usefully disclosed in the annual report and account package. As such, it is believed that the
disclosure of the human resource is likely to be demanded in the future accounting report.
(Shraddha V. & Philip D. 2004)
Methodology
With reference to many previous researches it showed that the problems of the concept of
recording human resource are the non acceptance and unawareness of the concept and the
absence of demonstration to substantiate the usefulness. (John G., Edward E, & Gary L
2001). This could be the situation which is arising in Malaysia.
A survey questionnaire approach was used to gather data from 90 randomly selected
organizations from Malaysia. This marks the primary stage of the research project to
establish the perspectives of Malaysian’s organizations towards the Human Resource
Accounting concept. A self completion questionnaire was sent out to large, medium and
small scale organizations. 34 responses were received representing a response rate of 38%.
As the research is in the progressive stage, the present report is based on a sample of 90
organizations. Data analysis was carried out on the responses from the survey. Though not
so conclusive owing to the small sample nevertheless it shows a light of the Human
Resource Accounting Concepts from the Malaysian’s organizations perspectives. Further
research will be developed to enhance the finding in this area in future.
Findings
Characteristics of sample of organizations
In terms of the industry, a breakdown of replies received in the different industry groupings
in percentage is given in table 1 and bar chart shows the organizations who had participated
in the survey. The category “others” was represented in the sample by real estate dealers
and Advertising/multimedia/design companies. A total of 90 surveys were sent and only 34
participants responded.
Table 1:
Sector
No of replies
%
6
4
5
7
17.65
11.76
14.70
20.59
% excluding “other”
sector
20.00
13.33
16.67
23.00
8
4
34
23.53
11.77
100.00
27.00
100.00
Manufacturing
Accounting / Audit
Construction
Wholesales & retail
trade
Governmant Services
Others
Total
Participants
6
4
8
5
4
Ot
he
rs
7
Ma
nu
fac
t ur
Ac
ing
co
un
t in
g&
Au
d it
Co
ns
W
tru
ho
ct i
les
on
a le
&
Re
t ai
lT
rad
Go
ve
e
rn
me
nt
Se
r vi
ce
s
10
8
6
4
2
0
Disclosure of human resource value in financial statement
no of
participants
Of the 34 replies that were received, none of the sample organizations in Malaysia are
practicing the recording of human resource value in the financial statement in any form.
Awareness of the concept of recording human resource
67.65% (23 respondents out of 34) are aware of the Human Resource Accounting concept
but no implementation of the concept in the organization.
Awareness of Respondents
7
6
6
5
4
4
4
4
3
3
Respondents
2
2
1
O
th
er
s
s
en
tS
er
vic
e
Tr
ad
e
Re
ta
il
&
e
W
ho
le
sa
l
G
ov
er
nm
ct
io
n
Co
ns
tru
Au
di
t
&
in
g
Ac
co
un
t
M
an
uf
ac
t
ur
in
g
0
Comparison of the respodents and awareness of the respondents in recording of
human resource value
Type of Industry
Manufacturing
Accounting and
audit
Construction
Wholesale & retail
Government services
Others
Number of Awareness of
Respodents Respondents
6
4
2
4
Percentage of
respodents awareness
in human resource
value for different type
of industry
33.33%
100%
5
7
8
4
4
4
6
3
80%
57.14%
75%
75%
34
23
From the analysis, it shows that the respondents in the Accounting and audit are well aware
of the concept of recording human resource value follow by respondents from construction
, government and others. Respondents from manufacturing shows the least knowledge in
the concept.
Implications of Human Resource Accounting
In this section, data has been collected in respond to the importance of valuing/ measuring
of human resource from the 23 respondents with knowledge of human resource recording.
78.26 % of the respondents stated that the measurement of human resource was very
important or extremely important in their organization. The rest 21.74% of the respondents,
stated that the measurement of human resources was not important, somewhat important or
of moderate importance.
A list of statements was given to the respondents to consider and indicate in a five point
scale how strongly they agreed with it. The following three statements have been ranked of
the most important reasons for recording and measuring human resource in an organization.
It has been given above 75% of all respondents.
Important reasons for measuring human resources
The knowledge and skill of our people are our most important
source of sustained competitive advantages.
% agreeing or
strongly agreeing
with the reasons
91.3%
Measuring of human resource will give the management needed
information about people resources in the organization so to
identify the support given in business strategies.
82.60%
Measurement helps with strategic planning
78.26%
Of other scales of importance, from around 25% to around 75% agreeing or strongly
agreeing with the reasons by all respondents:
i.
The concept of Human Resource Accounting would increase the productivity of
human resources. With the monetary value being attached to human resource, skills, talents
and devotions, this would boost the morale, loyalty and initiative of employees.
ii.
Measuring of human resource creates the sense of belonging in the employees’
mind towards the organization and this eventually will increase the productivity.
iii.
Failure to measure their value and account for the human cost will reduce the
effectiveness of the organization. Capitalizing the human resource would also assists in
restoring individual relationships between management and the employees in a complex
organization.
iv.
Human Resource measurement and recording would enable managers to identify
the investment of the human resource and the job requirement of employees.
v.
Human Resource Accounting would quantify information about human resources
for use in the manager’s decision making and for evaluation of management’s utilization of
human resources.
vi.
Human Resource Accounting would attempt to assess the appreciation of an
employee who perform well and would otherwise go unrecognized.
vii.
The maintenance of Human Resource information will enable the organizations to
make more accurate decision when it comes to recruitment, retention, retrenchment and
any human relations costs related programme and budgetary control and as benchmark
measure.
viii.
Human Resource measurement and recording would be able to provide information
externally to investors in order to attract capital, to provide true and fair view of financial
position of organizations.
Conclusion
From the study, it shows that there were no measures of human resources that were
currently being introduced as stated by the respondents. Those who are aware of the human
resource recording concept are able to identify the advantages of implementing the concept.
From data collected it shows that the respondents acknowledge that the knowledge and
skill of people are most important source of sustained competitive advantages. Recording
of human resource will enable the organization to recognize the profitability that their
human resource can generate for the organizations. Human Resource Accounting will in a
way act as a measurement tool to assist organizations in their planning, investing,
developing and empowerment of the human resource in an organization. Organizations
may also be able to realize the return of investment of certain programme which will
increase the efficiency and effectiveness of the human resource and could be further
utilized as a benchmark measurement as inter-company comparison or for the same
industry.
Most organizations are aware that employees are their greatest assets and they are the
driving force behind the future success of any organization. In Malaysia, the concept of
human resource recording is still very immature. It is important to organizations in
Malaysia to take steps to assess and to present the value of their human resource even
though it is not a popular concept for Malaysian organizations as it is a well accept concept
which could add competitive edge to organizations.
Owing to the low response rate, though the results of the research is not so conclusive to
be able to make a generalization of the research, it actually shows a light of the concept in
human resource recording from the Malaysian’s organizations perspectives. Further
research will be developed to enhance the finding in this area in future.
A few questions have yet to be addressed for future research:
1. How to educate the users / organizations in Malaysia on the usefulness of measuring
human resource value?
2. Who should drive the measurement of human resources?
3. Model of recording of human resource value.
References
Dzinkowsi, R.(2000), The measurement and management of intellectual capital’,
Management Accounting, p32
Eliasson, G. & Braunerhjelm P (1989), Intangible, Human embodied capital and firm
performance, the micro foundations of Economic Growth
Gratton, Lynda, ‘Living strategy: Putting People at the heart of corporate purpose’,(2000)
,p.10
John G, Edward E &Gary L.(2001), ‘Human Resource Accounting :A critical Assessment’
Human Resource Accounting ,p.15
Kee F. & Richard Y., ‘Human capital Measurement and Reporting’ (2003)
Shraddha V. & Philip D. (2004), ‘Measuring the value of human resources’ Accounting
and Business.May 2004,p 46
Sveiby, K.E. (1997). The New Organisation Wealth: Managing and Measuring Knowlwdge
based Assets, San Francisco: Berrett- Koehler Publisers Inc.
Wallman, S. (1996), ‘The future of accounting and financial reporting.’ The colorish
approach. Accounting Horizons.p.81-91