A REVISITING HRA / HRR PREPOSITION:HOW TO BRING HUMAN RESOURCE ASSET INTO BALANCE SHEET
Keywords:
While most firms acknowledge the importance of their human resource assets, no firm has as yet tried to show it in its balance sheet. This is due to three main problems: firstly, the absence of a generally acceptable measurement of the value of this asset; secondly, the apparent breach of existing accounting standards and thirdly the possible tax implications. This article offers a solution to all these problems. The author proposes that the financial value of Human Resource Asset should be equal to the excess of NPV of a firm with existing staff over NPV of the same firm computed on the assumption of having an average quality of staff. Once measured, this asset can be brought to books through a formal accounting entry, debiting Human Resource Asset (to be shown in the Balance Sheet as an intangible asset) and crediting Human Resource Reserve (to be shown in the balance sheet as a non-distributable part of equity). The author also proposes periodic adjustment and prescribes accounting treatment for the same.Abstract
While most firms recognize the importance of their human resource assets, no organization has yet reflected this value on its balance sheet. This is primarily due to three challenges: the lack of a universally accepted method for valuing human resources, potential conflicts with existing accounting standards, and possible tax implications. This article offers a solution to address these issues. The author proposes that the financial value of a Human Resource Asset should be calculated as the difference between the net present value (NPV) of a firm with its existing staff and the NPV of the same firm assuming an average quality of staff. Once measured, this asset can be recorded in the accounts by debiting Human Resource Asset (to be presented on the balance sheet as an intangible asset) and crediting Human Resource Reserve (to be shown as a non-distributable component of equity). The author further recommends periodic adjustments and provides guidance on the appropriate accounting treatment for these entries.
