The value of the HR asset on the balance sheet

An integral part of HR management consists of continuous analysis and evaluation of the approved HR strategic plan. This is to facilitate any required course corrections, adjustments and control of the plan and its subsidiary parts during the entire period for which the plan is relevant.

It is important that the value HR brings to the table is consistently established during the analysis and evaluation. Any HR plan works in tandem with the company’s overall strategy and must show how HR’s strategic objectives will assist, support and are vital to the company overall success.

HR’s strategic mandate is demonstrated by its ability to develop, implement, and measure systems that better recruit, attract, train, motivate, retain, and develop its human capital. HR’s value-based strategic mandate also frequently includes how best to foster a culture that facilitates melding the diversity of the human capital into goal directed activity.

An organisation’s human capital refers to the financial worth of its employees’ skills and knowledge. Human capital consists of the employees’ education level and training, their acquired skills, intellect, and their health. Therefore, human capital is considered an intangible asset or value that has the capacity to boost efficiency and effectiveness, resulting ultimately in higher profits.

It can thus be inferred that the more an organisation invests in the training and development of its human capital, the more profitable and successful it will likely become.

I recommend that HR professionals consider including levels of commitment, relevant competencies, or real-time training plans to ensure that all the salient elements of HR value are captured and reported.

Only a fraction of the HR professionals in our local industries possess the expertise, confidence and business acumen to keep up with changes in the HR function, much less shape its new direction. Many business leaders have remained stuck in antiquated mindsets that thwart any attempts at innovation that their HR managers may propose.

However, it is up to HR leadership to build a compelling business case for how HR can support the corporate strategy and thereby create HR value. HR leaders seeking to build HR value, must identify credible and feasible solutions and responses to the contemporary challenges of identifying the right talent and providing the support and tools to develop and retain the best people.

Success in this area should be measured by relevant performance measurement tools and metrics. There should be a measurement system that showcases the impact of HR on business performance by showing the role HR plays in implementing strategy.

One key measurement tool in value creation is the return on investment (ROI). Companies must consider the value of investing in the training of their human capital and the development of the requisite skills needed to keep the business sustainable and achieve its corporate objectives and be made to view this as an investment and not as an expense (incidentally, an "expense" that is frequently the first item to be removed or reduced during periods of budgetary revision).

The premise is that if you hire, train and place employees effectively, the average revenue per employee will increase as a result. A useful measure is revenue per employee (total revenue/the number of employees).

Another measure is the human capital ROI or HCROI. This is an HR metric that evaluates the financial value added by the organisation’s workforce against the money spent on them in terms of salaries and other benefits. In layman’s terms, it is the amount of profit obtained by an organisation against every dollar invested in their human capital compensation.

I am certain your organisation’s CEO or you yourself have said that “employees are the greatest asset.” Therefore, I ask: should accounting practices consider adopting HR value as an intangible asset on an organisation’s balance sheet?

It is well established in the sporting world that professional basketball and football players are bought and sold just as an organisation would sell its goods or services. Therefore, I would submit, it is time we now consider incorporating the HR asset into our financial statements, as opposed to only including in our financials the employees' salaries wages, and training as costs expensed to the account.

This is not a far-fetched suggestion, as the investors and shareholders in most organisations do acknowledge the importance of HR value and its direct relationship to the success and profitability of the organisation.

I must point out, however, that three major challenges exist for any consideration of including this on your organisation’s balance sheet. The first is the absence of a generally acceptable measurement of the value of this asset; second is the apparent lack of relevant and supporting accounting standards; and finally the possibilities of tax implications. The first and second challenges are probably not very difficult to overcome if the International Accounting Standards Organisation gives this priority attention. The tax issue is, however, a different matter, which of course will be country-specific.

The advantage of the inclusion of HR value in your organisation’s balance sheet would allow you to quantifiably reflect the most valued asset, as well as present the most accurate value of the organisation’s actual HR asset. It also has the potential to allow for intermittent modifications or improvements of the value of the HR asset.

Human capital is and will remain an organisation’s most crucial resource. Your workforce can either make or break your organisation, making it a true lifeline of your company. Investing, tracking and calculating your organisation’s HR value can therefore prove to be a prudent organisational decision.