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Human Capital Accounting As A Means Of Enhancing Information Disclosure In Financial Reports

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This research work is aimed at providing the missing link through human capital accounting as a means of enhancing disclosure in financial reporting with particular reference to Emenite Ltd, while carrying out this research work these are the areas that this research work concentrated. The first chapter is the introductory part of the research work. This chapter also contains the background of the study, statement of problems, research Question etc. Data for the study was sourced from two main sources. Which includes: Primary data: Questionnaires and oral interviews was used to collect information from the respondents. Secondary data : Journals, magazine and other relevant materials relating to the area of my investigation will be review. Extensive literature review was carried out on direct literature and indirect literature on books, journals and past works. The research instrument  used in this study includes oral interview and questionnaire.  The questionnaire is structural as to contain both close and open ended question. Simple tables, pie-charts and percentages were used in treatment of data while chi-square was used in the research work. Based on the findings, conclusions were drawn and recommendations were also in the last chapter of this work which is the fifth chapter.




Title page                                               i

Certification page                                      ii

Approval page                                           iii

Dedication                                              iv

Acknowledgement                                     v

Abstract                                                 vii

Table of contents……                                   viii




1.1  Background of the study…                         1

1.2 Statement of problem                              5

1.3 Objective of the study                              12

1.4 Research question                                  13

1.5 Research hypothesis                              13

1.6Significance of the study …                         14

1.7  Limitation of the study                            15

References                                         18



Literature review

2.1  Accounting for human capital…                   

2.2  Why measure human capital values                     31

2.3  The techniques of measurement                   44

2.4  Human capitals in the knowledge-based economy

2.5  HCA to promote lifelong learning                  45

2.6  HCA to promote return-on-investment …          47

2.7  HCA and the assessment of acquired learning …   49

2.8  HCA and the future of Labour relations …          52

2.9  issues of measurement and validation of learning        56

2.10 Implementation of HCA and the portfolio …       58

2.11 Imperatives of effective management of human capital for

optimum performance                             60

References                                         65



Research design and methodology

3.1  Research design                                   68

3.2  Description of respondents ……                    69

3.3  sources of data                                         70

3.4  Population and Sample Size Determination        71

3.5  Methods of investigation…                         73

References                                         74



Presentation and analysis of data

4.1       Analysis of data  ……                              75

4.2      Test of hypotheses…                              85



Summary of Findings, Conclusion And Recommendations

5.1 Summary of findings                                     90

5.2 Conclusion…                                        91

5.3 Recommendation                                   93

Bibliography                                       95

Appendix I                                         97

Appendix II                                        98




       The implementation of Human Capital Accounting (HCA) is an OECD-recommended means of improving the efficiency of human capital investment and utilization. The concept of HCA has been explored and developed by the OECD as a means to understand and implement the necessary adaptations individuals and nations must make to measure and utilize knowledge assets – knowledge resident in human beings – in relation to economic performance and prosperity. In 1996, the OECD concluded that public policy must focus on the development of better signals for competence validations, valuation, accounting and financial reporting. Firms had begun to think of employees as investments rather than costs, and as the cost-to-investment-based thinking evolved, the transition continued towards full accounting of human capital investments as assets that produce returns over an extended period of time. The OECD publications Measuring What People Know: Human Capital Accounting for the Knowledge Economyand Human Capital Investment: An International Comparisonextend the treatment of physical capital to human capital in a discussion of knowledge production, diffusion and consumption in light of the disciplines of economics, accounting and education.

Human capital is defined as the knowledge that individuals acquire during their life and use to produce goods and services or ideas in market or non-market circumstances.According to the OECD, this definition of human capital is non-committal about the source, nature or validation of embodied competences; and helps to focus on two issues: (1) the productive capacity arising from knowledge; and (2) the utility of improving the methods for assessing the productive capacity of human capital. HCA is a method of systematically identifying, measuring and presenting information about the human resources of an organization. It is related to and sometimes confused with such other concepts as: intellectual capital,intellectual potential,knowledge management, Human Resources Accounting (HRA), Human Capital Management (HCM), intangible investmentsand/or intangible assets – which range from the intellectual property rights of patents, trademarks, copyright and registered design through contracts; through trade secrets and public knowledge such as scientific works; to the people-dependent or subjective resources of know-how, networks, organizational culture, and the reputation of product and company.It has been concluded that the concept of HCA is also directly related to human resources management in the knowledge economy, lifelong learning, PLA/PLAR, electronic LMI management, and the electronic learning record.

The basis for interest in the Portfolio, the assessment and recognition of non-formal and informal learning, and Knowledge Management is expediency. Expediency in the areas of human resources development and management, from the individual to the national level, is needed to address the challenges presented by the emerging Knowledge-based Economy, skills shortages, education/training reform, and structural unemployment. For example, in their analysis of the International Adult Literacy Survey (IALS) results, Human Resources Development Canada (HRDC) and Statistics Canada have concluded “that the ‘new’ economy requires workplace arrangements that empower employees to make workplace decisions and challenge them to use existing skills and develop new ones.”9 The Organization for Economic Co-operation and Development (OECD) has deemed it important that nations concern themselves with how and why they invest in and use human capital because a commitment to improving the skills of citizens is one of the principal means for dealing with economic uncertainty. The OECD has concluded that improvements to the systems of human capital acquisition, measurement, accounting and valuation are key factors in helping a nation’s firms to compete in the globalized economy. “Investment in education and training helps form the human capital – the skills and abilities – that is a vital element in assuring economic growth and individual advancement and reducing inequality. It is an important element in combating unemployment and social exclusion.


According to the American Association of Accountants as cited in Rao (2005) “Human Capital Accounting is a process of identifying and measuring data about human resources and communicating this to interested parties.” Based on the assumption that the primary purpose for which accounting information is generated is to facilitate decision making; external users, particularly investors, could benefit immensely from Human Capital Accounting. Potential investors need to know the changes and value in human assets in order to evaluate properly assets and income. 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 human resource pool that cannot be imitated or substituted by its rivals (Barney, 1991).The concept views workers as key resource managers use 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 long term perspective in managing people and urged that people should be considered assets rather than merely variable costs. Consequently, there is an overwhelming case for evolving methods of valuing human capital as an aid to decision making. There was tremendous growth of interest in Human Capital Accounting between 1971 and 1977. One of the companies that took steps to bring approaches of Human Capital Accounting into practice was Berry R. G. (Amaefule, 2008).

Although, it excited interest, it also generated controversy. Some saw the idea of treating people as asset to imply “management ownership or control of employees”. Since early 1980s, companies in industrial nations are moving from production-oriented operations to service-oriented operation. This rekindled interest in Human Capital Accounting and made it to gain more attraction. Consensus is building on the necessity of valuation and accounting for human capital. However, the traditional accounting practice in which only physical and intangible {goodwill} assets are recorded as assets still prevail because problems associated with Human Capital Accounting process are yet to be resolved.

With the surge in investment in the Nigerian stock exchange in recent times, it will be interesting to see what the impact of Human Capital Accounting will have on the selection of stock for investment by stockbrokers, acting on behalf of their clients. There was unprecedented surge in the volume and value of stocks listed in the Nigerian stock market for forty (40) months, propelled by  The statistics show that many Nigerians, more than ever before, were now investing in stocks. Hundreds of billions of naira worth of shares were bought and sold on the floor of the Nigerian exchange daily. Many of the public offerings were several times oversubscribed. However, since March 2008; many investors have watched in bewilderment as the value of their stocks plummeted. This ugly situation of the market eroded the confidence of many investors. The extent of the stock market crash made such investors to resign from investing their income. On the 27th of March, 2009; the index closed at 19,836 base points, a 70.11% drop when compared to its height of 66,371 in March 2008. Some Analysts have predicted that share index may go as low as 18,000 base points before a rebound. Several reasons have been given for the persistent fall in stock prices since March 2008:

• Some see it as a price correction taking place after several stocks were overvalued due to excitement of the public and high liquidity in the economy.

• Another group blames it on poor and inconsistent policy formulation and implementation. Such people cite policies on margin facilities, Banks uniform year end etc.

• Yet another group blames the global financial crisis which started in the USA with the collapse of big banks like Lehman Brothers, Merrill Lynch and WAMU. This group argues further that stock markets all over the world are currently taking a beating of their lives with indexes heading southwards.

• The former Governor of Central Bank of Nigeria blamed the stock market drop on some foreign investors who have pulled their funds out of the Nigerian Stock Market.

The real reasons for the drop may be a combination of these factors. However, it could be seen that investors are no longer motivated by results. Gone are the days when fundamentals count. Good quarterly and audited results published by companies are largely ignored by investors as they hardly affect prices. This may signal that there is a fundamental rethinking by investors of the basis for valuating stock. Investor in Nigeria may now be looking beyond the financials in placing value on stock. A rationale investor would evaluate a company’s performance and value its shares before deciding to invest; if the stock is fairly priced; whether it is likely to do well in future and the like. The traditional method of business/ performance evaluation through financial ratio analysis can be misleading because it tends to have short-term focus. Many critical success factors such as quality and effectiveness of employees are not given adequate consideration. Hedrick (2004) opines that external decision makers should know the changes in human assets in order to evaluate properly the assets and income of an organisation. Although, balanced scorecard framework incorporates qualitative and abstract measures of performance to an enterprise, it suffers from one important deficiency; which measures of performance should be chosen and the fact that scores are not based on any proven economic or financial theory and have no basis in the decision sciences. Human Capital Accounting was developed in response to the criticism of the traditional accounting system for failing to meet the variegated number of users especially long term investors in stock. The practice of regarding all expenditures in human capital formation as immediate charge against income is inconsistent with treatment being accorded comparable outlays on physical assets. American Accounting Association had in 1966 suggested that costs for recruitment and training be capitalized.

Corporate Success now rests on the ability and knowledge of people who can easily adapt to technological charges and drive organization to attain its goals and objectives. With this in mind, acquisition, development and management of human capital by companies of all sizes have become critical. It is therefore important that information on human capital be presented in a way investors can easily factor it into the analysis. The function of human capital accounting is to provide information

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