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Assessing The Impact Of Human Resources Accounting Practices On The Performance Of Manufacturing Industries In Southwest Nigeria


This study aims to investigate the impact of human resource accounting (HRA) on the overall performance of the organization. By presenting the details of HRA the study identifies various dimensions of organizations’ financial aspects viz., human capital efficiency, organization profitability, return on asset, and return on equity. To understand the impact of various measurements, the study collected required data from 268 responses of human resource and finance departments of manufacturing firms and analyzed the data using linear regression and the result of ANOVA and coefficient values illustrated there is a positive significant effect of HRA on human capital efficiency, organization profitability and return on equity. This is evident that the manufacturing firms in Nigeria are aware of the benefits on HRA of the organization and the only concern is it needs rapid implementation initiatives from the management which is possible with wide awareness across the nation. However, there is no significant effect of HRA on return on assets. This study contributes to the manufacturing firms, human resource departments, and managerial decision-makers to understand the HRA concept and its usefulness to a make positive difference in their financial statements.




  • Background of study

Accounting continues to evolve in response to human civilisation. As human being achieves advancement in concepts and applications, so does accounting. According to Bello (2009), accounting is believed to be an information infrastructure used by economic units to achieve various economic decisions. This means that accounting is an information system that is used for communication purposes and for the purpose of aiding decision making.


Taking decisions related to human resources (HR) had never been so easy without proper knowledge of cost-benefit analysis. As most of the firms anticipate cost-cutting, cost-benefit analysis becomes a powerful tool to assess an extensive range of business prospects. Also, this cost-benefit analysis is proven to calculate and produce promising results against accompanying costs of investment in many HR activities viz., employee training, automation of HR process, etc. across various firms. However, most of the firms currently perceive much easy to look into the cost related to HR planning and implementations, however often face challenges while inspecting benefits in terms of monetary value.

The service companies’ major asset is the human capital and the intellectual ability of their work force. Although all companies need strong and competitive human resource to succeed, the success of service companies largely depends on the quality of their human resource. According to Robbins (2001), the characteristic that differentiate successful organisations from their less successful counterparts in almost every industry is the quality of the people they are able to get and keep. Service companies do invest heavily in employee training to make sure that their employees’ skill levels are kept current (Peris-Ortiz, 2009; Verma & Dewe, 2004; Robbins, 2001). Thus, money spent on improving employees capacity is one of the best investments that business executives could make (Owen, 1825).


The traditional accounting practice is not able to place value on such intangible assets as employee capabilities and knowledge. Newman (1999) stated that traditional accounting views virtually all expenditure related to the improvement and intellectual development of an organisation’s human resource as expenses. The implication of this system of recognition is that such expenses are unimportant beyond the current period. This may not be true because employee’s knowledge and skills are important to the future of the organisation. For this reason, the recognition of human resource as an asset becomes necessary provided that the true state of the organisation needs to be revealed.


Newman (1999) also stated that the United States economy has changed from one in which business activity is of an industrial nature to one in which most business activity is of a service nature. His study concluded that investors in the United States are largely, if not completely, skewed towards investing in service companies/businesses rather than in manufacturing companies/businesses. In service businesses, the intellectual capital or the capability and ability of human resources is paramount for success. In this vein, organisations do spend a lot of money in ensuring that their human intellectual capital is enhanced significantly through training and development policies and programs. It is hard to justify the human capital investment, unless the HR departments shift their views from the process costs to financial return and benefits. While the cost aspects include both direct and indirect costs like office supplies, payments to trainers, developing a new system, loss of employees’ productive time; benefit aspects include an increase in production, improve quality and efficiency, generation of firms’ revenue. Therefore, the HRA approach is imperative and crucial to bridge a gap between a firm’s human capital and expected cost-benefit outcomes to accomplish critical objectives. On the other side, it promises to assist the HR departments to develop comparative alternatives. Based on this, the human resource experts are developing new HR models to implement in their business with the hope to serve their employees and firms better and create a difference in the market with a deep insight into future benefits. This motivated the author to explore more on HRA and identify which factors logically proven to be the driving factors in the HR arena. Though there were limited attempts especially in Nigeria answering few research questions such as the reasons why firms consider HRA, what is its role and what do they accomplish out of it, the future impact of HRA on firms’ profitability, current and future goals of a firm and their consequences after executing HRA. There exists a research gap in understanding what are the most essential HRA determinants that are driving firms’ performance in terms of profitability. Therefore, this study identifies all the components of HRA that composes in assessing human assets and human resource valuation models.


1.2 Statement of Problem

Human resource constitutes a valuable resource to every organisation whether manufacturing–oriented or service-oriented. It is as important as the machines, materials and money without whom other resources cannot be blended and coordinated for the purpose of achieving profitability. Characteristics such as experience, skill, knowledge, and age affect the productivity of human resource. Reporting information on the value of a company’s human resource via the use of a standard and realistic model could add value to the information content of financial reports of organisations and hence assist users in making informed decisions. In addition, Jasrotia (2004) pointed out that the information generated by HRA systems can be put to use for taking a variety of managerial decisions. She added that decisions on recruitment planning, turnover analysis, personnel advancement analysis and capital budgeting could be aided by the HRA system; and help organisations in taking informed decisions thereon.


The advancement of societies from manufacturing-based to information-based; and the gradual transformation to knowledge-based societies requires the unfreezing of certain processes and procedures including such relating to management, accounting and finance. In knowledge society, human resource constitutes the focal point on which all economic activities revolve. A knowledge economy is one in which the generation and exploitation of knowledge play the predominant part in the creation of wealth (United Kingdom Department of Trade & Industry, 1998). In knowledge-based economies, the major asset is thus the knowledge workers who manipulate symbols rather than machines. In this vein, reporting the financial performance and position of knowledge-based companies (service- based companies) will invariably be incomplete without reporting the value of human resource.

Though it was cited in Enofe et al. (2013) study that HRA concept is very popular, it lacks general acceptability and still many organizations are attempting to understand it conceptually. The recognition of HRA is lagging as there are no accounting standards that guide the consideration dimensions of HR in financial statements. However, it is considered that human resource is the intellectual asset of any firm as their employees’ competencies and capabilities determine the achievement of an organization (Bokeno, 2011). Some organization’s financial statements demonstrate the huge amount of money spent on employee development like training, employee welfare, medical, and insurance are not regarded as an investment rather those costs are company expenses for a particular period which will affect the firm’s value and profit. The foremost issue is how to assess the worth and economic value of employees to the organization and how to determine the cost issues. Therefore, a well-established system of HRA could account for managerial decisions internally and investors’ decisions externally (Fajana, 2002). Rao (2000) asserted that prospective investors can easily decide on their investment in various firms based on investigating the strength and utilization of human assets. It has been observed very few developed and developing countries like Canada, United States, Mexico, and India have implemented HRA and there needs to be a massive consideration globally to recognize and standardize the HRA concept to bring changes in their financial statements. While computing employees’ worth in terms of experience, qualification, and contribution to the organization is a key limitation, it is also hard to predict how long the organization can retain its employees could make it challenging to compute the value for more than a year. Meshack et al. (2013) reported many researchers suggested various approaches to valuing employees. Brumment suggested the original cost method; Likert recommended the replacement cost method; Flamholtz, Bullen and Hua developed the present value method but so far, no method is accepted globally. Till today the HRA concept is mostly restricted to academics but the practical implementation in firms is not observed actively. Many past researchers (Bowers, 1973; Likert, 1967; Schulz, 1961; Flamholz et al., 2002) research on bringing the worth of human in the firm’s financial statements. As such the HRA concept is very new in Nigeria. Hence, this study was conducted to bridge the gap by investigating the impact of HRA on the overall performance of manufacturing firms in Southwest Nigeria.


1.3     Objectives of the Study

In visualizing the concept of HRA, the study attempted to address the identified gaps in the context of manufacturing firms. In this regard, the general objectives are to explore if HRA contributes as a potential measurement tool of human capital efficiency and to conclude if HRA will help improving organizations’ profitability and make difference in a firm’s financial statements. Therefore, the specific objectives are as below.

  1. To determine the impact of HRA on human capital
  2. To determine the impact of HRA on organization
  3. To determine the impact of HRA on return on
  4. To determine the impact of HRA on return on


  • Research Questions
  1. What is the impact of HRA on human capital efficiency?
  2. What is the impact of HRA on organization profitability?
  3. What is the impact of HRA on return on asset?
  4. What is the impact of HRA on return on equity?


1.5 Research Hypothesis

H0: HRA has a significant positive effect on the organizations’ human capital efficiency (HCE)

H0: HRA has a significant positive effect on the organization’s profitability (OP)

H0: HRA has a significant positive effect on the return on asset (ROA


1.6 Significance of the Study

The wide increase in the number of manufacturing companies globally where personnel knowledge, skills, expertise and experience are the key to their success makes the human resource accounting a necessity. Organisations do report on capital and other assets in their financial reports but reporting nothing regarding human resource except as a charge in their income statements. Money spent on hiring, recruiting, training and developing human resources are expensed rather than capitalised. Nowadays, the amount invested by organisations on human resource is very huge and calls for a better way of reporting. The financial information contained in the financial statements of organisations is considered inadequate because of many reasons, which inability to account and report human resource is one.


Human Resource Accounting is relatively a virgin area in accounting and yet to be applied in Nigeria (Kodwani & Tiwari, 2007). This study looks at the possible application of the concept in the human resource accounting in the manufacturing firms in Nigeria. Although some Nigerian researchers attempted to unveil the philosophy and epistemology of Human Resource Accounting, none is yet to bring out the possible ways of applying it in the manufacturing companies.


1.7 Scope of the Study

This study is limited to the human resource accounting Practices of Manufacturing Industries in southwest Nigeria companies in Nigeria. As such, personnel found in the manufacturing-oriented organisations and those working with government, at any level, and its agencies are excluded. The reason behind this delimitation is because of the sensitivity of human resource in the success of profit-motive service organisations and the attention that such organisations usually give to their employees or human resource.

1.8  Limitations

This study attempted to understand the impact of various HRA aspects on the overall organization. Further studies must develop strategies to overcome the losses that firms face during the employee’s span of service in an organization. More studies need to

be conducted to create organizational awareness and the benefits the firm could have by implementing the HRA concept in alignment with cost-cutting efforts in this modern global economy. As the HRA was found to hurt ROA, it was recommended to conduct more studies to validate this finding.


1.9 Organization of the Study

This research study is presented in five chapters and arranged in chronological order, starting from chapter one and ending with chapter five. Chapter one contains the study philosophy and general background information on human resource accounting (HRA) and corporate financial reporting. The details of the problem under study will be incorporated in the chapter. Other aspects to be dealt with in chapter one include the objectives of the study, the statement of the research hypotheses, the significance and scope of the study, limitation and organization of the stydy.

Chapter two reviews literature, documents and statistical records, which are relevant and related to the concept of human resource accounting and its application. The theoretical framework and the modelling process of a standard measure to be used in the valuation of human resource in Nigeria would be properly presented in this chapter.

The research methodology adopted in this study is provided in chapter three and captioned accordingly. In this chapter, the type of research adopted for this study is clearly stated and adequately justified. The population and the sample size through which the relevant data will be collected; and the procedures for their collection are adequately elaborated.

The detailed analysis and interpretations of the data so collected will be provided in chapter four. Thus, the chapter presents and analyses the data collected via interviews, questionnaires and annual reports and accounts of the selected manufacturing companies. The tests of the research hypotheses and the research findings are also provided in this chapter.

Finally, chapter five tagged summary, conclusion and recommendations provides a summary of the entire study and the findings therefrom. It also provides conclusions and relevant recommendations on this research study.


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