Practicing of Human Resources Accounting in Infosys Limited

Transcription

1 Practicing of Human Resources Accounting in Infosys Limited R. B. Sharma Assistant Professor, Department of Accounting College of Business Administration Salman Bin Abdul Aziz University Al Kharj, Kingdom of Saudi Arabia Asha Sharma Assistant Professor, Department of Commerce Mahila P G Mahavidhalaya Jai Narain Vyas University, Jodhpur, INDIA drashasharma.sharma7@gmail.com Abstract The success of the any organization depends on the quality of its human resources, whether it belong to manufacturing, service or a retail outlet. Physical assets are used to increasing earning capacity of any business organization; likewise human resources are important assets and used to increase productivity, earning capacity, increasing the wealth and profit, market value and value. Aim of the study is to analyze HRA in Infosys Ltd. to understand the efficiency of human resources in comparison to fixed assets as well as to find out the impact of increasing the number of employees on profit earning capacity of company. Index Human Resources Accounting, Value Added, efficiency and profitability. I. INTRODUCTION Success of corporate undertakings purely depends upon the quality of human resources. Human resources play the most important part in the development of an enterprise. Human resource accounting (HRA) helps to measure the value of employees, which helps management, take the vital decisions related to human resources in order to increase production. It requires the measurement of the performances of an organization and the optimum use of the resources under its direct and indirect control. It is simply an attempt to identifying measuring and communicating information about human resources and it ought to be viewed as a metaphor. It s the way of thinking about management of people. It is a recording of transactions related to the value of human resources. It is a popular phenomenon among the Indian corporate world is to disclose information relating to human resource in annual statements. In this context, it is necessary to conduct a study to assess the disclosure pattern of HRA information in Indian corporate World. COMPANY PROFILE Infosys Technologies (Infosys) became the first software company to value its human resources in India. The company used the Lev & Schwartz Model and valued its human resources assets at Rs 1.86 billion. Infosys had always given utmost importance to the role of employees in contributing to the company's success. Analysts felt that human resources accounting (HRA) was a step further in Infosys' focusing on its employees. Narayana Murthy (Murthy), the then chairman and managing director of Infosys, said: "Comparing this figure over the years will tell us whether the value of our human resources is appreciating or not. For a knowledge intensive company like ours, that is vital information." The concept of HRA was not new in India. HRA was pioneered by public sector companies like Bharat Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way back in the 197s. However, the concept did not gain much popularity and acceptance during that time. It was only in the mid-199s, after Infosys started valuing its employees, that the concept gained popularity in India. By 22, HR accounting had been introduced by leading software companies like Satyam Computers and DSQ Software, as well as leading manufacturing firms like Reliance Industries. HR managers were quick to respond on the above developments by stating that more and more organizations had now started to realize the importance of skilled workforce. They felt that to be successful in highly competitive markets, companies require to continuously improve the level of performance of their workforce. A. Objectives OBJECTIVES AND HYPOTHESIS The objectives of the study are as under: To study the current practices of HRA in the company To determine employees strength and their valuation To determine revenue growth of the company To study the relation of human resources value and rate of return To find out the relationship between human resources value to fixed assets, current assets, total assets and value 57

2 B. Hypothesis In order to realize the above objectives, the following hypothesis has been formulated. Recent emphasis on intellectual capital (IC) and Human capital disclosure can be attributed partly to the increased interest on enhancing voluntary corporate disclosure of nonfinancial information (AICPA 1994; Bjurstrom, Catasus & Jorlusury, 23; CICA, 1995; DMSTI, 23a; DMSTI, 23b; FASB, 21; IASB, 2; Meritum, 22; Wallman, 1995; Wallman 1996.) Some companies in Europe produce a separate IC statement as a supplement to their annual report or as a separate report. Hypothesis 1 H1: There is significant relationship between No. of employees and EBIT & PAT H11: There is negative relationship between No. of employees and EBIT & PAT Hypothesis 2 H1: There is significant relationship between human resources value to fixed assets, current assets, total assets and value H11: There is negative relationship between human resources value to fixed assets, current assets, total assets and value II. LITERATURE REVIEW In the economics literature, human capital refers to the productive capabilities of people (Becker 1964). Skills, experience, and knowledge have economic value to organizations because they enable it to be productive and adaptable. Thus, people constitute the organization s human capital (Bassey and Arzizeh, 212). However, there have been controversial issues of human capital reporting on whether it is value relevant to be considered as asset, even though its association with company s expected future benefits is not certain. Some group considered it as what people owned from learning, experience and skill while another group delineated it as human capability that is directly linked to the work (AL Maani and Jeradat, 21). Few studies on value relevance of intellectual (human) capital assets include Guthrie, 21; Amir and Lev 1996; Barth, Beaver, and Landsman, 21; Aboody and Lev, 1998; Kohlbeck, 24; Okwy and Christopher 21. The chartered institute of management accountants noted that all drivers of performance and value should be provided to investors including the non financial ones such as intangibles (Starovic &Marr, 23). The financial Accounting Standard Board addressed this issue by encouraging business to voluntarily disclose information regarding their intangibles and intellectual capital (FASB 21). Intellectual capital resources (including human capital) are increasingly important factors on the successful achievement of organizational objectives (Guthrie and Petty, 2). For stakeholders to fully understand an organization and the effectiveness of its managers, it is therefore important that corporate reports adequately reflect all resources used and developed to further the organization s achievement (Boedker et al (25). Williams (21) predicted that a positive relationship exists between a firm s level of performance and its level of intellectual disclosure. Contrary to the prediction, the researcher found a statistically significant inverse relationship between the level of a firm s intellectual capital disclosure and its level of performance. Based on the results of their study they reasoned that once a firm reaches a certain level of performance, it may reduce its level of disclosure to conceal from competitors strategically significant information in an effort to maintain its competitive advantage. Syed (29) examined the relationship between corporate characteristics and HRA disclosure. The study indicates that companies with higher profitability intended to disclose more HRA information. A good financial position intensifies the credibility of information released by a company (Hughes, 1986; Scott, 1994; Beaner, 1989). As a result of the increased credibility the value of the firm is enhanced (Clarkson and Simumic, 1994; Cormier and Magnan, 2). Credibility of information disclosed adds to the value of the enterprise as the details released assists in reducing the risk associated with an investor s decision-making process. This supposes that if human capital is not reported, there is a risk that it is not receiving sufficient attention from management and other stakeholders (Guthrie and Petty, 2), thereby diluting firm s value. To remove this difficulty and get shareholder s attention, many companies are now reporting on their human resources in a mostly non financial format in the annual reports voluntary. III. RESEARCH METHODOLOGY Research methodology comprises the research design, sample design, sources of data, selection of data, various designs and techniques used for analyzing the data. The methodology used for the study at hand is as under: Research Design: The research design used for the research problem in hand is causal research as the objective is to determine which variable might be causing certain behavior, i.e. whether there is a cause and effect relationship between variables. In order to determine cause and effect, it is 58

3 important to hold the variable that is assumed to cause the change in the other variable(s), constant, and then measure the changes in the other variable(s). This type of research is very complex and the researcher can never be completely certain that there are not other factors influencing the causal relationship, especially when dealing with people s attitudes and motivations. Independent Variables: profit, growth, efficiency, earning capacity, evaluating operating performance Dependent Variables: Human resource valuation Methods of Data Collection For the study in hand, both the primary and secondary data was collected. The sources of collecting both the data is as follows: Sources of Primary Data: The primary data for the study was collected directly from target respondents through structured questionnaire. This questionnaire includes the personal information about the respondents. The questions asked to respondents were about the impact of HRA on the growth of the company. Sources of Secondary Data: present study is mainly based on secondary data which were collected from the corporate annual audited reports, company database, published research reports by various industries, related websites, and annual report of different companies of different industry and research organizations. Tools for Analysis of Data Along with the usual statistical tools such as tables, charts, percentages, ratio analysis, mean, standard deviation, correlation, T-test was used for analyzing the data which helps in arriving at sound conclusions. Selection of Company and Period: The present study is mainly intended to examine the comparative financial performance of Infosys Limited for two years in the period between 211 and 212. Result & Discussions For the purpose of paper, financial performance analysis and current practice in human resource accounting is studied. To understand its valuation, human resources strength and revenue and growth of the company, various financial data including financial statement, human resource value statement and data of Employees strength and Revenue growth, has been taken. Research Technique Applied Table: 1 Table 1 HUMAN RESOURCES VALUATION No. of employees Software Personnel (Rs. In crores) change in % Supporter Total Software Personnel Value Of Human Capital Supporter Total Software Personnel Value Of Human Capital Externally Supporter Total Value Of Human Capital And Human Capital Externally Table: 2 HUMAN ASSET VALUE ANALYSIS: INFOSYS (Rs. in crores) Human asset value Fixed assets (Current cost) Current assets (current cost) Total resources(current cost) Turnover Value Turnover/human resource Turnover/fixed assets Turnover/total assets Value /human resources Value /fixed assets Value /total resources

4 Table: 3 Table: 5 HUMAN ASSET VALUE ANALYSIS: INFOSYS Fiscal EMPLOYEES STRENGTH AND REVENUE GROWTH SINCE 1996 Emp. Growth In Per Income Rs.in crores Growth In Per PAT growth% Table: 4 TABLE FOR APPLYING STATISTICAL TOOL Mean Standard deviation co-relation between No. of employees and EBIT co-relation between No. of employees and profit after tax (Rs. in crores) Human asset value Fixed assets (Current cost) Current assets (current cost) Total resources(current cost) Turnover Value No. of Employees ( No.) Turnover/human resource Turnover/fixed assets Turnover/total assets Value /human resources Value /fixed assets Value /total resources Human resource value per employee To test the Hypothesis 1 VI ANALYSIS AND INTERPRETATION H1: There is significant relationship between No. of employees and EBIT & PAT Table 1 indicates about human resources details for two years 211 & 212 and variation in the two years. No. of employees, value of human capital, total value of human capital and value of per human capital and the variations during the two years Table 2 (To verify hypothesis 1), table 2 & 3 are indicates about Employees strength of Infosys. Classification of employees has been categorized on three criteria. One is function area wise where employees are software personnel and supporter. Second is based on gender wise criteria. 65% male and 35% are female. Male dominates in the organization. Third is based on age wise segmented. Majority of employees means 45.8% belongs to age % employees belong to age group Age group 31-4 is at III rank with 17.6%. Age group 41-5 is at IV rank with 1.7%..4% employees belong to 6 and above age group. It shows that most human resource assets in company is consist of 2-25 age group which is the most efficient age group to work in any organization. 6

5 Table 3- It indicates the last 1 years scenario of company employees. Their number, cost, value, Income and PAT are presented by the table. This table helps to understand corelation between human resources and its impact on profitability and growth of the company. Table 4: The various statistical tools are applied to measure the impact of HRA on earning capacity and growth of Infosys. Minimum range of Income in earlier period was 2693 which is enhanced to It is an achievement for a company. Standard deviation indicates that the income is scattered form the central tendency means mean. The strong positive Co-relation between employees and income is , which shows the there is a positive relationship between increase in the number of employees and revenue growth of the company. Same thing is followed on co-relation between employees and PAT. The strong positive Co-relation between employees and PAT is To test the Hypothesis 2 H1: There is significant relationship between human resources value to fixed assets, current assets, total assets and value Turnover/Fixed Assets It shows the optimum utilization of fixed assets. The efficient use of assets can be measured by it. With the help of fixed assets turnover ratio, it is determined that number of times in a year the money is being received from the fixed assets. Earlier it was.18 but it decrease in year 212 to.17 means productivity is decreasing. Turnover/Total Assets Fixed assets (Current cost) Turnover Table 5: (To verify hypothesis 2) Human assets value is being analyzed in the table. Various ratios are calculated to show the relation between human resources value to fixed assets, current assets, total assets and value. Interpretation by each ratio is as: 3 2 Total resources(cu rrent cost) Turnover Turnover/Human Resource Human asset value Turnover It shows the efficient utilization of human resource. The efficiency and productivity is increase during the last year. With the help of human resources turnover ratio, it is determined that number of times in a year the money is being received from the human resources in comparison to investment. Earlier it was but it decrease in year 212 to means productivity is decreasing. These ratios are a measure to determine the managerial efficiency of the concerned business entity. This ratio shows the firm s ability in generating sales from all financial resources to total assets. Infosys turns over its fixed assets faster than last year.. Earlier it was.15 but it decrease in year 212 to.15 means productivity is decreasing. Overall in comparison to turnover ratio, human resources are being efficiently. Total assets are.15 and fixed assets are used.17 but human resources ratio to turnover is.26. It means human resources are being more efficiently used. Value Added/Human Resources 15 5 Human asset value Value 61

6 It measures the impact of human resources on value addition of the company which is decrease in comparison to last year 211. Value addition is.15 in 212 Value Added/Fixed Assets It measures the impact of fixed assets on value addition of the company which is decrease in comparison to last year 211. Value addition is.16 in 212. Value Added/Total Resources Fixed assets (Current cost) Value company towards more productivity, more turn over, profitability and growth direction. V. CONCLUSION Human element is the most important input in any corporate enterprise. The investments directed to raise knowledge; skills and aptitudes of the work force of the organization are the investments in human resource. In this context, it is worthwhile to examine and human resource accounting practices in corporate sector in India. The efforts are made to analyze the current practices of Human Resources Accounting in Infosys Ltd. This study pinpointed that Human resource accounting has great hand in enhancing growth of a company.on the basis of the analysis through the statistical tools like mean, standard deviation, correlation and T- test, the various aspects of uses of human resource accounting is tried to find out. It is found that there is a highly positive correlation between No. of employees and earning capacity (EBIT and PAT) of company. On the basis of last ten year data it can be said that increased in number of employees have positive impact on company s earning capacity. 3 2 It measures the impact of total assets on value addition of the company which is decrease in comparison to last year 211. Value addition is.147 in 212 in comparison to 211. Value of Human Capital Per Employee (Total Human Value in Rs./No. of employees) Total resources(c urrent cost) value of human capital per value of human capital per employee By analyzing the financial statement and human resource value, various facts come into light. As human resources is an asset for any organization. It is tried to find out the assets efficiency or utilization ratio of the company in comparison to other assets like fixed assets, current assets and total assets. The human resources efficiency is increased in comparison to last year but other efficiency of other assets is decreasing. It is indication of good managerial decision making capacity as well good productivity of human resources. Productivity of employees is a symbol of skill, knowledgeable and valueorientated i.e. loyal, honest, trust worthy in any organization which will take it in growth. It can be concluded that the efficiency, capability and contribution to the company s gains is understood by evaluating human resource value, Economic value of the human resources. If human resources are determined to attain their goals and enhancing their operational & work efficiency and must make the path for the growth of the company. Assets and value is also measured. This ratio is decreased in comparison to year 211 for all the assets whether it is human assets for fixed assets. Value of per employees is measured and found that Value of human capital per employee has been increased to.84 from.75 which is indication of employees focus organization. Regarding value addition point of view, efficiency and productivity of all type of assets are almost equal about.15. Human assets have equally contribution like fixed assets in value addition of company. Value of human capital per employee has been increased to.84 from.75. Increased economic value per employee leads It can be conclude that sound financial health of company is due to appropriate human resource value. Efficient employees 62

7 make the efficiency, earning capacity, productivity and growth increased of company. Infosys Ltd. is managing its employee in appropriate way. At the same time human assets are efficient enough to enhance profitability and value addition of company. The purpose of study is fulfilled to understand that human assets valuation works properly to understand their contribution and to motivate them. REFERENCES [1] Ami r, E., and B. Lev. (1996). Value- relevance of nonfinancial information: The Wireless communications industry. Journal of Accounting and Economics 22 (1-3): 3-3 [2] Bayes, Paul Eugene. (1984): An Empirical Investigation of the Effects of Human Resource Accounting Information on Decision-Making: Results of Mail Survey, Thesis, University of Kentucky, U.S.A. [3] Boedker, C., Mouristan, J., & Guthrie, J. (28). Enhanced business reporting: international trends and possible policy directions. Journal of Human Resource Costing & Accounting, 12(1), [4] Brummet, R.L., Flamholtz, E.G., Pyle, W.C. (1969), Human Resource Accounting: A Tool to Increase Managerial Effectiveness, Management Accounting, p.p [5] Firer, S., & Williams, S., M. (23). Intellectual capital and traditional measures of corporate performance. Journal of Intellectual Capital, 4(3), [6] Cascio, W. F. (1998). The future world of work : Implications for human resources Costing and accounting. Journal of Human Resource Costing and Accounting, 3(2), [7] DMSTI. (23 a, b). Analyzing Intellectual Capital statements. Danish Ministry of Science, Technology, and Innovation. retrieved from [8] FASB. (21) Improving business reporting: Insights unto enhancing voluntary disclosures. Retrieved from [9] Flamholtz, Eric. G. (1971), Should Your Organization Attempt to Value its Human resources? California Management Review, Winter, pp [1] Flamholtz, Eric. G. (1979), Human Resource Accounting: State of the Art and Future Prospects, Annual Accounting Review, Vol. 1, p [11] Framholtz, Eric. G. (1999), Human Resource Accounting: Advances in Concepts, Methods & Applications, Kluwer Academic Publishers, Third Edition, p.12. [12] Gul, Ferdinand A. (1984), An Empirical Study of the Usefulness of Human Resources Turnover Cost in Australian Accounting Firm, Accounting, Organization and Society, Vol. 9, pp [13] Gupta, D.K. (199), Human Resource Accounting In India: A Perspective, ASCI Journal of Management, Vol.2, No.3, September, pp-1-9. [14] Gupta, D.K. (1992), Probable Problem Areas Confronting Human Resource Accounting: A Survey Journal of Accounting and Finance, Vol. VI, No. 1, spring, pp [15] Gupta, D.K. (1992), Probable Problem Areas Confronting Human Resource Accounting: A Survey Journal of Accounting and Finance, Vol. VI, No. 1, spring, pp [16] Gut hrie, J. (21). The management, measurement and the reporting of intellectual capital. Journal of Intellectual Capital, 2 (1), [17] International Accounting Standards Board. (29). www. iasb.org [18] [19] Levine, Marc. (198), Perspective in Accounting for Human Resources, The Chartered Accountant, October, pp [2] Leyira Christian Micah1, Clifford O. Ofurum1 & John U. Ihendinihu, Firms Financial Performance and Human Resource Accounting Disclosure in Nigeria International Journal of Business and Management; Vol. 7, No. 14; July 212, pp [21] Okwy, P., O & Christopher, C., O. (21). Human capital Accounting and its relevance to Stock Investment Decisions in Nigeria. European Journal of Economics, Finance and Administrative Sciences, 21, [22] Sen, D.K., Jain, S.C., Jat, S.L and Saha, R.K. (28), Human Resource Accounting Information: It s Impact on Internal Decision-Making, The Journal of Accounting and Finance, Vol. XXII, No. 1, Oct-March, pp [23] Syed Abdulla Al Mamun (29), human resource accounting (hra) disclosure of bangladeshi companies and its association with corporate characteristics, BRAC University Journal, vol. V1, no. 1, 29, pp [24] Tomassini, Lawrence A. (1977), Assessing the Impact of Human Resource Accounting: An Experimental Study of Managerial Decision Preferences, The Accounting Review, Vol. 52, No. 4, October, pp [25] Wallman, S. (1996) The future of accounting and financial reporting. Part II: The colorised approach. Accounting Horizons. Vol 9, no 3, pp [26] Williams S. M. (21). Is Intellectual Capital Performance and Disclosure Practices related? Journal of Intellectual Capital, 2(3), [27] [27] 63