Knowledge Capital - its valuation aspect |
|||||
|
|||||
Growing
need to raise knowledge capital:-
Groups & individual capital has great potential. It can achieve
almost anything in this era. This is above anyone's imagination. Amazing,
this form of capital is really great. This form of capital is the future
of this century and we are going to witness its amazing performances. I
can see how it will overshadow every activity including commercial one. So
why not this should get place in the financial statements. The reason for
not including knowledge capital in financial statements is due to money
measurement concept. So the solution lies in finding a way of its
measurement i.e. accounting of knowledge capital.
Its great analytical power has given it an extra edge over any other
form of capital. This analytical power leads to new technologies,
strategies, policies, principles, tactics etc. Understanding something
& understanding it properly and then finding out way to work with it
has made this capital great.
Models for measurement of knowledge capital in monetary terms:-
Cost models are based on the acquisition cost,
including replacement and training costs and opportunity cost of human
asset. The supporters of this model are Burmment, Flamholtz and Pyle.
The Lev & Schwartz model, more
monetary-centric, is based on the likely future earnings of an employee
till his retirement.
Methods for Valuation of Knowledge Capital
Historical Cost Method
This method was proposed by Brummet to measure a firm's
investment in human resources. The current scarifies for obtaining future
benefits is the cost of human resource. The method suggests capitalizing
the firm's expenditure on recruitment, selection, training and development
of employees and treats them as assets for the purpose of human resource
accounting.
Capitalization of costs is contrary to
traditional accounting norms and does not reflect value. Moreover
the accumulated costs of human resource acquisition and development may
not reflect its proper worth. Instead of this, the total performance needs
should be assessed in relation to the total cost associated with human
resource to reflect their value.
Replacement Cost Method
This method involves assessment of replacement cost of
individuals, and rebuilding cost of the organization to reflect human
resource asset value of both the individuals and the organization.
However, the replacement cost may not reflect either the actual costs or
the contribution associated with human resource .
Opportunity Cost Method
According to this method the computation of monetary
value and allocation of people to the most promising activity and thereby
to assess the opportunity costs of key employees through competitive
bidding among investment centers.
Behavioral Method
In this method a set of casual variables through
psycho-social test results reflecting the appreciating or depreciating
condition of human organization as reflected by a set of intervening
variables, which in turn, are likely to result in the achievement of the
end result variables. The investment in human resource value
has been proposed to be amortized over the years in tune with the
condition of the human organization.
Economic Method
Lev & Schwartz advocated the estimation of future
earnings during the remaining life of the employee and then arriving at
the present value by discounting the estimated earnings at the employee's
cost of capital. The formula adopted for computation of the present value
of the future earnings in an extension to the formula propounded by Lev
& Schwartz.
Flamhlotz value human resource on the basis
of the roles which the employees are to perform. The method
also considers the present value of the future services at different
service states and takes into consideration the migration of an employee
from one service state to the other. However, the estimates of the
employees occupying different service states in his career in the
organization can be highly probabilistic and unreliable.
Harmonson advocated the human resource value as
the present value of the future wages payable for the next five years
discounted at the adjusted rate of return. The adjusted rate of return is
the average rate of return on the owned assets of all firms in the economy
multiplied by efficiency ratio of the organization. This method attempts
to bring into question the effectiveness of return on investment of the
industry on the assumption that there are no extraneous factors and that
the results were due to efforts of the employees.
Each model has its own negatives and positive when it
comes to practical application. In an Indian context, the Lev &
Schwartz model has an edge over the other models. Since the method has
been widely adopted by Indian companies such as Infosys, DSQ Software
Ltd., Satyam Computers, BHEL and SPIC, it enables the company to benchmark
the performance and efficiency of their human resources with others. The
assumptions in this model are realistic and scientific. The method has
practical applicability when availability of quantifiable and analyzable
data is concerned.
A Study of the Annual Reports of Infosys
The Lev & Schwartz model has been used by us to
compute the value of human resources. The revaluation is based on the
present value of the future earnings of the employees and on the following
assumptions:
|