KNOWLEDGE MANAGEMENT (KM) Session # 19

Human Capital Accounting Model V r = ∑ T t=r I(t)/(1+r) t-r Vr = Human capital value of a person “r” years old; I(t) = Person’s annual earnings up to retirement; r = A discount rate specific to the person; T = Retirement age. Model provides a means by which to disclose human capital values to stakeholders. Lev Baruch and Aba Schwartz. “On the Use of the Economic Concept of Human Capital in Financial Statements.” The Accounting Review 44 (1971):

Human Capital Accounting Model To compute the value of the human resources as of March 31, The evaluation is based on the present value of the future earnings of the employees and on the following assumptions: 1. Employee compensation includes all direct and indirect benefits earned both in nationally and abroad 2. The incremental earnings are based on group/age have been considered. 3. The future earnings have been discounted at 25.32% (previous year – 26.95%), this rate being the cost of capital for Company ABC. Beta has been assumed at 1.48 based on average beta for software stocks in the US.

Human Capital Accounting Model As of March No. of Employee Value of human resources (Rs. In lakhs) No. of Employees Value of human resources (Rs. In lakhs – 1 lakh = 1,000,00) Production4,292196, ,85476, Support- Technical* 4508, , Support – others64719, , ,389223, ,76694, * Note: Support – technical includes trainees, employees in R&D activities and support personnel allocated to production.

Human Capital Accounting Model Number of employees5,3893,766 Value of human resources223, , Total revenue92, , Software revenue88, , Employee cost33, , Value-added72, , Net profits excluding extraordinary income28, , Total revenue/Human resources value (ratio) Total software revenue/Human resources value (ratio) Value-added/Human resources value (ratio) Value of human resources per employee Employee cost/Human resources value (%)14.95%17.56% Return on human resources value (%)12.78%14.05%

Value-Added-Statement Year ending March Total revenue92, , Less: Software and development expenses (other than employee costs and provision for post- sales client support) 12, , Subtotal19, , Total value-added72, ,411.49

Value-Added-Statement(cont) Applied to meet Employee costs33, , Provision for post-sales client support Provision for bad and doubtful debts and doubtful loans and advances Provision for contingencies Provision for e-investing the company Provision for investment in subsidiary Income tax3, , Dividends (including Dividend tax)3, , Retained in business30, , , ,411.49

Relation Capital or Social Capital

Research of Community Studies explains that Social Capital is found in networks of relationships depends on trust, co-operation and collective action supports the survival and function of city neighbourhoods supports childhood development in families

Use of the term “social capital” in other contexts Social capital has impact upon: Development of human capital Performance of companies, regions and nations

Central proposition of social capital Networks of relationships are a factor of economic production and a resource for conduct of affairs. Networks –Formal, e.g. Family, Class, Club membership –Weak ties, e.g. friends of friends –Informal e.g. On line interest groups, Moodle, My Space

Social capital facilitates privileged access to Information Opportunities Social status in Networks

Social capital facilitates privileged access to Information Opportunities Social status in restricted networks 1970

Social capital facilitates privileged access to Information Opportunities Social status in restricted networks In 1993 Ali needed to confirm details about the Textile industry for his Masters dissertation In 1993 Maria was working for Nishat Textile as Export Exec.

In 1996 Maria wanted to get married (and so on...)

Social capital defined in context of Knowledge Management the Structure of Relationship Networks the Structure of Relationship Networks plus the Resources that can be accessed through the Networks

Social capital definitions “the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual, social unit or an organization” (Nahapiet & Ghoshal, 2002, p. 674) i.e. networks plus the resources of the networks “Value created by fostering connections between individuals” (Lesser, 2000, )