Journal of Accounting and Management JAM vol. 3, no.

2(2013)

Human Capital Accounting and the Comparability of Financial

Statements in Nigeria

Edirin JEROH 1

Abstract: The purpose of this study is take a closer look at the concept of human capital accounting
as it affects financial statement analysis and decision making since human capital is the major driver
of the competitive advantage of companies globally and Nigeria in particular. A total of 145
respondents comprising of investors in the Nigerian capital market, practicing accountants and
academics in Tertiary Institutions in Nigeria took part in this study. A validated self-structured
questionnaire was the instrument used in gathering primary data for this study. Frequency counts,
simple percentages and the chi-square (x2) were the descriptive and inferential statistics employed in
the analysis of the data obtained at a 0.05 level of significance. This study however found amongst
others that there is a significant relationship between human capital accounting and the comparability
of financial statements in Nigeria. Based on the findings, we recommend that appropriate steps must
be taken by regulatory bodies to develop uniform acceptable standards and models for the
computation of the value of human capital such that same can be reflected in the financial statements
of entities in Nigeria. Also, the accountancy curriculum at both professional and academic level
should be reviewed and updated to meet the present demands of HCA.
Keywords: Accounting, Performance, Decision Making, Intangible Assets, Human ResourceCost,
Ratio Analysis, Investors

1 Introduction
The recent global financial crisis coupled with various financial scandals
locally and internationally has brought about concerns and inspiring debates
in the media as well as the professional and academic communities. Such
debates and concerns focus amongst others, on the role of financial
accounting/corporate reporting and auditing in corporate governance as well
as the management of organizations. The reliability and relevance of the
information included in financial statements and annual reports of
companies has also received increased attention. To this regard, efforts have
been made to move towards the development of a universally acceptable
framework in financial reporting in Nigeria by the mandatory adoption of
the International Financial Reporting Standards (IFRS). It is therefore
presumed that with the adoption of IFRS, companies would have common
base of valuing and reporting their assets in the balance sheet which will
enable investors and other stakeholders to easily compare the performance
of companies in order to permit informed judgment and decision making.
Notwithstanding, there is a popular maxim that human beings are the
greatest and most valuable assets at the disposal of every organization,
without which, the overall goal of organizations cannot be achieved (Mayo,
2004; Verma and Dewe, 2004; Theeke, 2005; Verma and Dewe, 2006; and
Okpala and Chidi, 2010). In support of this assertion, Dumitrana, Jianu,
1
Lecturer, DELTA STATE UNIVERSITY, ABRAKA, DELTA STATE, NIGERIA, Accounting and Finance,
[email protected]

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Jianu and Gusatu (2012) opine that man is the richest resource in the
company. According to them, the performance of company is born by
coordinating elements of human resources. Despite the acknowledged
importance of human capital as reflected in the mission statements, annual
accounts and general meetings of corporations (Okpala and Chidi, 2010), the value
of human capital is not fully captured as an asset in the statement of financial
position of organizations. While some accounting procedures treat human
capital as expenses (costs/salaries), others treat it as an investment
(Hermanson,Hermanson, and Ivancevich, 1992; andFajana, 2002). Whichever
case, one fact remains; - to date, there is no systematic effort to construct a
comprehensive measure of the total human capital stock of companies in
Nigeria.
It is thereforedisheartening to note that the financial statements prepared by
most organizations in Nigeria and other parts of the world are yet to fully
recognize this all-important-asset (Jeroh, 2008) despite the growing interests
in accounting for its value (Okafor and Jeroh, 2010). In view of this
assertion, Wallman (1996) is of the opinion that financial statements fail to
communicate to the management as well as the investor community, the true
state of the business in relation to her human capital and its development.
Yet, it is this same human capital that is described as the driving factor for
future innovation and growth in profit margin (Wallman, 1996; Rimmel,
2003 and Jeroh, 2008).
This paper therefore highlights the concept of human capital accounting as it
affects decision making with respect to the comparability of financial
statements in Nigeria.

2 Literature Review
Theoretical Framework
There are growing numbers of studies on human capital measurement as
reflected in the literature. Empirical works like those of Flamholtz (1973,
1999) show that human capital stock can be measured on the basis of total
investment (cost-side)whileother studies estimated human capital from the
income side. In the views of Jasrotia (2000), human capital accounting can
basically be tracked through two methods—cost-based analysis and value-based
analysis. The cost-based approach focuses on the cost parameters, which may
relate to historical cost, replacement cost, or opportunity cost while the value-based
approach suggests that the value of human resources depends upon their capacity to
generate revenue (Jeroh and Okafor, 2010). The value based approach as they
noted, can be further sub-divided into two broad categories: non-monetary and
monetary. Using the Flamholtz (1999) model, the value of human capital can be
derived from general economic value theory. This is simply because just like other
resources and assets of organizations, people have values and are therefore capable
of rendering future services that would be of value and economic significance to
their respective organizations.

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In a similar vein, Washer and Nippani (2004:15), assert that “valuing human
capital is similar to valuing stock”. Thus, one may value human capital the same
way stock is valued using the constant growth model.
However, a general consensus as can be found in the literature is that despite
the fact that the idea of accounting for human resources started many years back,
the concept still lacks general acceptability in countries like Nigeria. This is simply
because there are only few evidences of its application worldwide and Nigeria in
particular.
Bassey and Tapang (2012) noted that theoretical perspectives guiding
empirical studies on the area of human resource management do exist.
Quoting Wright and McMahan (1992), Bassey and Tapang (2012) asserts
that theoretical perspectives based in sociology, economics, management
and psychology focus on different aspects of the domain of human resource
management. In this study therefore, we recognize four basic theories which
have been identified in existing literatures. These are:
i. The transaction cost economy theory;
ii. The human capital theory;
iii. Resource-based view of the firm theory; and
iv. The general system theory.
The transaction cost economy theory is based on the assumption that
organizations adoptthe most economical and most efficient governance
structures on issues that borders on the employment of personnel (Argyres
and Liebeskind, 1999; and Bassey and Tapang, 2012). Thus, a company is
faced with either recruiting a new staff from outside the organization to fill a
position, or, train and promote existing staff from within, to fill such a
position. In either ways, the company incurs transaction costs (where the
company recruits a new staff from outside) or bureaucratic costs (where the
company decides to train and promote existing staff from within). The
underlying argument of the transaction cost economy theory is that given the
above alternatives of recruiting personnel, companies are faced with making
the most efficient and economic choice by taking into consideration, all
relevant costs.
The human capital theory on its part is based on the assumption that
organizations would take decisions regarding the amount of investments that
would be made on human capital based on the anticipated future benefits
and/or returns from such investments. Investments in human capital in this
regards includes training and development costs. Quoting Flamholtz and
Lacey (1981), Bassey and Tapang (2012) opine that investments in human
capital includes all costs related to eliciting productive behaviours from
employees, including those related to motivating, monitoring, and retraining
them. Organizations therefore commit their resources to training employees’
specialized skills while at the same time, they make a comparison between
their investments in the firm’s human capital and the potential future
returns/benefits accruing from such investments. Efforts are expected to be
made to ensure that any of such acquired skills from training are retained in
the investing company and not transferred to other companies.

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However, the resource-based view of the firm’s theory presumes that there
are certain core skills that are central to every company’s competitive
advantage. Accordingly, the theory affirms that such core skills should be
acquired internally through training and re-training, while general
technology can be acquired externally through outsourcing.
The general system theory according to Bassey and Tapang (2012) was
propounded by Von – Bertalanffy in 1950. The theory assumes that every
system is made up of complex interdependent parts such that each system
depends on the environment for inputs. In this regard, the skills and
competencies of employees are seen as inputs from the environment needed
to be transformed within the organization to generate outputs (performance)
for the organization.
Based on the aforementioned, this study however would be guided by the
assumptions of the human capital theory
Human Capital Defined
Human Capital in its real sense, as noted by Itami (1987), is an invisible
asset. It is a component of intellectual capital. To date, available literatures
indicate that there are several definitions of the concept of human
capitalbased on existing theories. Dean, McKenna and Krishnan (2012)
noted that human capital comprises of the talents, skills and knowledge of a
company’s workforce. It is what Verguwen and Alem (2005) defined as the
value of all the employees in the organization and the rewards that is
attached to its utilization. In addition to the above, Weatherly (2003:1) sees
the human capital of an organization as “the collective sum of the attributes,
life experience, knowledge, inventiveness, energy, and enthusiasm that its
people choose to invest in their work”. Similarly, Yusuf (2013) pointed that
human capital is a broad concept encompassing many components but
essentially describing the quality of the labour force. As plausible as these
definitions are, we must note that no widely acceptable definition of human
capital has emerged. A general consensus however is that human capital is a
component of Intellectual Capital.
Despite the fact that organizations do invest in human capital, one fact that
has been argued in existing literature (Verguwen and Alem, 2005) is that
human capital does not belong to organizations, rather, they are owned by
the respective employees.
Human Capital Accounting and Financial Reporting
Until recently, the value of an enterprise, as measured by traditional balance sheets
(statement of financial position of firms), was viewed as a sufficient reflection of
the enterprise's assets (Okafor and Jeroh, 2010). However, with the growing
emergence of the knowledge economy, this traditional valuation has been called
into question due to the recognition that human capital is an increasingly important
part of an enterprise's total value (Westphalen and Nychas, 1998). According to
Kirfi and Abdullahi (2012), human capital accounting is the process of identifying
and reporting the investments made in the human resources of an organization that
are presently not accounted for in the conventional accounting practice. It involves
measuring the costs incurred by the business firm and other organizations to

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recruit, select, hire, train and develop human capital (Flamholtz, 1974).
Human Capital Accounting (HCA) can as well be described as the process
of identifying, measuring and communicating information about human
resources in order to facilitate effective management within an organization.
It is an extension of the accounting principles of matching costs and
revenues and of organizing data to communicate relevant information in
financial terms (Okafor and Jeroh, 2010).
At this juncture, we must understand that the immediate impact of human resource
costs on reported profits may lead to decisions which according to Avazzadehfath
and Raiashekar (2011) are influenced by tax considerations towards reporting
larger or smaller profits for a period. By implication, it becomes obvious that
profits reported in financial statements of organizations to a large extent affects
decisions of users of such statements. This invariably may have accounted for the
conclusion of Okafor and Jeroh (2010) that the inclusion of human capital costs in
financial statements will affect the decisions of investors. Our understanding
therefore tilt towards the argument that financial statements without a proper
disclosure of the value of human capital are misleading for both the management of
companies and other users/stakeholders who rely on the information contained in
financial statements for their respective decisions.
Human Capital Accounting (HCA) posits that since people are valuable
resources in organizations, information relating to their cost and value is
needed, otherwise, managing them effectively and efficiently would not be
attainable(Okafor and Jeroh, 2010). It is believed that accounting for the value of
human capital will guarantee transparency in financial reporting. Thus investments
in human capital can be capitalized in the statement of the financial position of
companies rather than treating them as negative factor when computing net
income.
Despite all arguments for human capital accounting, a study conducted by Kirfi
and Abdullahi (2012) revealed that in all parts of the world, different forms of
practice of accounting for the value of human capital exist. They noted further that
these forms of accounting for the value of human capital does not necessarily
imply complete uniformity in the existing practices since some aspects of the
practice obtained in one environment may fail in other environments. It is on the
basis of the above that the hypotheses of this study areformulated in the following
section of this paper.

3 Hypothesis Development
Several methods and models have been developed to capture the value of
human capital so that the same can be reported in the financial statements of
organizations. To date, no generally accepted method exist in Nigeria,
thereby generating questions regarding decisions made by stakeholders in
relying on financial statements in the process of making comparison on the
performance of organizations. On the basis of the above, the following
hypotheses have been developed.
HO1: The comparability of companies’ economic result cannot be
achieved among firms in Nigeria

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HA1: The comparability of companies’ economic result can be

achieved among firms in Nigeria

HO2: There is no significant relationship between human capital

accounting and the comparability of financial statements in Nigeria
HA2: There is a significant relationship between human capital
accounting and the comparability of financial statements in Nigeria

4 Materials and Methods

This study was conducted based on the assumptions of the human capital theory,
taking into consideration, arguments for the need of accounting for the value of
human capital. We therefore presume that without accounting for the value of
human capital and reporting same in the financial statements of organizations, the
true financial positions of entities would not be fully captured. Thus the survey
design was adopted for this studydue to its appropriateness to the topic on hand as
it has the ability of collecting original data for the purpose of describing the study’s
population. Both primary and secondary data were used in this study. The primary
data consisted of responses to closed ended questionnaires designed for the purpose
of this research and thereafter administered to the selected sample. The secondary
data on the other hand consisted of scholarly works (textbooks, journal articles,
conference papers etc) on the area of human capital accounting within and outside
Nigeria.
The research population comprised of Academics in tertiary institutions in Nigeria,
Chartered Accountants (who are not academics) in Nigeria and Investors in quoted
companies in Nigeria as at 31st December, 2012. Since the population is a large
one, a purposeful sample was selected based on convenience. A total of one
hundred and forty-five (145) elements made up the sample used in this study. The
data obtained was analyzed with the use of tables, simple percentages and the chi-
square (x2) Test.The formula for calculating the Chi-Square (x2) is given as
follows:
X2= ∑(O-E)2
E
Where:
O = Observed Frequency; E = Expected Frequency;
∑= Summation of; X2 = Chi-Square
(Source: Egbule and Okobia, 2001)
Decision Rule
When using the Chi-Square test at any level, the difference is significant if x2
(xcal) at a given degree of freedom is greater than the table value (xcrit). The
implication is that where the computed value of x2 is higher than the critical value
(i.e falls on the rejection region), the null hypothesis is rejected and the alternative
hypothesis is accepted.

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5 Data Presentation and Analyses

Demographic Characteristics of Respondents
The population of this study comprised of all investors in quoted companies as at
31st December, 2012, as well as practicing accountants and academics in the area of
accountancy in tertiary institutions in Nigeria. A purposeful sample was randomly
selected and questionnaires were distributed accordingly. A total of one hundred
and fifty (150) questionnaires were returned out of which one hundred and forty-
five (145) questionnaires were duly filled and found usable for inferential purpose.
The entire respondents that constituted the sample of this study were adults with an
average age (mean age) of 36years with the oldest respondent being 62 years old,
and the youngest being 23 years old. The mean age stated above with a standard
deviation of 5.5 is a good distribution with no bias given by too many older or
younger respondents included in the sample. Majority of the respondents (87 0r
60%) were males, while the remaining 58 (40%) of them were females, an
indication that the male gender constituted a majority of the subjects for this study.
Furthermore, majority of the respondents (116 or 80%) indicated that they were
married, 18 (12.41%) were single, 3 (2.07%) were widowed, and 8 (5.52%) were
separated. There was however no divorcee among the respondents.
General Responses To Questionnaire Items
The respondents were made to give their opinions on questions raised in the
questionnaire. The questions were basically designed to draw links between the
ideas of human capital accounting as it affects core issues in financial statement
analysis (ratio analysis) which basically focus on the comparability of financial
statements of organizations. Below is a summary of the general response to the
questionnaire items.
• All the respondents (145 or 100%) are familiar with the concept of human
capital accounting
• Most of the respondents (112 or 77.24%) indicated that there are no
operational system of accounting for the value of human capital known to
them, while 33 (22.76%) had a contrary opinion.
• A reasonable number of the respondents (75 or 51.72%) noted that human
capital accounting information has an effect on the productivity of entities
while 70 (48.28%) believes that human capital accounting information
does not have any effect on the productivity of entities.
• All the respondents (145 or 100%) indicated that the inclusion of
information on human capital in financial statements would affect their
conclusion on any firm’s overall performance. In addition, they all noted
that they are yet to hear of or be familiar with any uniform way of
accounting for the value of human capital in Nigeria.
• A total of 122 (84.14%) of the respondents noted that the value of human
capital can objectively be measured and reported in the financial
statements of entities, while 23 (15.86%) of the respondents had a contrary
opinion.
• A good number of the respondents (133 or 91.72%) indicated that there is
the need for the development of a standard/legislation bordering on the
applicability of HCA specifically for Nigerian firms, while the remaining

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12 (8.28%) respondents believes that there is no need for the development

of a standard/legislation bordering on the applicability of HCA specifically
for Nigerian firms.
Test of Hypotheses
In order to test the hypotheses formulated in this study, we adopted thechi-square
(x2) test. While responses to questionnaire item 9 was used to test hypothesis one,
responses to questionnaire item 6 was however used to test hypothesis two of this
study. In this section, we thus produce tables to analyze responses to both questions
9 and 6 respectively.
Test of Hypothesis One
In order to test hypothesis one of this study, we shall present the analysis of
responses to question 9 of the questionnaire items in the following section.
Question 9: Is it possible for the comparability of companies’
economic result to be achieved among firms in Nigeria?
Table 5.1 Comparability Of Companies’ Economic Result
Responses Academics Practicing Investors Total Percentage
Accountants
YES 38 40 47 125 86.21
NO 2 5 13 20 13.79
TOTAL 40 45 60 145 100
Source: Authors’ Fieldwork, 2013
Computation of the Expected Cell Frequency for the test of Hypothesis 1.
Category of Expected Number of Respondents Total
Respondents Yes No
Academics 125x(40/145) = 34 20x(40/145) = 6 40
Practicing 125x(45/145) = 39 20x(45/145) = 6 45
Accountants
Investors 125x(60/145) = 52 20x(60/145) = 8 60
Total 125 20 145
The Contingency Table 1
Responses O E O-E (O-E)2 (O-E)2
E
Academics (Yes) 38 34 4 16 0.47
Academics (No) 2 6 -4 16 2.67
Practicing Accountants (Yes) 40 39 1 1 0.03
Practicing Accountants (No) 5 6 -1 1 0.17
Investors (Yes) 47 52 -5 25 0.48
Investors (No) 13 8 5 25 3.13
2
TOTAL 145 145 0 x =6.95
Level of significance = 0.05
Degree of Freedom (df) = (C– 1) (R-1) = (3-1)(2 – 1)
=2

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Decision:
At 0.05 level, the difference is significant if x2 with 2 degrees of freedom is above
5.991. The value of x2from the computation above is 6.95. This value is greater
than the critical value (xcrit = 5.991), or falls on the rejection region. Given the
above, we therefore reject the hypothesis which states thatthe comparability of
companies’ economic result cannot be achieved among firms in Nigeria. By
implication, our conclusion is that the comparability of companies’
economic result can be achieved among firms in Nigeria.
Test of Hypothesis Two
In order to test hypothesis two of this study, we shall present the analysis of
responses to question 6 of the questionnaire items in the following section.
Question 6: Is there a significant relationship between Human
capital Accounting (HCA) information and the comparability
of financial statements?
Table 5.2: HCA Information and the Comparability OfFinancial
Statements
Responses Academics Practicing Investors Total Percentage
Accountants
YES 40 36 42 118 81.38
NO 0 9 18 27 18.62
TOTAL 40 45 60 145 100
Source: Authors’ Fieldwork, 2013
Computation of the Expected Cell Frequency for the test of Hypothesis 2.
Category of Expected Number of Respondents Total
Respondents Yes No
Academics 118x(40/145) = 33 27x(40/145) = 7 40
Practicing 118x(45/145) = 37 27x(45/145) = 8 45
Accountants
Investors 118x(60/145) = 49 27x(60/145) = 11 60
Total 125 20 145
The Contingency Table 2
Responses O E O-E (O-E)2 (O-E)2
E
Academics (Yes) 40 33 7 49 1.49
Academics (No) 0 7 -7 49 7
Practicing Accountants (Yes) 36 37 -1 1 0.03
Practicing Accountants (No) 9 8 1 1 0.13
Investors (Yes) 42 49 -7 49 1
Investors (No) 18 11 7 49 7
2
TOTAL 145 145 0 x =16.65
Level of significance = 0.05
Degree of Freedom (df) = (C – 1) (R-1) = (3-1) (2 – 1)
=2

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Decision:
At 0.05 level, the difference is significant if x2 with 2 degrees of freedom is above
5.991. The value of x2 from the computation above is 16.65. This value again is
greater than the critical value (xcrit = 5.991), or falls on the rejection region. We
therefore reject the hypothesis which states that there is no significant
relationship between human capital accounting and the comparability of
financial statements in Nigeria. By this, our conclusion is that there is a
significant relationship between human capital accounting and the
comparability of financial statements.

6 Discussion of Findings
It was hypothesized that the comparability of companies’ economic result
cannot be achieved among firms in Nigeria.Quite interesting, this study found
that about 86.21% of the respondents for this study are of the opinion that the
comparability of companies’ economic result can be achieved among firms
in Nigeria, while 13.79% were of the contrary opinion. This finding is in
consonancewithtrends inexisting literatures (Sulaiman, 2012).
Another interesting finding in this study was that though the comparability of
companies’ economic result can be achieved among firms in Nigeria, the
respondents are of the view thatthere is a significant relationship between
human capital accounting and the comparability of financial statements. By
implication, reliance on the results from the measurement of performance
and/or the comparability of financial statements using ratio analysis or other
means without the inclusion or consideration of information regarding the
value of human capital in organizations would be misleading. This also
implies that the inclusion o HCA information in financial statements is
desirable as it will aid users and all stakeholders in measuring the
performance of organization.This finding negates that ofDean, McKenna
and Krishnan (2012); but at the same time, corroborates those of Abdel-
khalik (2003), Okpala and Chidi (2010), Okafor and Jeroh (2010) amongst
others.

7 Conclusion and Policy Recommendations

This study set out to examine the link between human capital accounting
information and the comparability of financial statements in Nigeria. The
result has shown that human capital accounting information has a significant
relationship on the comparability of financial statements. Based on the
above, the following recommendations have been made:
• As a matter of urgency, appropriate steps must be taken by
regulatory bodies in the profession to develop uniform acceptable
standards and models for the computation of the value of human
capital such that same can be reflected in the financial statements of
entities in Nigeria.

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• The accountancy curriculum at both professional and academic level

should be reviewed and updated to meet the present demands of
HCA.
There is an urgent need for legislation on human capital disclosure in the
financial statements of companies in Nigeria.

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