IFRS Human Resource Accounting

The United States has a radically different accounting system than virtually every other the countries considered. The United States has their own system known as the general accepted accounting principles (GAAP). Other countries have used this system in the past, such as the UK and Germany, but there has been an international standard that has developed over the course of the last few years and virtually every other country in the world besides the U.S. has adopted this system. However, even the U.S. has received a lot of pressure from countries such as China, who has started the conversion but has formerly prepared their financial statements in what was known as China GAAP to avoid any trade disruptions

However, China has been working diligently to replace older systems such as the Chinese Accounting Standards (CAS) with the International Financial Reporting System (IFRS). It is estimated that China is roughly 90-95% in compliance with the IFRS system. Furthermore, Japan already uses the IFRS system so of the five countries, the U.S. is the only country that still uses their own system. However the U.S. has announced that it will eventually use the IFRS system but progress toward the implementation has been relatively slow. This creates an interesting situation in regards to Human Resource Accounting in the international community.

Human Resource Accounting (HRA) involves accounting for expenditures related to human resources as assets as opposed to traditional accounting which treats these costs as expenses that reduce profit; interest and contributions to growth in HRA have been evident in a number of countries and the strong growth of international financial reporting standards (IFRS) is an indication that the environment for international financial accounting is one that potentially encourages the consideration of alternative measurement and reporting standards and lends support to the possibility that future financial reports may include nontraditional measurements such as the value of human resources using HRA methods (Bullen & Eyler, 2009). This analysis will look at some of the features of the emerging IFRS system as well as consider how these can serve as assets to companies that can integrate some measures of HRA.

Regulation and Oversight

Many of the different accounting systems in the world developed because there are differing legal systems in differing regions. There are two primary types of legal systems used around the world which consist of common law and codified Roman law (McGraw-Hill, N.d.). The main differences in the system are that common law is less thorough in its written form which then allows the courts to interpret the law with more freedom while by contrast the code law covers more of the human range of activity in writing so that the courts do not have as large as a role in determining outcomes. Basically the main differences are the amounts of freedoms that the legal system has. Which also translates to the freedoms in accounting countries have developed.

In a code law country for example, the German accounting law passed in 1985 is only 47 pages long and is silent with regard to issues such as leases, foreign currency translation, and cash flow statements (McGraw-Hill, N.d.). By contrast in common law countries there are likely to be a non-legislative organization that helps to develop accounting standards that are much more specific. For example, while the German system was silent on how to treat leases, in the United States the Financial Accounting Standards Board (FASB) has provided a standards overload which requires leases to be capitalized in one of four very specific manners; sales with leasebacks, sales-type leases of real estate, and changes in leases resulting from refundings of tax-exempt debt (McGraw-Hill, N.d.).

GAAP and IFRS Differences

Great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP. The goal is that by the time the SEC allows or mandates the use of IFRS for U.S. publicly traded companies, most or all of the key differences will have been resolved (AICPA, 2012):

Because of these ongoing convergence projects, the extent of the specific differences between IFRS and U.S. GAAP is shrinking. Yet significant differences do remain. For example:

IFRS does not permit Last In First Out (LIFO) as an inventory costing method.

IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.

IFRS has a different probability threshold and measurement objective for contingencies.

IFRS does not permit curing debt covenant violations after year-end.

IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little industry-specific instruction.

Currently, more than 120 nations and reporting jurisdictions permit or require IFRS...

This includes the whole of the European Union, Australia, New Zealand, Canada, Japan, Mexico, Hong Kong, China, and many other key economic markets. Therefore there has been a lot of pressure on the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Boards (IASB) to resolve their differences. Of the 143 leaders from 91 countries who responded, 90% reported that a single set of international financial reporting standards was "very important" or "important" for economic growth in their countries (AICPA, 2011).
The Development of HRA

The standardization of an internationally accepted IFRS system, will undoubtedly open many doors for the continued development of the HRA accounting measure. The American Accounting Association's committee has defined Human Resources Accounting as "the process of identifying and measuring data about human resources and communicating this information to interested parties." Flamholtz, too, has offered a similar definition for HRA. They define HRA as "the measurement and reporting of the cost and value of people in organizational resources." Thus the concept of HRA can be basically examined from two dimensions (Vyas, N.d.):

1. Investment in human resources

2. The value of human resources

The expenditure incurred for creating, increasing and updating the human resource quality is known as investment in human resources; the yield or fruitful results, which the investment in human resources generates, will be considered as the basis of human resource value (Vyas, N.d.).

In recent years United States GAAP has been moving toward adoption of more complex measurement methods in financial reporting compared with the traditional historical cost approach to asset measurement, including a focus on the measurement of the time value of money and present value calculations (Bullen & Eyler, 2009). Some studies seem to indicate that in many cases the expected cash flow approach is a better measurement tool than traditional methods, and that CPAs should use it to report asset and liability values in the absence of specific contractual cash flows. Certain current assets are now reported at their fair market values at each balance sheet date, and many items on the balance sheet that are noncurrent are measured at the present value of the estimated future cash flows.

Other attempts to calculate and report the present value of future cash flows associated with an asset or liability have also been presented and as accountants have become more accustomed to complex measurement approaches, some similar to the approaches taken in developing HRA value measures, it seems reasonable that nontraditional HRA measures may become more accepted in future financial reports (Bullen & Eyler, 2009). In addition there has been increased interest in accounting for intangible assets in financial reporting by both the Financial Accounting Standards Board and the Securities and Exchange Commission.

Advantages of HRA Approaches

Human Resource Accounting (HRA) involves accounting for expenditures related to human resources as assets as opposed to traditional accounting which treats these costs as expenses that reduce profit. This makes a huge difference in the way a workforce will be perceived by a company. If the employee is an expense, then this has something of a negative connotation and workers can be viewed in a detrimental way. However, if the employee is an asset then this has a different set of implications. For example, assets are to be protected and to be used to their productive capacities. Therefore companies that take this approach are likely to make better use of their human resources.

Interest and contributions to growth in HRA have been evident in a number of countries. The strong growth of international financial reporting standards (IFRS) is an indication that the environment for international financial accounting is one that potentially encourages the consideration of alternative measurement and reporting standards and lends support to the possibility that future financial reports may include nontraditional measurements such as the value of human resources using HRA methods (Bullen & Eyler, 2009).

Conclusion

Ensuring a high quality corporate financial reporting environment depends on effective Control & Enforcement Mechanism. Merely adopting International Financial Reporting Standards is not enough and each interested party, namely Top Management and Directors of the Firms, Independent Auditors and Accountants and Regulators and Law Makers will have to come together and work as a team for a smooth IFRS adoption procedure. Top Management should ensure that the Financial Statements are prepared in compliance with the IFRS. Auditors and Accountants should prepare and audit Financial Statements in compliance with IFRS (Khairajani, 2012).

Regulators and Law Makers must implement efficient monitoring…