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Contemporary Accounting
Notes 2. Hermanson’s Unpurchased Goodwill Model: According to Hermanson, the unpurchased
goodwill notion is based on the premise that ‘the best available evidence of the present
existence of unowned resources is the fact that a given firm earned a higher than normal
rate of income for the most recent year. Here Hermanson is proposing that supernormal
earnings are an indication of resources not shown on the balance sheet, such as human
assets. Even though his method of valuing human resources is explicitly intended for use
in a company’s published financial statements rather than for internal consumption, this
would necessarily involve forecasting future earnings and allocating any excess above
normal expected earnings to human resources of the organization. However, the
assumptions would be subject to the uncertainties involved in any forecast of future
events.
!
Caution This method suffers from several limitations: Firstly, since the methods limits
recognition of human resources to the amount of earnings in excess of normal, the human
resource base that is required to carry out normal operations is totally ignored. As a
result, the value of human assets will be an underestimation. Secondly, the method only
uses the actual earnings of the most recent year as the basis for calculating human assets,
thereby, ignoring the forecasts of future earnings that are equally relevant for managerial
decision-making.
3. Human Organizational Dimensions Method: Based on the Likert-Bowers model of group’s
value to an organization, discussed earlier, this method is based on the relationship among
causal, intervening and end-result variables. The causal variables influence the intervening
variables, which, in turn, determine the organization’s end result variables. Hence changes
in the key dimensions of organisation can be used as dependable indicators for forecasting
future changes in productivity and financial performance.
Notes Monetary estimations of changes in human value of organisations
For computing a monetary estimate of the expected change in the value of human
organization, the following steps are suggested:
1. Measure the key dimensions of human organization, using a Likert scale at specified
time periods. These are in non-monetary measurements.
2. The scaled responses to questionnaire items called ‘scores’ are then standardized by
statistical methods to take into account the degree of variability of the set of responses.
This is done for responses in each time period.
3. The difference between two standardized scores from one period to the next is then
calculated. This difference (called delta) represents the change in an index of specified
dimensions of the human organization.
4. From present changes in dimensions of the human organization, the expected future
change in end result variables is estimated. Specifically, for a given variable the
delta is multiplied by coefficient or correlation between that variable and the end
result variable. This provides an estimate in standard scores of the anticipated change
in the end result variable attributable to a change in the human organisational
dimension believed to cause that change.
5. Lastly, the standard scores are converted into the measuring monetary units for the
end result variables. Likert points out that changes in the productive capability of a
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