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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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