human resource accounting

1. HUMAN RESOURCE
ACCOUNTING
By
Abhinanda Bhattacharya

3. HRA - Concept
 “Human Resource Accounting” is the offshoot of various research studies
conducted in the areas of accounting and finance.
 Human resource is an asset whose value gets appreciated over the period of time
provided placed, applied and developed in the right direction.
 Till the recent past, organizations took few efforts to assign monetary value to
human resource in its accounting practice.
 Behavioural scientists initiated efforts to develop appropriate methodology for
finding out the value of human resource to the organization. They were against the
conventional accounting practice for its failure to value the human resource of an
organization along with physical resources.

4.  The traditional concept suggested that expenditure on human resource is treated as a
charge against revenue as it does not create any physical asset.
 At present there is a change in this concept and the expenses incurred on any asset
(as human resources) should be treated as capital expenditure as it yields benefits
which can be derived for a long period of time and could be measured in monetary
terms.
 The following are the reasons why Human Resources Accounting has been
receiving so much attention in the recent years.
1. Firstly, there is genuine need for reliable and complete management of human resources.
2. Secondly, a traditional framework of Accounting is in the process to include a much broader
set of measurement than was possible in the past.
3. The people are the most important assets of an organization but the value of this asset yet to
appear in financial statements.

5.  Human Resource Accounting is the measurement of the cost and value of
people to the organization.
 It involves measuring costs incurred by the organizations to recruit, select,
hire, train and develop employees and judge their economic value to the
organization.
 Human resource accounting can be defined as a system of accounting which
consider human resources as an asset and all the financial expenses on human
resources such as wages, salary, training etc. are recorded in the books of
account.

6. Definition - HRA
 According to R. L. Woodruff:
"Human resource accounting is an attempt to identify and report investment
made in human resource of an organisation that are presently not accounted for
in conventional accounting practice".
 According to American Accounting Association committee:
"Human resource accounting is the process of identification and measuring data
about human resource and communicating this information to interested
parties".
 According to Stephen Knauf:
"Human resource accounting is measurement and qualification of human
organisation input such as training experience, requesting and commitment".

7. Objectives
 Measuring cost related to the human resource of the organization
 Enabling management to properly plan and budget for training and other services
for the human resource.
 To ensure proper utilization of resources is done or not.
 Increasing awareness and value about human resources;
 To proper accounting of retiring benefits and other benefits over the service
period;
 For efficient and better human resource planning;
 For determining actual cost incurred by the organization on human resources;
 To determine whether an organization has gained from inputs put on human
resources, training, recruitment, and other facilities.
 To aid top management on human resource analysis.

9. Benefits
 HR Accounting helps the company ascertain how much Investment it has made
on its Employees and how much return it can expect from this Investment
 The Ratio of Human Capital to Non-Human Capital computed as per the HR
Accounting Concept indicates the degree of Labour Intensity of an
Organisation.
 HR Accounting provides a basis for planning of physical assets vis-a-vis Human
Resources
 HR Accounting provides valuable information to Investors interested in making
Long Term Investments in Service Sector Companies

11. Limitations
1. Variety of Methods Create Confusion -
There are many methods which can be used to calculate the cost incurred on human
resource. This creates misunderstandings, so management should exercise a particular
method to evaluate the human resource cost to avoid any kind of uncertainty.
2. Uncertainty about Continuance of Employees -
Unlike machinery one cannot expect the workforce to stay within the organisation for a
lifetime. Situation may arise that may force the employees to leave the job. Thus, it can
be said that stability of an employee in the organisation is not certain. But this uncertainty
increased the vacancies in the organisation, troubling the estimation of Human Resource
Accounting which further disturb the working of entire organisation.
3. Results in exploitation in organisation -
If the human asset valuation is not done correctly, it may result in exploitation of workers
the evaluation done by the human resource accounting should be useful for the
organisation, but not at the cost of partiality towards the employees.

12. 4. Lack of Perfect Knowledge about Future Receiving of HR -
Future is unpredictable and full of uncertainties, nobody is sure whether an investment will
be profitable or not. Thus, sometimes evaluation on imaginary basis creates a great
problem for HRA system. Therefore, one can say that there is lack of perfect knowledge
regarding future earning of any organisation.
5. Trade Union Resistance -
Estimating the value of human resources may give rise to industrial conflict and residence
by the union leaders. The reason for this opposition can be the blaseness on the part of
management while estimating the value of the human assets. Thus, before introducing
Human Resource Accounting in an organisation all the employees are leader must be made
aware about the importance of HRA and how it can be beneficial for them.
6. Expensive -
While introducing HRA in an organisation the first thing which should be kept in mind that
it should be cost-effective. Thus, the expenditure made on the system should be made
sensibly otherwise it can incur additional cost to the organisation. If its adoption is
affecting the profit of the organisation then the system is useless.

13. Evolution
The development of HRA as a systematic and detailed academic activity according to Eric
G. Flamholtz began in sixties. He divides the development into five stages. These are as
follows :
 1. First Stage (1960-66) - This mark the beginning of academic interest in the area of
HRA. However, the focus was preliminary on deriving HRA concept from other studies
like the economic theory of capital, psychological theories of leadership effectiveness,
the emerging concept of human resource as different from personal or human relation
as well as the measurement of corporate goodwill.
 2. Second Stage (1966-71) - The focus there was more on developing and validating
different models for human resource accounting. These models covered both cost and
the monetary and non monetary value of human resource. The aim was to develop
some tools that would help the organisation in assessing and managing their human
resource/assets in a more realistic manner. One of the earliest studies here was that of
Roger Hermanson, who as part of his Ph.D. studies the problem of measuring the
value of human assets as an element of goodwill. Inspired by his work, a number of
research projects were undertaken by the researchers to develop the concept and
methods of accounting for human resource.

14.  3. Third Stage (1971-76) - This period was marked by a widespread interest in the field
of Human Resource Accounting leading to a rapid growth of research in the area. The
focus in most cases was on the issue of application of HRA in business organisation.
R.G. Barry experiments contributed substantially during this stage.
 4. Fourth Stage (1976-80) - This was a period of decline in the area of HRA preliminary
because of complex issues that needed to be explored required much deeper
empirical research than was needed for the earlier simple models. The organisation,
however where not prepared to sponsor such research. They found the idea of HRA
interesting but did not find much used in pumping in large sums for investing a lot of
time and energy in supporting the research.
 5. Fifth Stage (1980 Onwards) - There was a sudden renewal of interest in field of
Human Resource Accounting partly because most of the developed economies had
shifted from manufacturing to service economies and realised the criticality of human
asset for their organisation. Since, the survival growth and profit of the organisation
were perceived to be dependent more on the intellectual assets of the companies
then on the physical assets, the need was felt to have more accurate measure for HR
costs, investment and value.