Human Resource Accounting : An Overview

Human Resource Accounting: An Overview


# Meaning and Definition of Human Resource Accounting:

The concept of human resource accounting can be better understood if one goes through some of the important definitions given by competent authors in the accounting field.

1. The American Accounting Society Committee on Human Resource Accounting defines it as follows:

“Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.” In simple terms, it is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms.


2. Mr. Woodruff Jr. Vice President of R. G. Batty Corporation defines it as follows:

“Human Resource Accounting is an attempt to identify and report investments made in human resources of an organization that is presently not accounted for in conventional accounting practice. Basically, it is an information system that tells the management what changes over time are occurring to the human resources of the business.”


3. M.N. Baker defines Human Resource Accounting as follows:

"Human resource accounting is the term applied by the accountancy profession to quantify the cost and value of employees to their employing organization"


"The measurement of quantification of human organization inputs such as recruitment, training, experience and commitment"


Thus, human resources accounting may be defined as, “a process of accounting which identifies, quantifies and measures human resources for the use of management to cope up with the changes in its quantum and quality so that equilibrium could be achieved in between the required resources and the provided human resources”


In short, human resource accounting is the art of valuing, recording and presenting systematically the worth of human resources in the books of account of an organization. This definition brings out the following important characteristic features of human resource accounting:


1. Valuation of human resources.
2. Recording the valuation in the books of account.
3. Disclosure of the information in the financial statements of the business.



The traces of a rudimentary HRA can be found in the Medieval European practice of calculating the cost of keeping a prisoner versus the expected future earnings from him. The prisoners in those days were seen to be the general property of the capturing side. Consequently, after the victory, a quick decision regarding whether to capture a prisoner or to kill him had to be taken based on the costs involved in keeping him and the benefits accruing from killing him. However, these represented very rough measurements with limited use. The development of HRA as a systematic and detailed academic activity, according to Eric G Falmholtz (1999) began in the sixties. He divides the development into five stages. These are:


The first stage (1960-66): This marks the beginning of academic interest in the area of HRA. However, the focus was primarily on deriving HRA concepts from other studies like the economic theory of capital, psychological theories of leadership- effectiveness, the emerging concepts of human resource as different from personnel or human relations; as well as the measurement of corporate goodwill.


The second stage (1966-71): The focus here was more on developing and validating different models for HRA. These models covered both costs and the monetary and non-monetary value of HR. The aim was to develop some tools that would help the organizations in assessing and managing their human resources/assets in a more realistic manner. One of the earliest studies here was that of Roger Herman son, who as part of his Ph.D. studied 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 concepts and methods of accounting for human resources.


Third Stage (1971-76): This period was marked by a widespread interest in the field of HRA leading to the rapid growth of research in the area. The focus in most cases was on the issues of the application of HRA in business organizations. R.G. Barry experiments contributed substantially during this stage. (R.G. Barry Corporation: 1971)


Fourth Stage (1976-1980): This was a period of decline in the area of HRA primarily because the complex issues that needed to be explored required much deeper empirical research than was needed for the earlier simple models. The organizations, however, were not prepared to sponsor such research. They found the idea of HRA interesting but did not find much use in pumping in large sums or investing a lot of time and energy in supporting the research.


Stage Five (1980 onwards): There was a sudden renewal of interest in the field of HRA partly because most of the developed economies had shifted from manufacturing to service economies and realized the criticality of human asset for their organizations. Since the survival, growth, and profits of the organizations were perceived to be dependent more on the intellectual assets of the companies than on the physical assets, the need was felt to have more accurate measures for HR costs, investments and value.


An important outcome of this renewed interest was that unlike the previous decades, when the interests were mainly academic with some practical applications, from mid 90s the focus has been on the greater application of HRA to business management. Different types of models to suit the specific requirements of the organizations have been developed incorporating both the tangible and intangible aspects. Also, a larger number of organizations actually began to use HRA as part of their managerial and financial accounting practice.


Today, human and intellectual capital is perceived to be the strategic resources and therefore, a clear estimation of their value has gained significant importance. The increased pressures for corporate governance and the corporate code of conduct demanding transparency in accounting have further supported the need for developing methods of measuring human value.


In Bangladesh, human resource valuation has not yet been institutionalized though, as mentioned above, many public, as well as private, have adopted HRA.


# The main objectives of an HR Accounting system are as follows:


1.      To furnish cost value information for making proper and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost-effective organizational objectives.

2.      To allow management personnel to monitor effectively the use of human resources by the management.

3.      To have an analysis of the human asset i.e. , whether such assets are conserved, depleted or appreciated.

4.      To aid in the development of management principles, and proper decision making for the future by classifying financial consequences, of various practices.

5.      To facilitate the effective and efficient management of human resources.

6.      To make external financial reporting more informative by including HR Value.

7.      In all, it facilitates the valuation of human resources, recording the valuation in the books of account and disclosure of the information in the financial statement.

8.       Further, it is to help the organization in decision making in the following areas:
a) Direct Recruitment Vs promotion.
b) Transfer Vs. Retention.
c) Retrenchment Vs. Retention

d) Impact on budgetary controls of human relations and organizational behavior.

e) Decision on reallocation of plants, closing down existing units, and developing overseas subsidiaries etc.


# Importance/Advantages of Human Resource Accounting:

Human Resource Accounting provides useful information to the management, financial analysts, and employees as stated below:

1.      Human Resource Accounting helps the management in the Employment, locating, and utilization of human resources.

2.      It helps in deciding the transfers, promotion, training and retrenchment of human resources.

3.      It provides a basis for the planning of physical assets vis-à-vis human resources.

4.      It assists in evaluating the expenditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm.

5.      It helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it.

6.      It helps in locating the real cause for low return on investment, like improper or under-utilization of physical assets or human resource or both.

7.      It helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavorable circumstances.

8.      It provides valuable information for persons interested in making long-term investments in the firm.

9.      It helps employees in improving their performance and bargaining power. It makes each of them to understand his contribution towards the betterment of the firm vis-à-vis the expenditure incurred by the firm on him.


# Benefits of Human Resource Accounting

The concept of human resource accounting covers the people who constitute a valuable resource of an enterprise and information on the investment and value of such resources is useful for internal and external decision-making. Such accounting is of permanent importance to the nation and also to individual organizations. The following are the main benefits of Human Resource Accounting:


1. Helpful in proper interpretation of Return on Capital Employed.

The human resource accounting will disclose the value of human resources. This will help in proper interpretation of return on capital employed. Such information will give long-term perspective of the business performance which could be more reliable than the return on capital employed based on net profit only.

2. Improves managerial decision-making. The maintenance of detailed records relating to internal human resources (i.e. employees), will improve managerial decision-making specially in situations like direct recruitment versus promotion, transfer versus retention, retrenchment or relieving versus retention, utility of cost reduction programmed in view of its possible impact on human relations and impact of budgetary control on human relations and organizational behavior and decision on relocating plants, closing down existing units, developing overseas subsidiaries etc. Thus, the use of HRA will definitely improve the quality of management.

3. Serves social purpose. It will serve social purpose by identification of human resource as a valuable asset which will help in prevention of misuse and under use due to thoughtless or rather reckless transfers, demotions, lay offs and day to day maltreatment by supervisors and other superiors in the administrative hierarchy; efficient allocation of resources in the economy; effecting economy and efficiency in the use of human resources and proper understanding of the evil effects of avoidable labor unrest/disputes on the quality of the internal human resources.

4. Increases productivity. It will have the way for increasing productivity of the human resources because, the fact that a monetary value is attached to human resources, and that human talent, devotion and skill are considered as valuable assets and allotted a place in the financial statements of the organization, would boost the morale, loyalty and initiative of the employees, creating in their mind a sense of belonging towards the organization and would act as a great incentive, giving rise to increased productivity.

5. Invaluable contribution to humanity. HRA will be an invaluable contribution for accounting to humanity and it will lead to improve human efficiency while preserving human dignity and honor. For this, a basic change in individual behavior, attitude and thinking is required. HRA will help in realizing the value of human resources and, thus, will influence the individual behavior, attitude and thinking in the desired direction.

6. Essential where the human element is the prime factor. HRA is absolutely essential in such organizations where human element is the prime factor, e.g., a professional accounting firm, a drama company, a solicitor and attorney firm, an educational institution etc.

7. Helps in investment decisions. The value of a firm’s human resources is helpful to potential investors and other users in making long-term investment decisions.

8. Completes MIS. Human resource data would create a more complete management information system as it can provide information of vital importance for both short-term and long-term decision-making as well as performance measurement. It will provide adequate basis for decision on allocation of resources e.g. budgeting, capital expenditure decisions and better measurement of resources of an organization. Performance measurement helps in assessing the strengths and shortcomings of an organization and helps in making better promotion policies.

9. For successful operation of an organization. The success of an organization very much depends on the build up of quality work force at all levels. The success stories of BHEL, ITC, Hindustan Lever, Larsen & Toubro and several other enterprises are largely due to the emphasis on human resource development. IF this vital asset is not shown in the balance sheet, to that extent the public and investors are handicapped.


# Limitations of Human Resource Accounting:

Human Resource Accounting is the term used to describe the accounting methods, system and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in financial terms. It presumes that there is great difference among the personnel in their knowledge, ability and motivation in the same organization as well as from organization to organization. It means that some become liability too instead of being human assets. HRA facilitates decision making about the personnel i.e., either to keep or dispense with their services or to provide training. There are many limitations which make the management reluctant to introduce HRA. Some of the attributes are:

1.      There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human resources of an organization. The systems which are being adopted have certain drawbacks.

2.      The period of existence of human resource is uncertain and hence valuing them under uncertainty in future seems to be unrealistic.

3.      There is a fear that HRA may dehumanise and manipulate employees.

4.      For e.g., an employee with a comparatively low value may feel discouraged and develop a complex which itself will affect his competency to work.

5.      The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a tool of the management facilitates better and effective management of human resources.

6.      In what form and manner, their value to be included in the financial statement is the question yet to be classified on which there is no consensus in the accounting profession.

7.      As human resources are not capable of being owned, retained and utilized, unlike the physical assets, there is problem for the management to treat them as assets in the strict sense.

8.      There is constant fear of opposition from the trade unions as placing a value on employees would make them claim rewards and compensations based on such valuation.

9.      Another question is, on value being placed on human resources how should it be amortized. Is the rate of amortization to be decreasing, constant or increasing? Should it be the same or different for different categories of personnel?

10.  In spite of all its significance and necessity, tax laws do not recognize human beings as assets.

11.  There is no universally accepted method of human asset valuation.

12.  As far as our country is concerned human resource accounting is still at the developmental stage. Much additional research is necessary for its effective application.

13.  There is still no specific IAS on HRA.


# Assumptions of Human Resource Accounting:

As an important branch of accounting, the following are the assumptions of Human Resource Accounting:

  1. HR provides benefits to an organization in a fashion similar to the manner in which financial and physical resources provide benefits.
  2. The benefits associated with both conventional assets and HR value to the organization because these benefits contribute in some way to the the accomplishment of organization’s goal.
  3. The acquisition of HR typically involves an economic cost and the benefits associated with such resources can reasonably be expected to contribute to economic effectiveness. It follows, therefore, that these benefits are essentially economic in nature and are subject to measurement in financial terms.
  4. Since the usual accounting definition of an asset involves the right to receive economic benefits in future, human resources are appropriately classified as accounting assets.
  5. It is theoretically possible to identify and measure HR costs and benefits with an organization.
  6. Information with respect to HR costs and benefits should be useful in the process of planning, controlling, evaluating and predicting organizational performance.  


# “Human Resource Accounting is unnecessary for an organization”. Do you agree? Why?

Answer: I do not agree with this statement, because-

a)      HRA is required as HR is an integral asset of an organization. Just as other physical assets, HR also should be evaluated and reflected I the financial statements. Otherwise, the statements will not show the appropriate picture of the financial status of an organization.

b)      For the above reason, HRA will aid as the basis of long-term investment decision by the investors.

c)      HRA discloses the value of the human resources of an organization.

d)      HRA provides a better basis for managerial decision-making. Specially, in the situation where managers need to choose between alternatives like layoff or hire, retrenchment or replacement, transfer or suspension, etc.

e)      HRA aids in increasing productivity of the employees as they will get a moral boost knowing that they are evaluated for their work and contribution.

f)       HRA even serves social purpose as it communicates to the society that human resource are a valuable asset and thus, should not be misused or under-used.

g)      HRA develops the MIS of an organization more informative and accurate and thus help in decision making.

h)      HRA improves the quality of the work force of an organization.


Therefore, due to above all advantages derived from HRA, I disagree with the given statement that HRA is unnecessary for an organization.

# “HRA reminds the slavery system of the past.” Do you agree? Explain. 

Answer: No, I do not agree with the given statement. This is one of the common objections against HRA. Although the fact that valuation of human resources and their treatment in HRA is look like the slavery system of the past, but there is no reason to accept the statement. The following are the differences between the past slavery system and the present concept of HRA:

a)      Slaves in the past were traded and were owned just like other commodity and they have no rights of their own. Though the employees are ‘legally owned’ to some extent by accepting the terms of employment but they have some rights legally given to them. They cannot be treated as like as slaves of the past.

b)      HR has the right to get Casual Leave, Salaries, Bonuses, incentives, etc.

c)      Slaves were traded against their will/desire, but employees are free to accept the terms of the employment or terminate it. They, in some cases, are even happy and proud of being an employee of certain organizations.

d)      Treatment to slaves in the past, in most cases, was inhuman to some extent. Treatments to employees, however, depend on the employer and in most cases, are guided by law. The employers cannot violate the rights of the employees if they want.

e)      HRA is still at its developing stage and there are many methods that have and are still being developed to evaluate the human resources of an organization. However, there were no such methods to determine the price or value of the slaves in the past.


For all of the above reasons, it can be said that ‘HRA reminds the slavery system of the past’ is merely a weak arguments against HRA and it has no logic.


# “The Valuation of HR is helpful to the potential investors for making long-term investment decision”. Do you agree? Explain.


Answer: Yes, I do agree with the given statement for the following reasons:

a)      HRA discloses the human value as assets in the financial statements making them more accurate and thus, helps to calculate more accurate accounting ratios.

b)      HRA evaluates not only the cost incurred for human resources, but also the benefits derived from them, thus, more accurately present the operating results of an organization.

c)      HRA improves the Management Information System (MIS) of an organization by including more information and more accurate data about human resources. Long-term investment decision might be beneficial from this information.

d)      Without HRA, the expenses incurred for training and development of HR is shown as revenue expense, and thus have the impact only on the short period but not future accounting period, whereas HR benefits the organization for a longer period of time like other capital asset. This impact on financial statements may influence the long-term investment decision of the investors.

e)      HR value may be used as the basis of determination of the future profitability of an organization because more value of HR indicates more experienced and more qualified employees of an organization.


For the above reasons, I believe that HRA is helpful for potential investors in making long-term decision.


# Three (3) tests of Human Resources as Asset:

There are three tests for determination of HR as assets. The tests are as follows:

  1. Expectation of future economic benefits.
  2. The organization’s right to receive these benefits.
  3. The benefits generated by HR are measurable in terms of money.


The Human Resources appear to meet tests 1 and 3. Test-1: There can be little doubt that human resources are, in fact, a source of economic benefits. Because HR serve the organization for generating benefits in general. Test-3: There is no reason to assume that these benefits cannot ultimately be measured in some useful manner.


But Test-2: It presents somewhat more difficulty. This right typically considered by accountants to attach to the legal ownership of an asset. Since human resources cannot be owned except under conditions of slavery, it seems that they do not meet this test. But Hermanson proposed that legal ownership is too narrow an interpretation of the right to receive benefits. He argued that the appropriate criterion is not legal ownership but rather the operational right to receive the benefits like lease contract.

# Arguments for HR Expenditure as Expense:

The following are the arguments in favor of treating HR Expenditure as Expense:

1.      HR are not owned or acquired like other capital assets.

2.      Generally there is no contract that prevents the employees from leaving the organization at any time, except in some cases.

3.      Organization gets benefits of services of its HR at the time they perform only (that is, for short time).

4.      The future cost and benefits from HR are totally analogous to the case of a contemplated assets purchase (uncertain benefits).

5.      Employment of HR is not a transaction; since HR are not remunerated upon acquisition, in most cases, thus yielding no objective measure for their value.


Therefore, HR expenditures are expenses as and when the expenditures are incurred in return for their services in the conventional accounting practices. 


# Arguments for HR Expenditure as Assets:

The following are the arguments in favor of treating HR Expenditure as Assets:

1.      Definition of wealth as a source of income, inevitably leads to the recognition of Hr as assets like money, securities, and physical capital.

2.      As per future benefit criteria of assets, any HR expenditure should be treated as assets.

3.      Employment related costs in one period give rise to economic benefits in later periods and such quantify as assets and also such costs might obviate the need for future costs (for example, Amortization/Depreciation).

4.      As per the criteria of benefits must accrue to a specific firm, HR as whole is constantly associated with the firm and it can be constructively regarded as being owned by it. HR also interested to be owned by recognized organizations.

5.      Expenses are not developed but assets are developed through adding different quality, skills, and criteria in it. HR being provided training for its development of full potentials.

6.      Management of HR as assets rather than expense would perhaps lead to comparatively easier adoption of optimal strategies towards its acquisition, maintenance, and enhancement of its capabilities.


# New Knowledge Added by HRA in accounting field:

1.      Emphasis on more disclosure, more broadening of the information base for the manager and the decision maker.

2.      Legal ownership of resources is not important to an economic entity but rather the right to control such resources and receive benefits from them.

3.      Quantifying the aggregate of the contribution/ value of human resources of the firm; and

4.      Positioning the macro figure (economic value) in the final accounting profile of the firm—in the balance sheet in practical rather than as an appendix to the annual report for communication.


Thus, HRA is primarily an information system which informs the management about the changes that are taking place in the human resources of an organization.   


# Human Resources as Assets: Objections and Counter Arguments

The objections raised against recognizing HR as assets are as follows:

i)       Human beings cannot be owned and are incapable of giving enduring benefits like other material assets, and so they cannot be treated as assets.

ii)     The valuation will be largely subjective (no verifiable evidence being available).

iii)         It reminds the slavery system of the past.

iv)   There is a lack of unanimity regarding the valuation of human resources and problems of their accounting.

v)      It is said that cost of evaluating human resources will be much more than the utility derived from this type of study.

vi)   Tax laws do not recognize human resources as assets.


# HRA for managers & HR Professionals:

HR Professionals must perform a wide variety of functional roles. A functional role is a specific set of tasks and expected output for a particular job. We will briefly discuss the roles played by two HR Professionals: the HR Executive/ Manager and the HR Practitioners.


The HR Executive/Manager:

The HR executive/manager has primary responsibility for all HR activities. This person must integrate the HRD programs with the goals and strategies of the organization, and normally assumes a leadership role in the executive development program, if one exists. The outputs of this role include long-range plans and strategies, policies, and budget allocation schedules.


One of the important tasks of the HR executive is to promote the value of HRD as means of ensuring that organizational members have the competencies to meet current and future job demands. If senior managers do not understand the value of HRD, it will be difficult for the HRD executive to get their commitment to HRD efforts and to justify the expenditure of funds during tough times. Historically during financial difficulties, HRD programs and HRM has been a major target of cost-cutting efforts. Unless the HR executive establishes a clear relationship between HRD expenditures and organizational effectiveness (including profits), HRD programs will not receive the support they need.


The role of the HR executive has become more important and visible as organization make the necessary transition to a global economy. The immediate challenge to HR executives is to redefine a new role for HRD during this period of unprecedented change.


According to Jack Bowsher, former director of education for IBM, when HRD executives "delve deeply into reengineering, quality improvement, and strategic planning, they grasp the link between workforce learning and performance on the one hand, and company performance and profitability on the other." The HRD executive is in an excellent position to establish credibility of HRD programs and processes as tools for managing in today’s challenging business environment.


As organization has adjusted to environmental challenges, the roles played by HR professionals have changed. Based on the ASTD (American Society for Training and Development) study results, Pat Mclagan states that contemporary professionals perform nine distinct roles, which are described below:


  1. The HR strategic adviser consults strategic decision makers on HRD issues that directly affect the articulation of organization strategies and performance goals. Output includes HR strategic plans and strategic planning education and training programs.


  1. The HR systems designer and developer assist HR management in the design and development of HR systems that affect organization performance. Outputs include HR program designs, intervention strategies, and implementation of HR Programs.


  1.  The organization change agent advises management in the design and implementation of change strategies used in transforming organizations. The outputs include more efficient work teams, quality management, intervention strategies, implementation, and change reports.


  1.  The organization design consultant advises management on work systems design and the efficient use of human resources. Outputs include intervention strategies, alternative work designs, and implementation.


  1. The learning program specialist (or instructional designer) identifies needs of the learner, develops and designs appropriate learning programs, and prepares materials and other learning aids. Outputs include program objectives, lesson plans, and intervention strategies.


  1. The instructor/facilitator presents materials and leads and facilitates structured learning experiences. Outputs include the selection of appropriate instructional methods and techniques and the actual HRD program itself.


  1. The individual development and career counselor assists individual employees in assessing their competencies and goals in order to develop a realistic career plan. Outputs include individual assessment sessions, workshop facilitation, and career guidance.


  1. The performance consultant (or coach) advises line management on appropriate interventions designed to improve individual and group performance. Outputs include intervention strategies, coaching design, and implementation.


  1.  The researcher assesses HR practices and programs using appropriate statistical procedures to determine their overall effectiveness and communicates the results to the organization. Outputs include research designs, research findings, and recommendations and reports.


# Challenges to organizations and HR Professionals

Many challenges face organizations as a new century unfolds before us. Michael Hitt and his colleagues have identified increasing globalization and the technological revolution, in particular, the internet has a two primary factor that make for a new competitive landscape they suggest a number of actions that organizations can take to address the uncertainty and turbulence in the external environments. These actions include developing employee’s skills, effectively using new technology, developing new organizational structures and building cultures that fosters learning and innovation. These obviously have a great deal to do with human resource development. We will add to and build upon that list to present five challenges currently facing the field of HRD.


 These challenges include:

1. Changing workforce demographies

2. Competing in a global economy

3. Eliminating the skills gap

4. Meeting the need for lifelong individual learning

5. Facilitating organizational learning.


Each of these challenges has potential impact on HRD.


Though HRA has had its inception in the 1960s, it is an evolving concept, which is still at nascent stage. Nonetheless, its relevance to organizations is immensely gaining ground. Armed with various measures and figures, managers and firms can focus on decisions regarding investments in areas of intellectual capital that will have the greatest payoff for the firm.

Internally and externally, HRA would provide information to investors and other staff, of the value of human resources, the returns on investments in training and development and also the link between HR interventions and financial results.

As a way to assess human capital, HRA represents a new way of thinking strategically.

Boudreau has noted that measures of HRA and benefits can serve a variety of purposes. It acts as a catalyst for change. It tends to enhance the credibility of the HR functioning for it was not long back that this function was looked down disdainfully as only a department to organize picnics for its staff.

HRA also helps persuade others to support investment in HR and also to improve the quality of HR decisions.

Change is taking place at the tremendous rate. To make it effective and in order to make the team, HR professionals need to develop the business skills of strategic planning and process technology. And the first step towards the sustainable growth is accounting HR in financial terms.

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