HR Accounting? Objectives and Methods

Definitions of Human Resource Accounting

Human resource accounting is the process of identifying and reporting investments made in the human resources of an organization that are presently unaccounted for in the conventional accounting practices. It is an extension of standard accounting principles. Measuring the value of human resources can assist organizations in accurately documenting their assets.

The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as
“the process of identifying and measuring data about human resources and communicating this information to interested parties”.

HRA, thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and develop ent of employees, but also the quantification of the economic value of the people in an organisation.

Flamholtz (1971) 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”.

Likert (1971) explained that Human Resource Accounting serves several purposes in an organization. It provides cost/value information for taking management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness. It permits management employees to scrutinize effectively the use of human resources. The human resource accounting is done to provide cost value information for making appropriate and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost effective organizational objectives. Leading management scholar,

Flamholtz (1979) explains the human resource accounting model as “psycho-technical systems” (PTS) approach to organizational measurement. This approach indicated that, the two functions of measurement are process functions in the process of measurement and numerical information from the numbers themselves. Therefore important role of human resource accounting is to present numerical measures. The HRA measurement process facilitates to increase recognition that human capital is vital to the organization’s short and long-term productivity and expansion.

  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 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.

Human Resource Accounting Methods

Approaches to human resource accounting (HRA) were first developed in 1691. The next approach was developed from 1691-1960, and the third phase was post-1960. There are two approaches to HRA. Under the cost approach, also called the “human resource cost accounting method” or model, there is an acquisition cost model and a replacement cost model. Under the value approach, there is a present value of future earnings method, a discounted future wage model, and a competitive bidding model under.

Cost approach

This approach is also called an acquisition cost model. This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition, formal training and familiarization, informal training and informal familiarization, and experience and development. This model suggests that instead of charging the costs to profit and loss statement accounting, it should be capitalized in the balance sheet. The process of giving a status of asset to the expenditure item is called capitalization. In human resource management, it is necessary to amortize the capitalized amount over a period of time. So, here one will take the age of the employee at the time of recruitment and at the time of retirement. Out of these, a few employees may leave the organization before attaining the superannuation. This method is the only method of Human Resource Accounting that is based on sound accounting principles and policies.

Limitations

  • The valuation method is based on the false assumption that the dollar is stable.
  • Since the assets cannot be sold there are no independent checks of valuation.
  • This method measures only the costs to the organization, but ignores completely any measure of the value of the employee to the organization.
  • It is too tedious to gather the related information regarding the human values.
  • it may be possible that the employee is already fully trained and there is no need to employ any development, training, recruitment cost.It will create difficulty for a company to find out CTC according to acquisition model.
  • Does not account for software which can reduce the overall cost of human resources from by having integrated software completing the tasks of staff.

Replacement cost approach

This approach measures the cost of replacing an employee. According to Likert (1985) replacement cost includes recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.