Human Resource Accounting(HRA): Definition, Advantages, Limitations

Human Resource AccountingHuman Resources Accounting involved in identifying, measuring, capturing, tracking and analyzing the potential of the human resources of a company and communicating the resultant information to the stakeholders of the company.

Human Resource (HR) is though one of the valuable assets of the organization, there is no statutory regulation to report it in the organization’s annual report.

But sometimes the HR value of an organization can exceed its’ tangible asset value, but traditional accounting systems provide little chance to record and recognize these values of HR.

For instance, a few years back when Bill Gates declared to retire from the Microsoft Corporation, the share price of the company fall in a large amount.

But traditional accounting suggests no impact on the financial condition of the company, but the actual scenario is totally different.

It was a method by which a cost was assigned to every employee when recruited and the value that the employee would generate in the future. Human Resource accounting reflected the potential of the human resources of an organization in monetary terms, in its financial statements.

Definition of Human Resource Accounting

Ravindra Tiwari (2012) has pointed out, “Human Resource Accounting is an attempt to identify, quantify and report investment made in Human resources of an organization that is not presently accounted for under conventional accounting practice”.

“Human Resource Accounting (HRA)refers to the measurement and quantification of human organizational inputs such as recruiting, training, experience, and commitment”. – Stephen Knauf (1983)

“Human Resource Accounting is accounting for people as organizational resources. It is the measurement of the cost and value of people for the organization” – Eric Flamholtz (1974)

“A term used to describe a variety of proposals that seek to report and emphasize the importance of human resources – knowledgeable, trained and loyal employees in a company earning process and total assets.” – Davidson and Roman L Weel

“Human resource accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties”. – American Accounting Association (1973)

“Human resource accounting is an attempt to identify and report investments made in human resources of an organization that the presently not accounted for in a conventional system that tells the management what changes over time are occurring to the human resources of the business”. – Woodsuff (1970)

“Human Resource Accounting involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organization”. – Palanivelu, R.P (2007)

It is clearly evident from the above definitions that human resource accounting is the process of identifying and reporting the investment made in the Human Resources of an organization that is presently not accounted for in the conventional accounting practices.

Human Resource Accounting is the art of valuing, recording and presenting the work of all human resources in the accounts of an organization. It can help management in taking vital decisions relating to selection, layoff, transfer, training, and promotion.

The modern view is that cost incurred on any asset as human resources need to be capitalized as it provides benefits measurable in monetary terms.

Measurement of cost and value of the people in organizations is highly important, costs incurred in recruitment, selection; hiring, training and development of employees, along with their economic values are very much relevant for Human Resource Accounting.

Therefore, Human Resource Accounting can be defined as the process of identifying, recording, measuring human resources and communicated related financial information associated with the human resource for interested users.

Advantages / Benefits of Human Resource Accounting

The main purpose of the Human Resource Accounting is to help human resource professionals and senior managers to use human resources of an organization efficiently and effectively.

Human Resource Accounting is intended to provide the users with information to acquire, develop, allocate, conserve, reward and utilize human resources.

Human Resource Accounting measures the cost and the value of people in an organization for use in a variety of management decisions.

Human Resource Accounting provides information about the total cost of human assets which can use for calculating their benefits for business by comparing it with the benefits provided by employees.

Human capital becomes the most important asset in the corporation to extract value. The present accounting system ignores the importance of human resource value. Managers lack information about the effectiveness and efficiency of human resource investment.

Experts identified that Human Resource Accounting produces a variety of benefits for management, employees, and stockholders, which are listed below:

  1. Human Resource Accounting provides useful information about the cost and the value of human resources. It shows the strengths and weakness of human resources. All this information helps the managers in planning and making the right decisions about human resources.
  2. Investors would like to know the value of a firm’s human asset. Moreover, they want to know about an organization’s investment in human resources. This information would assist them in making decisions to acquire, retain and dispose of the stock.
  3. Human Resource Accounting provides useful information for making suitable personnel policies about promotion, favorable working environment, and job satisfaction of employees, etc.
  4. It allows management personnel to monitor effectively the use of human resources.
  5. It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved.
  6. It helps in the development of management principles by classifying the financial consequences of various practices.
  7. Only reputed organizations conduct Human Resource Accounting. So, competent and capable people want to join these organizations. Therefore, it attracts the best employees and managers to the organization.
  8. It provides cost/value information for making management decision about acquiring, allocating, developing, and maintaining human resource in order to attain cost-effectiveness.
  9. It offsets uncertainty and change, as it enables the organization to have the right person for the right job at the right time and place.
  10. It provides scope for advancement and development of employees by effective training and development.
  11. It helps the individual employee to aspire for promotion and better benefits.
  12. It aims to see that human involvement in the organization is not wasted and brings high returns to the organization.
  13. It can foresee the change in value, aptitude, and attitude of human resources and accordingly change the techniques of interpersonal management.

Limitations or Disadvantages of HRA (Human Resource Accounting)

Many difficulties are involved in the implementation of human resource accounting.

Few important limitations or demerits are mentioned below:

  1. There is no specific guideline for measuring the cost and value of human resources.
  2. While valuing the human assets, demand for rewards and compensation might be higher.
  3. The nature of amortization to be followed is yet to be fixed up.
  4. Tax laws do not recognize human assets and in that sense, it might be theoretically only.
  5. Several methods are available in valuing human resources, but there is a lack of their wider acceptance.
  6. It is a difficult task to value human asset.
  7. Human Resource Accounting is full of measurement problems.
  8. Employees and unions may not like the ideas.
  9. The life of a human being is uncertain. So its value is also uncertain.
  10. All the methods of accounting for human assets are based on certain assumptions, which can go wrong at any time. For example, it is assumed that all workers continue to work with the same organization until retirement, which is far from possible.
  11. It may lead to jealousy among the employees when they find differences in their relative value. One can think that its price is very high and the other’s price is very low and this may destroy team solidarity.
  12. It lacks empirical evidence.
  13. There is no universally accepted method of the valuation of human resources.

Conclusion

The traditional accounting practices simply ignored the value of human factors in the organization and preferred to treat it as an expense and expendable factors.

This fundamentally lopsided attitude towards human resources goes against the interest of the employees decisively.

For instance, the cost of training incurred to update the skills and knowledge of the employees were treated only as expenses and not as an investment.

Although human resource accounting is still in its infancy as far as its development is concerned, there are a few approaches available to the study of human resource accounting.

However, none of these approaches has so far found universal acceptance, because they have inbuilt contradictions, incompleteness or inability. These approaches have thus far failed to fulfill the basic requirements of traditional accounting concepts and practices like the double-entry concept.

It is still extremely difficult to determine the actual value of the human resource of the organization through the different methods and accounting techniques have already proposed for human resource accounting.

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