“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 it is placed, applied and developed in the right direction.
Till the recent past, organisations took few efforts to assign monetary value to human resource in their accounting practice. Behavioural scientists initiated efforts to develop appropriate methodology for finding out the value of human resource to the organisation.
According to Flamholtz – “Human resource accounting is accounting for people as an organisational resource. It involves measuring the costs incurred by business firms and other organisations to recruit, select, hire, train, and develop human assets. It also involves measuring the economic value of people to the organisations.”
Learn about the definitions and meaning of human resource accounting provided by eminent authors, management thinkers and various institutions.
Definition of Human Resource Accounting – By Eminent Authors, Management Thinkers and Various Institutions
Definitions of Human Resource Accounting – Provided by Woodsuff, Flamholtz and American Accounting Association’s Committee
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 development of employees, but also the quantification of the economic value of the people in an organisation.
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In the words of Geoffrey M. N. Baker, “Human resource accounting is the term applied by the accountancy, profession to quantify the cost and value of employees to their employing organization.”
Another definition given by Woodsuff Jr. R. L., Vice President of R. G. Barry Corporation, Columbus, Ohio, U.S.A reads as follow:
“Human resource accounting is an attempt to identify, quantify and report investment made in resources of the organization that are not presently accounted for under conventional accounting practice. Basically it is an information system that tells management what changes over the period of are occurring to the human resources of the business. It must be considered as an element of a total system of management-not as separate ‘device’ or ‘gimmick’ to focus attention on human resources.”
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According to Flamholtz – “Human resource accounting is accounting for people as an organisational resource. It involves measuring the costs incurred by business firms and other organisations to recruit, select, hire, train, and develop human assets. It also involves measuring the economic value of people to the organisations.”
Human resource accounting is primarily involved in measuring the various aspects related to human assets. Its basic purpose is to facilitate the effective management of human resources by providing information to acquire, develop, retain, utilise, and evaluate human resources.
Therefore, HRA comprises of valuation of human resources, recording the valuation in the books of accounts and presenting this information in the financial statements for communication.
Definition of Human Resource Accounting – According to Davidson and Roman L Weel
In 1891, first William Patty calculate the value of human resource in the form of money. Lev and Schwartz (1971) is the first person who discover above formula of value of employee. Most popular book of human resource accounting is Human Resource Accounting: Past, Present and Future which is written by Caplan, Edwin H. and Landekich, Stephen.
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Thus, Human Resource Accounting is a term applied by the Accountancy Profession to quantify the cost and value of employees of their employing organisation. Human Resource Accounting is the process of assigning, budgeting, and reporting the cost of human resources incurred in an organization, including wages and salaries and training expenses.
Human Resource Accounting is the activity of knowing the cost invested for employees towards their recruitment, training them, payment of salaries & other benefits paid and in return’ knowing their contribution to organization towards its profitability.
Flamholtz of university of California, Los Angeles 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”. Human Resource Accounting (HRA) means to measure the cost and value of the people (i.e. of employees and managers) in the organisation. It measures the cost incurred to recruit, hire, train and develop employees and managers.
Davidson and Roman L Weel – “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.”
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HRA also finds out the present economic value of its employees and managers. After measuring the cost and value of its employees and managers, the organisation prepares a report. This report is called HRA Report. It is shown to the top level management. It can also be shown to the employees, managers and outside investors.
Definition of Human Resource Accounting – Put Forward by American Accounting Association
In the beginning of industrialization, proper attention was not paid towards the working force. It was treated as a cog in the machine. And no accounting was done at that time. Now, with the changing situation, nature of job, competition and technology, the importance of HR accounting is realized. To meet the HR requirement for fast-changing technology, information’s regarding numbers, types and skills of employees must be made available so that management can know HR costs.
Accounting is commonly known as language of business. The main function of a language is to v communicate matters relating to different areas of business operation to the users. Thus we can say, “Accounting is the art of recording, classifying and summarizing in a significant manna- and in terms of money, the transactions and events of financial character and interpreting the results thereof”.
Human resource accounting is an attempt to identify and report investments made in the human resources of an organisation that are not presently accounted for under conventional accounting practice. Basically, it is an information system that tells the management what changes overtime are occurring to the human resources of the business, and of the cost and value of the human factor to the organisation.
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The system may serve both the internal and external users, providing management (internal users) with relevant data on which to base recruiting, training and other development decisions and supplying investors, lenders and other external users of financial statement with information concerning the investment in and utilisation of human resources in the organisation.
Accounting is a man-made art and its principles and procedures have been evolved over a long period to aid business in reporting for the management and public. Of the four factors of production, viz., man, money, material and land, the last three of them are amenable to conventional accounting, but the first one, i.e., the human resource has not been subject to such accounting. Over the last two decades the idea of accounting for human resources is gaining active consideration.
Much of the work on accounting for human resources focused primarily on development or validation of HRA concepts. The traditional practice of treating all expenditure on human capital formation as an immediate charge against income is not consistent with the treatment accorded to comparable outlays in physical capital.
The American Accounting Association strongly criticised the practice of assigning a Zero value to an asset and stated that ‘Costs should be capitalised when they are incurred in order to yield future benefits and when such benefits can be measured.’
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Management of any concern continuously strives hard for obtaining maximum efficiency. In order to measure the effectiveness of any firm the normal method is to examine financial statements. These statements include balance sheets in which physical assets such as cash accounts receivables, inventory and plant are recorded. These statements normally do not mention the productive capacity of the workers or goodwill of the company.
HRA is the art of valuing, recording and presenting systematically the work of human resources in the books of accounts of an organisation. Thus, it is primarily an information system, which informs the management about the changes that are taking place in the human resource of an organisation.
Human resource accounting can be defined as a process of recording, classifying and summarizing data relating to human resource and communicating these information to the concerned parties.
In HR accounting, the account of human resource is kept and further it is communicated to the management to take necessary decisions regarding adjustment, procurement and development of human resource.
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Some renowned management experts have defined the concept of HR accounting as follows –
Human resource accounting is, “the measurement and quantification of human organisational inputs, such as recruiting, training, experience and commitment”. (Stephen Knauf)
Human resource accounting is defined as – “accounting for people as organisational resources. It is the measurement of the cost and value of people for the organisation”. (Eric Flamholtz)
HR accounting includes the following steps:
(a) Recording data regarding HR
(b) Summarizing data
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(c) Communication of HR data.
Importance or need of HRA is realized due to following reasons:
(a) HR is the most important element of production.
(b) No information is available in conventional accounting regarding HR.
(c) In human resource, capital investment is very high.
(d) HR requirement in number is changing from time-to-time.
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(e) Types and skills of HR are different at different times.
(f) Technological changes.
(g) Competition in the market, and
(h) Conventional accounting is not supporting management to take proper decision regarding HR.
Definition of Human Resource Accounting – According to Archel
Business organizations use tangible assets—fixed and current, intangible assets, and investment assets to create value for the shareholders. Fixed assets refer to land, buildings, equipment, machinery, vehicles, furniture, etc., which are tangible and have a normal life of more than 12 months. Current assets are stocks, debtors, cash, and other current assets that are realizable within 12 months.
It is important to understand that some businesses, particularly those in the service industry, have low fixed assets and are not capital intensive. However, manufacturing businesses such as steel, automobiles, telecom equipment, etc. are capital intensive and, therefore, require more fixed assets.
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Most tangible assets exist in the physical form and are easy to evaluate, so their worth can be incorporated in the balance sheet. However, intangible assets such as goodwill, brands, and human resources (HR) are difficult to be valued and, hence, incorporated in the balance sheet.
Once their value is ascertained, these assets too depreciate like tangible assets over their useful economic life. It is these assets that play a critical role in the growth of certain businesses and, therefore, their value needs to be ascertained, so as to duly incorporate their worth and give these assets a due accounting treatment.
Importance and relevance of human resource accounting has been appreciated by a number of authors over the past four decades. Rensis Likert undertook research in the area of HR accounting in the 60s. He emphasized on the qualitative aspect of HR planning that contributes to long-term gains and benefits.
In the resource theory highlighted that the competitive position of an organization largely depended upon its HR. According to Archel (1995), it is HR that provides the rationale for some firms being more productive and profitable as compared to others.
According to American Accounting Association (1970), HR accounting is the human resource identification and measuring process and so is its communication to the interested parties. Like any other resource, HR has two sides—asset value and procurement cost.
However, in case of HR, as per generally acceptable accounting principles, only the procurement/maintenance cost is accounted for in the balance sheet and not the asset value.
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With the knowledge economy playing a greater role in business, human capital plays a critical role within the enterprise and a need to evaluate it in the balance sheet has been felt. Human resource accounting attempts to measure and incorporate its potential in monetary terms in the financial statements of a company.
Some of the key parameters that are used to attach value to human resources are experience, education, psychological traits, intellectual property, and, above all, their future earning capacity to the company. The idea of HR accounting is gaining more and more prominence particularly in HR-oriented organizations in areas such as law and accounting, consulting, IT, advertising and marketing research, education, hospitality, health, etc.
Different methods and approaches are used by organizations to reflect the value and worth of its people. Two broad categories in which different methods for HR accounting can be classified are cost-based methods and economic value- based methods.
1. Cost-based methods refer to the cost that a company has incurred in recruitment, hiring, training, and developing human resources. Prominent cost-based methods are—(i) historical cost or the cost of acquisition to be capitalized and written off during the expected useful life of employees; (ii) replacement cost, wherein human resources are valued, based on the monetary implication of replacing personnel; and (iii) competitive bidding, capitalizing on the earning potential of human resources by using opportunity cost concept.
2. Economic value-based methods emphasize on the capitalization of a company’s earnings. The prominent economic value-based methods are—(i) Jaggi and Lau method, a group-based approach that contributes to productivity and performance in the organization. It is used for estimating the value and worth of human resources; and (ii) economic value method that considers net present value of incremental cash flows on account of human resources.
In India, the Companies Act (1956), does not require explicit disclosure of human assets in the financial statements of the companies. However, realizing the benefits derived from these assets, some companies have started disclosing all relevant information in their books of accounts.
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Thus, it is the financial statements and the details therein along with the notes to accounts that gives a clear picture about the financial working position of the company. It answers questions such as how far has it been able to utilize the funds optimally? To what extent has it been able to meet the corporate objectives?
The information given in the financial statements has different meanings to different stakeholders. The companies that are able to respond to the objectives of various stakeholders to meet their concerns and objectives survive and grow in the long run.
Definition of Human Resource Accounting
“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 it is placed, applied and developed in the right direction. Till the recent past, organisations took few efforts to assign monetary value to human resource in their accounting practice. Behavioural scientists initiated efforts to develop appropriate methodology for finding out the value of human resource to the organisation.
They were against the conventional accounting practice for its failure to value the human resource of an organisation along with physical resources. 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.
Human resource accounting has been given due importance in recent years due to the following reasons:
Firstly, there is genuine need for reliable and complete management of human resources.
Secondly, a traditional framework of Accounting is in the process to include a much broader set of measurements than was possible in the past. The people are the most important assets of an organisation but the value of this assets yet to appear in financial statements. It does not get included in management information systems too. Conventional accounting of human resources took note of all expenses of Human capital formation which does not seem to be correct or meeting the actual needs.
Human Resource Accounting is the measurement of the cost and value of people to the organisation. It involves measuring costs incurred by the organisations to recruit, select, hire, train and develop employees and judge their economic value to the organisation.
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 organisation.
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.
Definition of Human Resource Accounting – Propounded by Famous Mangement Thinkers Like: Flamholtz , Lace, Davidson and R.L.Woodruff
The subject of offering measures of the values of people to the organization through human resource accounting has tempted human resource professionals and academics alike.
Flamholtz and Lace (1981) have defined this approach in the following way:
“Human Resource Accounting may be defined as the measurement and reporting of the cost and value of people as organizational resources. It involves accounting for investment in people and their replacement costs, as well as accounting for the economic values of people to an organization.”
They go on to describe the value of an employee to the firm as the present value of the difference between wage and marginal revenue product. An employee’s value drives from the ability of the firm to pay less than the marginal revenue product.
Flamholtz refers to human resource accounting as – “accounting for people as an organizational resource”. According to him, it involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human resources. It also involves measuring economic value of people to organizations. Eric Flamholtz’s definition makes it clear that the terms “human resource” recognizes people who form organizational resource.
To quote Davidson, “Human resource accounting in the measurement of the cost and value is a term used to describe a variety of proposals that seek to report and emphasise the importance of human resources knowledgeable, trained and loyal employees in a company’s earning process and total assets.”
In the words of R.L.Woodruff, Jr. Vice President. R.G. Barry Corporation the company which undertook pioneering work (1960s) in developing human resource accounting -“Human Resource accounting is an way to identify and report investment made in various resource of the organization that are not presently accounted for under conventional accounting practice.”
Woodruff further considers it to be an information system that tells management what changes over time are occurring to the human resources of the business.
In the foregoing definitions one may not find unanimity on what human resource accounting is but one point should not escape notice – the significance of information. Human resource accounting system requires and produces a great deal of information.