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Question 1

History of Human Resource Accounting


Eric G. Flamholtz (The Anderson School, UCLA, Los Angeles, California, USA)

Maria L. Bullen (School of Accountancy, Robinson College of Business, Georgia

State University, Atlanta, Georgia, USA)

Wei Hua (The Anderson School, UCLA, Los Angeles, California, USA)

The purpose of this paper is to provide an overview and history of human resource
accounting (HRA) with the objective of promoting both continued academic research
and organizational applications. The history of HRA illustrates how academic
research can generate improvement in management systems. The paper defines HRA
and suggests implications of measuring human capital for financial reporting and
managerial uses. Recent Swedish‐based HRA applications with respect to measuring
human assets and intellectual capital, including the Skandia Navigator, illustrate how
intellectual history and developments in business schools can influence business

Eric G. Flamholtz, Maria L. Bullen, Wei Hua, (2002) "Human resource accounting: a
historical perspective and future implications", Management Decision, Vol. 40 Issue:
10, pp.947-954,
Question 2


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 the human resources can assist organizations in accurately documenting
their assets.

Human resource accounting (HRA) is similar in principle to the financial accounting. That is,

just as financial accounting reflects the costs of assets such as building and machinery, human

resource accounting shows human resources as capital not as expenses. Thus, HRA shows the

investment the organization makes in its people and how their values change over a period of

time. In simple words,

- Woodruff
Question 3

The human resource process was established to fulfill a number of objectives within the
organization. These include:

 To enable management of the organization to effectively monitor the use of human resources.
 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.
 To monitor effectively the use of human resources by the management.
 To have an analysis of the human assets i.e. whether such assets are conserved, depleted or
 To aid in the development of management principles. and proper decision making for the
future by classifying financial consequences of various practices.
 To create managerial awareness about the value of human assets.
 To ascertain the conservation, appreciation and depreciation of human resources during any
given time period.
Question 4
Benefits of HRA

There are several benefits accrue from the human resources practices.

They are listed below:

 HRA provides vital information about the human capital to the organization enabling
executives to take right decisions in respects of recruitment, promotions, transfers etc.

 HRA provides a true picture about the human resources with their strengths and
weaknesses in the enterprise so that the recruitment or retrenchment policies can be

 HRA provides feedback to the performance of employees enabling managers to evaluate

the effectiveness of current policies and practices of human resources.

 HRA facilitates comparison between enterprises or with the industry and enable the
investor to make a choice of enterprise to invest.

 HRA is a tool of cost control.

 The organization records physical resources and value of human resources are ignored
which does not provide correct evaluation. HRA practices prevent the faulty evaluations.
Question 5

1. Historical Cost Approach

This approach was developed by William C. Pyle and R.G. Barry corporation, a leisure

footwear manufacturer based on Columbus, Ohio (USA) in 1967.

In this approach, actual cost incurred on recruiting, hiring, training and development the human

resources of the organization are capitalized and amortized over the expected useful life of the

human resources. Thus a proper recording of the expenditure made on hiring, selecting, training

and developing the employees is maintained and a proportion of it is written off to the income of

the next few years during which human resources will provide service.

But it suffers from the following limitations:

 It takes into account a part of the employees acquisition costs and thus

ignores the aggregate value of their potential services.

 It is difficult to estimate the number of years over which the capitalised

expenditure is to be amortized.

2. Replacement Cost Approach:

This approach was first suggested by Resins Likert, and was developed by Eric G. Flamholtz on

the basis of concept of replacement cost. Human resources of an organisation are to be valued on

the assumption that a new similar organization has to be created from scratch and what would be

the cost to the firm if the existing resources were required to be replaced with other persons of

equivalent talents and experience. It takes into consideration all cost involved in recruiting,
hiring, training and developing the replacement to the present level of proficiency and familiarity

with the organisation.

But it suffers from the following limitations:

 This method is at variance with the conventional accounting practice of valuing assets.
 There may be no similar replacement for a similar certain existing asset. It is really
difficult to find identical replacement of the existing human resource in actual practice.

3. Opportunity Cost:

This method was first advocated by Hc Kiman and Jones for a company with several divisional

heads bidding for the services of various people they need among themselves and then include

the bid price in the investment cost. Opportunity cost is the value of an asset when there is an

alternative use of it. There is no opportunity cost for those employees that are not scarce and also

those at the top will not be available for auction. As such, only scarce people should comprise

the value of human resources.

But this approach suffers from the following limitations:

 It has specifically excluded from its preview the employees scarce or not being ‘bid’ by
the other departments. This is likely to result in lowering the morale and productivity of
the employees who are not covered by the competitive process.

4. Standard Cost:

Instead of using historical or replacement cost, many companies use standard cost for the

valuation of human assets just as its used for physical and financial assets. For using standard

cost, employees of an organization are categorized into different groups based on their
hierarchical positions.
Among these methods Historical Cost Principle is more appropriate because:

The concept of historical cost principle is that the assets are recorded base on the price at the

time they are purchased. And the liabilities are recorded based on the values that expected to pay
at the original value rather than market value or inflation adjusted value.

Example: The example of the historical cost principle in IFRS, PPE per IFRS is require to record
initially at cost, and the value will be subsequently reduce by depreciation or impairment.

Advantages of Historical Cost Principle:

The advantage of historical cost principle is that the users of financial statements could know
exactly the original value of Assets or Liabilities in the financial statements as its require no

Advantages of Human Resource Accounting:

Many organizations, particularly in the USA, are following the human resource accounting

approach. In our country, too, there is a need for establishing systems which can generate

monetary and non – monetary information about human beings in the organizations, particularly
about managerial talents whose dearth is felt by business organization.

This is due to the fact that human resource accounting offers following advantages:
1. It helps in giving valuable information to the management for effective planning and
managing human resources.

2. It helps in measurement of standard cost of recruiting, selecting, hiring and training people and
organization can select a person with highest expected realizable values.

3. Human resource accounting can change the attitude of managers completely, thereby, they

would try to maximize the expected value of human resources and effective use of human
resources in the organization.

4. It also provides necessary data to devise suitable promotion policy congenial work
environment and job satisfaction to the people.
Question- 6

Disadvantages of Human Resource Accounting

1. Not easy to value human assets:

There are no guidelines differentiating the “cost” and “value” of human resources. The existing
valuation system suffers from many drawbacks. After valuing human resources in a specific
way, many of them may leave the organisation.
2. Results in Dehumanizing Human Resources:
There is a possibility that HRA may lead to dehumanizing and manipulation employees. For
example, a person having a lower value may feel discouraged and this, in itself, may affect his
competence in work.

3. No Evidence:
The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a
managerial tool facilitates better and effective management of human resources.

4. HR is full of measurement problems:

There is no agreement among the accountants and financial professionals regarding the
measurement process. In what form and manner should their value be included in the financial

5. Employees and Unions may not like the idea:

There is constant fear of opposition from trade unions. Placing a value on employees would
prompt them to seek rewards compensation based on such valuation.
Human Resource Accounting Context In Bangladesh

Though HRA is not practiced in BD but Success and failure of corporate undertakings

purely depends upon the human resources. Now-a-days human resource is a prime concern for

all the institutions especially for financial institutions as they have required investing a huge

amount of capital. In this context, it is worthwhile to examine human resource accounting

practices in corporate sector i.e. banking sector in Bangladesh. For the convenience of

completing the research paper successfully it has been prepared based on a sample of 25

commercial banks and practice of human resource accounting has been measured on five broad

indicators which incorporates several sub indicators. In the survey it has found only few banks

had mechanism to practice of human resource accounting in 2010 and now in 2011 almost the

same number of banks has such mechanism and score improved by .09 due to the some

enhancement program in this regard and it has been found that banking sectors in Bangladesh are

often alleged as too vague in the issues of practicing human resource accounting.
HRA Usage in various Countries
HRA usage in USA

– American Accounting Society Committee on HRA

“Human resource accounting is the measurement of the cost and value of the people for the

– Eric Flamholtz of university of California, Los Angeles

IT, hospital, sports club, research oriented and many organisations mostly depends on human
capital rather physical capital. When we have a look at service oriented organisations which are
creating more wealth to the society typically have greater significance to the human resources as
the value of the knowledge and skills of its personnel more than that of physical assets of the

HRA usage in INDIA

1BHARAT HEAVY ELECTRICALS LTD.(BHEL) BHEL was set up in Nov.1956 at Bhopal

to cover conversion, transmission, utilization and conservation of energy in core sector of the
economy like power industry and transportation and fulfils vital infrastructure needs of the
country. Today, the company has 14 manufacturing divisions of service centre and 4 power
sector regional centers spread all over India and abroad to provide prompt and effective service
to customers. Human resources have been valued on the model based on Lev and Schwartz with
the following assumptions: " Present pattern in employee compensation, including direct and
indirect benefits, including the effect of provision for wage division.


statutory corporation on 23June, 1993 at New Delhi and its corporate headquarter at Dehradun
with project centre office located throughout the country. Intellectual capital is considered one of
the most valuable assets of this organization. It is the key to its success. Development of human
resources facilitates an organization to meet the challenges of the ever changing business
scenario. For valuation of human assets, SAIL has adopted the ECONOMIC VALUATION
MODEL METHOD and the basic model as conceived by Lev and Schwartz. Minor
modifications have been made to suit special requirements.


The concept of HRA is one of the branches of modern accounting system. Earlier, this account
system developed by an Italian Monk, Luca Paciolo who used his analytical skills to discuss the
system of double entry book keeping system. By laps of time, the span of accounting has been
accelerated and as part of it; the demand of the public and the organization have turned into
diversification in practicing in accounting system. Most of them want to know the actual cost of
human resources and future economic value of human resources because they have required
investing a huge amount of capital to develop human resources. As a result of this human
resource accounting has been developed.