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International Journal of
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Accounting for human

resource development in the
public sector
a
Kenneth A. Klase
a
Department of Public Administration, West
Viginia University, Post Office Box 6322,
Morgantown, West Virginia, 26506-6322
Published online: 26 Jun 2007.
To cite this article: Kenneth A. Klase (1996): Accounting for human resource
development in the public sector, International Journal of Public Administration,
19:5, 661-688
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INT'L. J. OF PUB. ADMIN., 19(5), 661-688 (1996)
ACCOUNTING FOR HUMAN RESOURCE

DEVELOPMENT IN THE PUBLIC SECTOR
Kenneth A. Klase
Department of Public Administration

West Virginia University
Post Office Box 6322
Morgantown, West Virginia 26506-6322
ABSTRACT
This article evaluates the merits of utilizing human resource

accounting (HRA) concepts to account for human resource
development (HRD) in the public sector. It describes the
development of the economic theory of human capital and the
increasing recognition of human resources as human assets of
public organizations to be managed and accounted for in a manner
similar to capital assets. The development of HRA concepts
concerning human resource value and cost is discussed. These HRA
concepts are applied to HRD and to current and potential uses in
external financial reporting and internal managerial accounting in
public organizations. This article concludes that the application of
HRA ccncepts to HRD would have significant benefit for the
operational and strategic management of human resources in public
organizations. Using HRA information in internal managerial
decision making would demonstrate the value gained in excess of
costs incurred for such activities. The application of HRA concepts
66 1
Copyright 1996 by Marcel Dekker, Inc.

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in pubic organizations, whether to internal managerial a.ccounting

and decision making or to public sector financial reporting, would
heighten the priority of HRD activities by recognizing them as asset
building rather than as an expense.
INTRODUCTION
Public sector organizations are undergoing dramatic change.

They confront an increasing emphasis on performance standards

and demands for new skills. An evolving work environment in the
public sector will require new performance standards going beyond
efficiency to new dimensions of quality, variety, convenience, and
timeliness in provision of public goods and services. To meet new
standards such as these will entail human capital development to
satisfy new skill and competency requirements. In such an
environment, human resource development (HRD) activities could
be the vehicle for developing human capital since they build the
capacity of human resources and strengthen the human dimension
of public organizations which must meet the challenges of a
changing environment.
Unfortunately, not very many public organizations have made

HRD a high priority. In fact, public organizations have been
criticized for not having strategic plans for training and
development and for not linking such designs to long term
organizational goals. Public sector human capital development has
been stymied by a number of contextual problems in the public
sector environment: fear of bureaucratic discretion, lack of a
meaningful relationship between public sector workforce training
and development and customer satisfaction, ambivalence of elected
officials due to political and short-term perspectives, lack of trust
in the ability of civil service employees, and lack of public funds
for human capital development.(') Even more fundamental as a
deterrent to increasing priority on HRD than contextual problems
has been the tendency to see HRD activities as expenses rather than
HRD IN THE PUBLIC SECTOR 663
as building the capacity of human resources to address

organizational problems.
In spite of these limitations, somewhat more attention has been

given, particularly by federal agencies, to human resource
management in the last decade.(2)Human resources have begun to
assume a fundamental importance in public sector organizations,
perhaps to meet the realities of evolving public expectations and
changing technology. Human resources in public organizations have
begun to be perceived as strategic assets. A strategic management

approach to the public workforce ties these human resources to the
strategic plans of the public organization. In essence, the
availability of people is managed through the human resource
management cycle (recruitment, selection, placement, performance
appraisal, compensation and rewards, and training and
development) in ways that meet the strategic requirements and
resource constraints of the public organization. Thus human
resource management in the public sector is becoming the strategic
management of a strategic res~urce.'~'
An input-output model of human resource management depicts

a system designed to transform inputs (human resources) into
outputs (human services). In the process, human resource value is
produced. The human resource management process performs the
functions of acquisition, development, allocation, conservation,
utilization, evaluation, and compensation. Perhaps most important
to the value added to human resource inputs in this process is
human resource development. Development of human resources
involves enhancing the knowledge, skills, and abilities of
employees through formal programs and on-the-job training.
Expenditures for human resource development can be viewed from
a strategic perspective as capital investments. Although human
capital is not clearly defined in either public or private
organizations, many types of human resource spending in the public
sector are beginning to be considered as investments in human
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capital, particularly expenditures for education and training

program^.'^)
Public sector managers face the problem of assessing the value

of investments in human resource development versus the
estimation of costs incurred in the development process. This study
examines the development of human resource accounting (HRA)
concepts about human resource value and cost. It evaluates the
merits of utilizing HRA concepts to account for human resource
development (HRD) in public sector organizations. It describes the

development of the economic theory of human capital and of the
concern for human assets as an organizational asset. Models are
discussed for measurement of human resource value and cost which
have current and potential uses for raising the priority of HRD in
the operational management and strategic management of human
resources.
HUMAN RESOURCE ACCOUNTING CONCEPTS AND

THE ANALYSIS OF HRD COSTS AND BENEFITS
Human resource accounting (HRA) has developed since the

1960s as a body of research and theory to account for an
organization's human assets. It had its impetus in accounting for
the human assets of private sector organizations, but its conceptual
basis applies to organizations in general, whether public or private.
One definition of HRA describes it as "a process of identifying and
measuring data about human resources and communicating this
information to interested parties".") An equally broad definition of
HRA notes that "it involves accounting for people as organizational
resources" and, more specifically, that "it involves measuring the:
costs incurred by organizations to recruit, select, hire, train, and
develop human assets".(6) Beyond the costs incurred, H W L
recognizes that the skills, experience, and knowledge that peoplr:
possess in an organization as a result of those expenditures are
assets that can be considered as human capital. This is the
conceptual basis for the economic theory of human capital espoused

by Nobel laureate Theodore ~ c h u l t z . ' ~ )
HRA concepts have direct application in accounting for HRD

in public organizations. The primary concern of public
organizations about HRD is trying to find out how effective
training and development is and what it means to the organization.
One of the most important potential benefits of accounting for
HRD is to help public organizations get the best return possible on
the expenditures for investments in human resources through HRD

activities. The only way to evaluate whether training and
development activities are being effective is to systematically
account for HRD expenditures and relate them to their effects.
Naturally, the effects of investments in HRD are expected to be
positive increases in the value of human resources reflected in
positive future benefits for the organization. Therefore, one of the
most productive uses of accounting for HRD might be in
facilitating cost-benefit and return on investment analysis of current
and proposed HRD activities.@'
Until recently, public organizations have often been relatively

less concerned than private sector organizations with the benefits
derived from and the costs associated with HRD activities and
programs. Increasing cost-consciousness in public organizations is
now placing relatively more emphasis on demonstrating benefits or
the value of training and development activities to the public
organization and matching those with the associated costs. Cost-
benefit analysis is an established tool for evaluating program costs
against their benefits.
Concepts of Human Resource Cost Applicable to HRD
The costs of HRD activities are difficult to derive. Determining

HRD costs involves valuing inherently intangible and in many
instances relatively nonquantifiable costs. The notion of human
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resource cost is derived from more general concepts of cost.

Human resource costs are generally considered "sacrifices incurred
to acquire or replace people in an organization".@)Human resource
costs, like costs in general, have expense and asset components.
The expense portion of the cost refers to the portion consumed
during the accounting period whereas the asset portion reflects
expected future benefits. It is the measurement of these expense and
asset components that is the major concern of HRA.(')
The general concepts of human resource cost previously

described are useful in understanding how H W costs are
investments in human assets and enable them to acquire value. A
I
major portion of the costs incurred under historical or replacement
cost concepts of human resource cost are related to HRD.
Determining the HRD costs associated with training and
development activities requires understanding how these specific
costs are typically categorized.
Full costs of HRD activities include direct and indirect costs

related to designing and conducting training and development
programs. Direct costs are expenses associated with costs traceable
to specific HRD programs or activities. HRD direct costs include
personnel costs and out-of-pocket expenses such as travel fees and
daily expense allowance (per diem), cost of purchased learning
materials, contracted consultants, training room rental, and food
service. Out-of-pocket expenses rarely exceed ten per cent of a
training program's total costs, and the major direct costs are
personnel related. Indirect costs are necessary functional
expenses-that cannot be directly associated with a specific project
or activity-often called overhead. It includes costs fbr general
building maintenance and repair, utilities, and general and
administrative expenses. The full costs of HRD activities are the
total of direct costs plus indirect costs. The costs of various phases
of training and development (administration, research and
development, analysis, design, development, delivery, evaluation,
and marketing) can be divided into personnel costs, outside

purchase of goods and services, facilities costs, incidental expenses,
and general and administrative costs. The most significant element
of total costs of HRD activities is the full cost of the instructors'
and participants' time and consequent salary costs.(I0)
Carnevale and Schulz present a four-step standardized model

to account for the total costs of training and development. First, an
organization-specific definition of training and development
activities is established. Such a definition often includes activities

such as formal training courses, structured on-the-job training,
employee development activities (e.g.,job rotation), conferences,
seminars, meetings, and employee self-development activities.
Specific and detailed training and development cost categories are
next determined consistent with the general direct and indirect cost
categories previously discussed. Finally training and development
costs are then calculated as indicated in Table 1 and coded
according to the categories developed to determine total HRD
costs.('*)
There are several significant advantages of collecting and

categorizing training and development cost information utilizing a
standardized accounting model such as that described. It enables
organizations to know what their total HRD expenditures are.
Organizations differ in bases used for cost calculations, making
comparisons difficult; nonetheless, general comparisons can be
useful in comparing specific HRD program unit costs with other
programs or organizations. HRD cost information is also useful in
making choices between alternative training and development
programs. Monitoring costs also enables the proportion of
investment in specific training populations, subject areas, and
training providers to be evaluated. It also enables the costs of
various phases of the training and development process to be
evaluated. Availability of cost information thus helps to control
training and development program costs.('')
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TABLE 1
Calculation of Human Resource Development Costs
DIRECT COSTS
Personnel
Training Participant Costs:

Mean salary or wages for training participants + current fringe benefits =

total loaded annual personnel costs per training participant.
Total loaded annual personnel costs per participant I total number of

productive days = average participant salary cost per day.
Average participant salary cost per day 1 number of hours in working day
= average hourly cost per participant.
Training participant cost = number of participants X total contact hours X

average hourly cost per participant.
Training and Other Personnel Costs are similarly calculated.
Total Direct Outside Personnel Costs = cost per day X number (or
fraction) of days worked.
Travel, Per Diem, Accommodations, and Incidental Expenses

Total Travel Costs = average travel costs per person (determined from
personnel record information) X number of travelers.
Average Per Diem Costs are similarly determined.
Outside Goods and Services

Additional Subsidiary Cost = per participant cost X number of
participants or per program total.
Facilities
Facilities Cost = daily or weekly rental fee X number of days or weeks
of rental
TABLE 1 (Continued)
INDIRECT COSTS
Overhead Costs
Base Percentage Indirect Cost Rate X Total Direct Personnel Costs =

Estimated Indirect Cost of Program.
Requires establishing a typical estimated base percentage rate of indirect

costs for all training and development programs or calculating this rate as
follows: ( ( Total training indirect costs ) - ( direct cost of loaded salaries
of employees making a direct contribution to training programs ) ) 1 Total
Loaded Salaries.
Facilities
Facilities Cost for Particular Training Program: Total Facilities Cost
= Cost per Square Foot X Square Footage for Training Facility.
Total Facilities Cost I number of annual productive working days = Cost per
day.
Cost per day X number of days facility used for training program =
Facilities Cost for particular training program.
Equipment Costs
Annual Equipment Cost = Equipment purchase and maintenance costs
I Equipment's Useful Life. Annual Equipment Cost is distributed
evenly to all training and development programs.
Source: Taken from Carnavale and Schulz, 1990, pp. S-9 - S-14
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Comparing HRD Costs to Benefits
HRA information can be specifically used in analyzing the

development of human resources through various forms of training
and education designed to enhance knowledge, skills, and abilities
which in turn increase the value of those human resources to the
organization. HRA can facilitate decisions about resource allocation
to human resource development by aiding in the assessment of the
value of proposed investments in HRD and in the estimation of
associated costs. From this perspective, HRD is a strategy designed

to influence the value of people as human assets to the
organization. Thus, decisions about HRD should be made based on
an assessment of the cost and value involved in the decision.(14'
This is currently done to some degree by many organizations. It
needs to be done much better by many more organizations and
could be more comprehensively done utilizing HRA concepts.
While the costs associated with HRD are difficult but not
infeasible to define and quantify, the benefits resulting from HRD
are even more difficult to measure. Many HRD benefits are
inherently difficult to measure due to their diffuse nature over
activities and time. This is especially true for training that is not
highly technical such as management training. Also attempting to
quantify benefits in dollar terms for comparison to costs is often
problematical. For example, how can you measure in dollars the
fact that training may produce a percentage increase in customer
satisfaction with a service when it likely will not affect user volume
or revenue generated? Methodologies for measuring changes in
individual valuation as a result of HRD activities generally relate
to changes in overall expected future benefits. In order to compare
benefits with associated costs of specific HRD activities, the
incremental increased value associated with the costs of' investments
in specific training and development activities must be measured.
Determining the benefits of HRD means measuring and

evaluating the value of training and development activities for
HRD IN THE PUBLIC SECTOR 67 1
improvements in performance, productivity, or overall

effectiveness. Evaluating training and development activities is best
performed utilizing multiple indicators. A variety of objective
I
measures of improvements is needed (e.g., accuracy, quality, and
productivity rates) to measure changes in performance and
effectiveness before and after the HRD activities. Productivity
measures would involve determining to what degree productivity,
such as increased output, is improved. Performance measures would
evaluate process improvements, such as error rate reductions.
Assessing improvements in organizational effectiveness for public

organizations as a result of training and development programs is
perhaps even more problematical than in private sector
organizations but is potentially feasible through survey research
method~logies."~' While such measures do determine the level of
performance, productivity, and effectiveness as well as changes in
them as a result of training and development programs, the
measures themselves are nonrnonetary quantitative measures and do
not place a monetary value on the improvements achieved as a
result. Thus it is difficult to compare results measured in this
manner to cost information.
In private sector organizations, comparisons of benefits to costs

of HRD activities would involve comparing bottom line savings or
profits that accrue to the expenses incurred in training and
development and examining return on investment. Although this is
not a simple task, it is significantly more feasible than determining
the monetary benefit that accrues to public organizations from
HRD. Some public organizations (e.g., enterprise fund entities like
utilities) operate in a manner similar to private sector organizations:
they sell goods and services to generate revenue to cover their
costs. For such organizations, it should be feasible to use
methodologies similar to those employed for private sector
organizations. Benefits would be determined based on increased
revenues accruing as a result of the costs of HRD activities. For
most other public organizations which do not function like private
sector organizations, it is very difficult to put a dollar value on the
672 KLASE
benefits to be derived from HRD. The nature of the benefits

resulting from HRD activities is a unique aspect of the
measurement problem for public organizations. For example, law
enforcement training and development activities save lives, but it
is not easy to put a dollar value on the lives saved as a benefit;
nonetheless, insurance companies and actuaries do not shy away
from doing so. Most public organizations will not have increased
revenues accruing or other simple measures to estimate the
effectiveness of training and development activities and programs
and will have to use estimated savings or devise methodologies for

establishing what those benefits are.
Benefits from training and development for the public

organization are likely to be more easily quantified as potential
savings or changes in the future benefit to be derived from human
resources (their assessed utility value) rather than increased
revenues. Potential savings can be estimated by a panel of subject
matter experts who would estimate the value of improvements in
efficiency, productivity, and effectiveness or savings that would
result from HRD activities. In this way, a determination is made of
the potential for recovery of training and development costs by
I estimating the value of resultant changes in performance,
productivity, or effectiveness. Such evaluations then become
benchmarks for future estimation of benefits accruing from similar
training and development activities. An alternative method to using
a rating panel is to use historical information to document actual
savings achieved or changes in performance, productivity, and
effectiveness as a result of specific training and development
activities for determining savings achieved or value added.(I6)
Once cost and benefit (or value) information is determined, the

HRD costs must be compared to estimated benefits to determine if
the HRD activity is cost effective. If estimated potential savings or
positive changes in value exceed costs, the HRD activity is said to
be cost effective. The cost effectiveness of other training and
development activities and programs must be compared to
determine if alternative uses of resources may result in higher

potential returns. Use of actual historical data is preferable in the
analysis of costs and benefits; however, the estimation techniques
described can provide reliably sound analysis of the value of
training and development activities. Such analysis can substantiate
the value of investments in HRD not only as expected future
benefits but as contributing more immediate benefits to the
organization.(I7)
HRA CONCEPTS AND

INTERNAL MANAGERIAL DECISIONMAKING
While HRA concepts should be used at a minimum to

determine what HRD programs really cost and what their benefits
are so that HRD activities can be compared as described in the
previous section, HRA concepts can also be used to make better
strategic organizational decisions relating to human resources. The
purpose of HRA is to help management efficiently and effectively
plan and control the use of human resources by providing the
information needed to acquire, develop, allocate, conserve, utilize,
evaluate, and reward human resources. It is a way of looking at
human resource management plans, decisions, and issues and a
means for quantitatively measuring the cost and value of people as
organizational resources. It is useful in analyzing long-range
consequences and hidden costs of organizational decisions in terms
of their effects on the costs and value of the organization's human
resources, for example, in estimating replacement costs associated
with workforce turnover or the impact of reductions in force. Thus,
HRA can serve as a framework for facilitating human resource
decisionmaking and can provide numerical information about cost
and value of people as organizational resources. Thinking in these
terms can encourage a human resource perspective that thinks of
people not as an expense to be minimized but rather as assets to be
optimized.('''
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HRD cost information can be useful from a managerial

accounting perspective for containing total costs of HRD. HRD
costs not only measure costs to the organization for training and
development activities but also represent future value to the
organization. From this broader perspective, HRD costs are an
investment in human resources as human capital or assets. The
asset portion of the human resource development costs is the future
benefits expected to accrue to the organization as a result of the
investments made in training and development costs. A major
benefit of measuring HRD costs is to incorporate the increased

value of human resources into managerial decisionmaking through
the use of managerial accounting information about HRD costs.
Both the cost and the value-added elements of HRD are often
underestimated in internal managerial decisionmaking;
consequently, neither the expense to train human resources to
minimum competency nor the expense to replace human resources
where necessary is generally appreciated.
The use of HRA information for the benefit of internal

management decisionmaking or in a managerial accounting context
applies HRA concepts in a specific and narrowly focused manner.
Managerial benefits can be gained by using straight-forward hiring,
training, and separation cost information. HRA has merit for more
than just putting a dollar value on people, but doing so can
emphasize the significance of human resources. Recognizing human
resources in quantitative terms as management accounting
information can lead to more optimal decisionmaking and operating
results.(19)
Management accounting information can incorporate

predictions of the consequences of various managerial decisions and
can do so without constraints on content or approach. Making
management fully aware of the potential impact of its decisions
through HRA information can have an impact by making
management think of human resources as assets in which

significant investment has been made and of which careful and
effective use should be made.('')
Such managerial accounting information might be useful in a

variety of decisions involving human resources in the areas of
recruitment, selection, hiring and placement, training and
development, turnover, and separation. For example, in one of the
only examples of the application of HRA concepts in a public
sector organization, the U.S. Office of Naval Research funded two

studies in the 1980s to investigate the application of HRA to human
resource management by the U.S. Navy. These studies utilized
HRA concepts in managerial decision making concerning the
replacement costs of Navy civilian industrial engineers.(") Other
applications include the case of organizational downsizing. When
private sector organizations engage in downsizing during
recessionary times, management decisions have been found to be
significantly influenced by management accounting information
reflecting associated human resource benefits and costs.(22)
Obviously, reductions in force in public sector organizations can
produce expenditure reductions, but the costs associated with such
downsizing and the loss of human asset valuation or estimated
future benefits are usually not reflected in the short-term
advantages to be gained by cuts in personnel expenditures. In this
and many other areas of managerial decisionmaking related to, or
having an impact on, human resources in both public and private
sector organizations, use of HRA information in a managerial
accounting context has a significant impact on the decisionmaking
process: it provides a more accurate picture of the overall value of
human resources to the organization, it furnishes a sounder basis
for managerial decisions on the utilization of human resources, and
it aids in the evaluation and monitoring of manpower benefits and
costs of organizational practices and decisions.(23)
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THE ROLE OF HRA IN

RECOGNIZING HUMAN RESOURCES AS ASSETS
AND HRD AS ASSET BUILDING
HRA theorists have encouraged the view that human resources

should be considered assets rather than expenses. Research based
on this viewpoint has been one of the principal sources for the
development of HRA concepts applicable to both the public and
private sectors. One of the ways in which HRA has proposed
implementing this notion is by capitalizing human resources

(assigning a monetary value to them) as an asset on the balance
sheet in financial reporting. This idea was proposed for application
to private sector financial reporting but applies equally well in
principle to public organizations which are also required by
generally accepted accounting principles to have financial
statements, including a balance sheet for the reporting of assets,
liabilities, and changes in fund balance. Considering human
resources as assets for financial reporting purposes is based on the
controversial premise that "an asset can be broadly defined as a
resource which provides an organization or entity with the right to
receive future measurable economic benefits" as opposed to the
traditionally more restrictive and conventional accounting definition
of an asset as "something of value owned ,,.(24) Strictly speaking, it
is the investment in people (e.g., the cumulative cost of training
and development incurred) that can be considered an organization's
human assets.
Concepts of Human Resource Value Applicable to HRD
The concept of human resources as assets requires accounting

for and evaluating HRD activities in terms that assess their value
as investments in human resources. Managemen1 in public
organizations needs to be able to measure the value of human
resources to the organization, i.e., expected future benefits, and
particularly the degree to which that value changes as a result of
training and development activities. People have value because of

their potential utility in providing future services. Like other
resources, the current value of an individual to an organization can
be defined as the present value of future services the employee is
expected to provide. An individual's value to an organization is
determined by an individual's expected realizable value - the
present value of expected future services.(25)
According to Flamholtz, an individual's expected realizable

value is composed of the conditional or potential value of the

individual to the organization and the probability that the individual
will remain with the organization during the individual's expected
service life. Conditional value is dependent on promotability,
productivity, and transferability - all of which are influenced by an
individual's skills and motivation as well as by organizational roles
assigned and the organization's reward system during the
individual's useful life. Organizational roles and rewards also
determine an individual's job satisfaction, which is related to the
probability that the individual will remain with the organization and
ultimately to the individual's expected realizable value to the
organization. Thus, an individual's value to the organization is a
function of both individual attributes and organizational
characteristics.(26)
There are several ways of measuring an individual's value to

an organization that broadly encompass the value of human
resource development. These include the stochastic rewards
valuation model outlined by Flamholtz as well as several other
methods for valuation: original or historical cost, replacement or
current cost, compensation, and opportunity cost. In the stochastic
rewards model of valuation, an individual's value to an
organization depends on the value of the various positions or
service states that individual will occupy in the organization during
his or her tenure as well as on the probability that he or she will
occupy each of those possible service states. Thus the value of
human resources to the organization is based on a stochastic or
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probabilistic process where rewards or benefits to the organization

are realized as transitions are made from one service state or
position to another. The stochastic rewards model of valuation
measures the added value potential of training or development
administered in each service state as a function of a number of
variables including the number trained in each service state, the
expected tenure of each individual trained, the effectiveness of each
program, and the service value of job performance. To actually
determine the value of an individual to an organization utilizing
this model involves significant measurement problems in defining

a set of service states or positions, measuring the value of each
service state to the organization, and estimating an individual's
expected service life and the probabilities that the individual will
occupy each service state at each point during the expected service
life of the individual. As a result, there have been significant
difficulties in applying the model, and surrogate measures might
more easily be used.'")
Other methods of valuation that might serve as surrogates for

measuring an individual's expected conditional and realizable
values to the organization include original or historical cost,
replacement cost and current cost, compensation, and opportunity
The original or historical cost of human resources is
generally considered to be the sacrifice incurred to acquire and
develop people. Original or historical costs typically include the
costs of recruitment, selection, hiring, placement, orientation, on-
the-job training, trainer's time costs, lost productivity during
training, and development costs.(29)Original or historical cost
consists of acquisition costs and learning or development costs.
Acquisition costs include direct costs of recruitment, selection,
hiring, and placement or the indirect costs of promotion or hiring
from within the organization. Learning or development costs are
sacrifices incurred to train a replacement to an expected level of
performance. These costs include the direct costs of formal training
and orientation and on-the-job training as well as indirect costs for
the time of trainers and lost productivity during training.(30)
Especially in the context of managerial accounting, the original or

historical cost of human resources may include opportunity costs in
addition to outlay costs. Outlay costs are the actual cash
expenditures associated with the original or replacement costs.
Opportunity costs are the "revenue foregone or sacrificed in order
to acquire or replace a resource'' or "the benefits that must be
sacrificed in order to use a resource in an alternative way".(31)
Replacement cost of human resources is "the sacrifice that would
have to be incurred today to replace human resources presently
employed .(32) Replacement costs typically include costs attributable

7,
to turnover and the costs that would be incurred to acquire and

develop a replacement if an individual left the organization.
Replacement cost of human resources includes potential
replacement costs, i.e., those associated with a given position, as
well as personal replacement costs, i.e., those incurred in replacing
a person with a substitute capable of providing equivalent services.
Replacement costs typically include acquisition, total learning or
development costs, and separation costs.(33)
Using original or historical cost to measure an individual's

value is consistent with the use of cost as an implicit surrogate of
value as previously discussed. A problem here is that the current
value of an individual after initial acquisition will probably differ
significantly from the costs incurred in acquiring the individual,
due in no small measure to training and development activities. As
a result, the replacement cost may be better than historical cost in
estimating the value of an individual because it represents the
sacrifice to be incurred by the organization in replacing the
individual as a resource under current market conditions. Another
surrogate measure of value is current costs which represent the
market's current assessment of an individual's value as a resource.
Other possible surrogates include compensation and opportunity
cost. Compensation (here the present value of forecasted future
earnings) may also be used as a surrogate since it presumably
represents the organization's assessment of the value of an
individual's services. Opportunity cost measures the value of the
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individual in an alternative use or the value foregone by allocating

the individual to one job rather than another. All of these surrogates
are somewhat difficult to measure and may be questioned on their
validity in adequately representing an individual's value to the
organization. Of the surrogate measures discussed, including
compensation and opportunity cost, historical and replacement costs
are probably most readily measured and more consistent with
conventional accounting concepts in determining an individual's
value to the organization.
The measurement of human resource value utilizing the

methods described results in a broad determination of' individual
value based on expected future benefits. Such broad valuation
models encompass all aspects of an individual's value to an
organization, including the accumulated valuation which results
from training and development activities. In essence, the models do
reflect the value of investments in human resource development
from a macro-perspective. The methods described have some utility
in defining the degree to which an individual's value changes as a
result of individual training and development activities. Their
macro-orientation makes them especially suitable for determining
overall human asset valuation and in raising the visibility of human
resources.
Incorporating the Value of Human Resources and HRD

Activities as Assets in the Financial Reports of Public
Organizations
The reporting of human assets in financial statements in the

private sector has presented a multitude of problems including how
to handle capitalization of human resource costs, amortization and
write-off of human assets, and presentation of human asset costs in
financial statements.(34) Nonetheless, there have been some
examples of experimentation with human resource asset reporting
in financial statements in the private sector by such organizations
HRD IN THE PUBLIC SECTOR 68 1
as a manufacturing company, an insurance company, a CPA firm,

one of the ten largest banks in the U.S., and a professional athletic
~rganization.'~''However, progress in the reporting of human
resources as assets on the financial statements of private sector
organizations has been slow.
Public sector organizations (states and local governments) are

required by generally accepted accounting principles for
governmental accounting to have financial statements equivalent to
those used in the private sector, including a balance sheet where

human resources could be reported as assets. Federal agencies and
departments are in the process of developing generally accepted
financial reporting practices under the Chief Financial Officers Act
which would require financial statements. Public sector external
financial reporting at the state and local levels conforms to fund
accounting principles which, for reasons similar to those for private
sector accounting, do not recognize HRA concepts as a part of
generally accepted accounting principles guiding financial reporting
for governmental entities and, thus, do not currently permit
reporting of the value of human resources as an asset on the
balance sheet. Consequently, while it might have significant benefit,
there are no current examples of the incorporation of human
resources as assets on the financial statements of public
organizations.
The concept of accounting for HRD by trying to convincingly

put an asset value on investments in human resources, such as
training programs and other development activities, has created
significant debate. Accountants historically have dealt with HRD
programs as expenses or expenditures rather than as assets.
Traditionally, accountants apply generally accepted accounting
principles (GAAP) to human resource activities and consider them
as expenses rather than as assets. The inclusion of HRA figures on
the balance sheet as assets does not conform to such standards in
either the private or the public sectors.(36)Accountants who are
schooled in valuing tangible assets have "an aversion to
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squishiness" and cringe at devising ways to put a value on such

intangibles as human assets.(37)Thus, controversy remains about
defining human resources as assets in financial statements because
they do not conform to the traditional definition of an asset as
something owned (broader definitions of an asset notwjthstanding)
and because it is difficult to place an asset value on humans for
financial statement purposes.(38)
Reluctance to accept the broad application of HRA concepts to

external financial reporting has undoubtedly constrained the

development and wider use of HRA concepts in the private sector.
The application of HRA concepts in the public sector has been
even more limited. The concept of recognizing investments in
human resource development as assets on financial statements of
either public or private sector organizations is motivated by the
need to recognize the nature and significance of these investments
and to enhance the visibility of human resources. Furthermore, it
would recognize the future service potential of human resources to
the organization rather than merely treating HRD as an expense and
giving a distorted view of the organization's return on such
investments in human capital.
The fact that applications of HRA concepts specifically to

external financial reporting have not been widely accepted does not
diminish the soundness of the fundamental HRA concepts involved.
The fundamental concepts that underlie the HRA perspective
encourage organizations to look at human resources as assets rather
than expenses. The consequences of such a perspective for
organizational decisionmaking related to human resources can be
quite significant. When organizations see human resources
primarily as expenses, then the organization perceives human
resources as something to be minimized at all times regardless of
resource availability, since expenses represent consumption yielding
little or no lasting benefit. Moreover, human resources, as expenses,
would need to be slashed rather than conserved during periods of
budget shortfall. On the other hand, organizations perceiving human
resources as assets would act quite differently since assets are seen
as something to be maximized at all times, especially during
periods of strong resource availability. Assets, as something having
lasting value, must be protected during periods of budget shortfall.
Considering HRD costs as investments in human resource assets
recognizes that HRD activities produce long term benefits as a
result of capacity building, that lack of HRD can result in potential
quality and liability problems, and that HRD contributes to
organizational cohesion, morale, and productivity. Thus HRA
concepts serve the critical function of emphasizing HRD as asset

building rather than as an expense. There is a desperate need for
organizations to better appreciate their human resource capacity and
to act to develop it in order to keep up with explosive changes. In
the current fiscal environment, organizations that view human
resources as an expense only could be tempted to cut the very
element that can save them from the problems they face. Cutting
edge organizations have conceptually already made the leap to
recognizing human resources as assets and HRD activities as asset
building by incorporating this into their decisionmaking, even if
their financial statements do not currently reflect it.
SUMMARY AND CONCLUSIONS
Accounting for human resource development (HRD) in public

sector organizations relies on human resource accounting (HRA)
concepts which apply to both public and private organizations.
HRA information is potentially useful in external financial
reporting and internal managerial accounting. In the most
controversial application of HRA concepts, human resources would
be incorporated into the organization's financial statements by
considering them human capital and valuing them as human assets
like more tangible capital assets. Although public organizations are
required by accountability and reporting requirements and by
generally accepted accounting principles (GAAP) for governmental
accounting to have financial statements that report assets (among
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other things), these financial statements are underutilized in the

public sector. The argument is often made that public sector
external financial reports should be used more widely for enhancing
accountability, but their accounting complexity can be technically
challenging. As a consequence, their potential for heightening the
visibility of human resources as assets is diminished. Public
financial managers are currently experimenting with popular reports
in addition to traditional financial statements to present financial
status and results in a manner understandable to nonaccountants. In
the future, this may insure a wider range of users for financial
statement information. In any case, the argument for including
human assets in financial statements has validity, and information
in financial statements will likely be better used in the future to
measure the status and performance of public organizations. The
development of the fundamental basis for HRA (the notion that
human resources should be considered assets rather than expenses)
is directly related to applying HRA concepts to external financial
reporting, concepts which are applicable to both public and private
organizations. Less controversial uses of HRA information involve
utilizing it as internal managerial accounting information that aids
in managerial decisionmaking of the organization.
Accounting for HRD requires the development of cost and

value concepts as they apply to HRD. This study has proposed
concepts for valuing HRD activities. It has indicated how the value
of HRD can be measured and utilized from financial reporting and
managerial accounting perspectives. This study has also proposed
cost concepts applicable to HRD in the public sector. It has also
indicated how those costs can be measured and utilized from
financial reporting and managerial accounting perspectives. In less
controversial and narrower application of HRA concepts than to
external financial reporting, this study has encouraged the analysis
of the costs versus the benefits of HRD activities in internal
managerial accounting and decision making. Public organizations
have begun to realize the necessity for demonstrating how training
and development activities relate to organizational performance,
productivity, and effectiveness. Accounting for HRD through HRA

concepts can make a significant impact by assessing the value of
investments in HRD versus the costs incurred in the development
process. Although the cost-benefit analysis approach is difficult in
public organizations because it is difficult to quantify costs and
particularly benefits, it offers a critical means of demonstrating cost
effectiveness or return on expenditures for HRD. The HRA
concepts and measurement techniques discussed are not easy to
utilize in the context of the public organization; however, their
measurement is feasible if the effort is made to focus on the human

resource value and cost concepts and measurement techniques
encompassed in HRA as described in this study.
Such a focus can assist in making human capital development

a higher priority in public organizations by recognizing HRD as
asset building and linking training and development to
organizational goals and objectives. Human resources produce the
changes needed by organizations. Today's organizations are
experiencing the need for dramatic change. HRD is the asset that
is the primary facilitator of change since it enables the organization
to respond to its long-term problems. Public organizations need to
take a strategic management approach in accounting for HRD that
values such activities and recognizes that expenditures for HRD are
not just mere costs but rather investments in human capital with
both long-term and immediate benefits.
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Administration and the Evolving World of Work." Productivity
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2. Hartenstein, Annette A. "Human-Resource Management

Practices in the Federal Government." National Productivity
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3. McGregor, Eugene B. Jr. "The Public Sector Human Resource

Puzzle: Strategic Management of a Strategic Resource." Public
Administration Review 48 (November-December 1988):94 1-
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Issues: Human Resource Programs WarrantingConsideration
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5. Caplan, Edwin H. and Landekich, Stephen. Humun Resource

Accounting: Past, Present and Future, National Association
of Accountant's, New York, 1974, p. 2.
6. Flamholtz, Eric G. Human Resource Accounting, 2nd. ed.,

Revised and Expanded, Jossey-Bass Publishers, San Francisco,
1985, pp. x-xi.
7 . Schultz, Theodore. "Investment in Human Capital." American

Economic Review (March 196 1): 1- 17.
8. Dahl, Henry, Oberlin, Jeffrey, and Schwandt, David. "What

Should Human Resource Accounting Systems Count?"
Training and Development (July 1988): 20-25.
9. Flamholtz, op. cit., p. 59.
10. Zbid. pp. 59-60.
11. Van Wart, Montgomery, Cayer, N. Joseph, and Cook, Steve.

Handbook of Training and Development for the Public
Sector, Jossey-Bass Publishers, San Francisco, 1993, pp. 112-
114; Carnevale, Anthony P. and Schulz, Eric. "Return on
Investment: Accounting for Training." Training and
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Gilley, Jerry W. and Eggland, Steven. Principles of Human
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14. Flamholtz, op. cit., pp. 13-18.
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16. Gilley and Eggland, op. cit., pp. 272-273; Michael A.

Sheppeck and Stephen L. Cohen, "Put a Dollar Value on Your
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18. Flamholtz, op. cit., pp. 7-10
19. Roser, Sherman R. "A Practical Approach to the Use of

Human Resource Accounting,?' Managerial Planning 32
(September/October 1983):35-39, 36.
20. Meyers, Bruce G. and Shane, Hugh M. "Human Resource

Accounting for Managerial Decisions: A Capital Budgeting
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Roger H. "Human Resource Accounting in Recessionary
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Accounting, Work in America Institute, Scarsdale, New York,
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24. Roser, Sherman R., op. cit, p. 35.
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Employees as Assets." Personnel Administration (June
1988): 168-170; Flamholtz, op. cit., p. 173.
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Measuring the Economic Effectiveness of Human Resource

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31. Ibid. p. 60.
32. Ibid. p. 61.
33. Ibid. p. 67-69.
35. Ibid. p. xv.
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1989):55-56.
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ACCOUNTING FOR HUMAN RESOURCE

Department of Public Administration

This article evaluates the merits of utilizing human resource

Copyright 1996 by Marcel Dekker, Inc.

in pubic organizations, whether to internal managerial a.ccounting

Public sector organizations are undergoing dramatic change.

They confront an increasing emphasis on performance standards

Unfortunately, not very many public organizations have made

as building the capacity of human resources to address

In spite of these limitations, somewhat more attention has been

begun to be perceived as strategic assets. A strategic management

An input-output model of human resource management depicts

capital, particularly expenditures for education and training

Public sector managers face the problem of assessing the value

development (HRD) in public sector organizations. It describes the

HUMAN RESOURCE ACCOUNTING CONCEPTS AND

Human resource accounting (HRA) has developed since the

conceptual basis for the economic theory of human capital espoused

HRA concepts have direct application in accounting for HRD

the expenditures for investments in human resources through HRD

Until recently, public organizations have often been relatively

Concepts of Human Resource Cost Applicable to HRD

The costs of HRD activities are difficult to derive. Determining

resource cost is derived from more general concepts of cost.

The general concepts of human resource cost previously

Full costs of HRD activities include direct and indirect costs

and marketing) can be divided into personnel costs, outside

Carnevale and Schulz present a four-step standardized model

activities is established. Such a definition often includes activities

There are several significant advantages of collecting and

Calculation of Human Resource Development Costs

Training Participant Costs:

Mean salary or wages for training participants + current fringe benefits =

Total loaded annual personnel costs per participant I total number of

Training participant cost = number of participants X total contact hours X

Training and Other Personnel Costs are similarly calculated.

Travel, Per Diem, Accommodations, and Incidental Expenses

Average Per Diem Costs are similarly determined.

Outside Goods and Services

Base Percentage Indirect Cost Rate X Total Direct Personnel Costs =

Requires establishing a typical estimated base percentage rate of indirect

Comparing HRD Costs to Benefits

HRA information can be specifically used in analyzing the

associated costs. From this perspective, HRD is a strategy designed

Determining the benefits of HRD means measuring and

improvements in performance, productivity, or overall

Assessing improvements in organizational effectiveness for public

In private sector organizations, comparisons of benefits to costs

benefits to be derived from HRD. The nature of the benefits

and will have to use estimated savings or devise methodologies for

Benefits from training and development for the public

Once cost and benefit (or value) information is determined, the

determine if alternative uses of resources may result in higher

HRA CONCEPTS AND

While HRA concepts should be used at a minimum to

HRD cost information can be useful from a managerial

benefit of measuring HRD costs is to incorporate the increased