Human resources accounting

Unit :01
What is Human Resource Accounting?
Human Resource Accounting is the process of
identifying and measuring data about Human
Resources and communicating this information to
the interested parties. It is an attempt to identify
and report the Investments made in Human
Resources of an organisation that are currently
not accounted for in the Conventional Accounting
Practices.
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 resources are considered as important assets
and are different from the physical assets. Physical
assets do not have feelings and emotions, whereas
human assets are subjected to various types of feelings
and emotions. In the same way, unlike physical assets
human assets never gets depreciated.
Therefore, the valuations of human resources along
with other assets are also required in order to find out
the total cost of an organization.
Definition
1. The American Association of Accountants (AAA)
defines HRA as follows: ‘HRA is a process of
identifying and measuring data about human
resources and communicating this information to
interested parties’.
2. Flamhoitz defines HRA as ‘accounting for people as
an organizational resource. It involves measuring the
costs incurred by organizations to recruit, select, hire,
train, and develop human assets. It also involves
measuring the economic value of people to the
organization’.

2. According to Stephen Knauf, ‘ HRA is the

measurement and quantification of human
organizational inputs such as recruiting, training,
experience and commitment.

Concept of Human Resource Accounting(HRA)

The concept of Human Resource Accounting (HRA)
is based on the idea that human resources are
valuable assets of an organization and should be
treated as one. HRA involves quantifying the value
of human resources in financial terms, which can
be used to make informed decisions regarding
investments in the workforce, talent retention,
and talent development. It recognizes that the
value of human resources is not only based on the
cost of hiring and training but also their
knowledge, skills, abilities, and experience.HRA
involves a systematic approach to measure the
value of human resources, which includes
identifying the relevant costs and benefits
associated with human resources, estimating the
value of human resources, and presenting this
information in a way that can be used to make
informed decisions.

The concept of HRA has gained popularity in

recent years as organizations recognize the
importance of human resources in achieving their
strategic goals. By quantifying the value of human
resources, organizations can better allocate their
resources, make informed decisions, and drive
long-term success. It is not just about measuring
the current value of human resources, but also
their potential future value. By investing in
employee training and development, organizations
can improve the quality of their human resources,
leading to greater future value.

Features of HRA:
1.Human Resource Management: It involves
everything from hiring and firing to training and
development.
2.Employee Benefits: This includes things like
health insurance and retirement benefits.
3.Payroll: Includes things like payroll taxes,
employee overtime costs, and other expenses
related to compensation and payroll processes.
4.Compensation: Things like salary, bonuses, stock
options, and other forms of payment that
employees receive are included.
5.Human Capital: Includes things like work hours,
absenteeism, turnover rates, etc.
6.Records Management: This involves everything
from keeping track records to tracking equipment
usage.
7.Benefits Administration: This involves keeping
track of benefits provided by employers, such as
vacation days or paid time off.
8.Recruitment & Selection - This involves recruiting
new employees as well as screening job applicants
to fit into the organisation’s culture.

Evolution of human resources accounting:

The evolution of HRA can be traced through
several stages:

1. Emergence and Conceptualization (1960s-

1970s): The concept of treating employees as
valuable assets gained attention during this
period. Researchers like Eric Flamholtz and Rensis
Likert laid the groundwork for HRA by proposing
methods to assess the value of human capital.

2. Early Models (1980s): The 1980s saw the

development of early HRA models that attempted
to quantify the costs and benefits associated with
human capital. However, challenges in
measurement and skepticism from the accounting
community limited its adoption.

3. FASB Statement No. 87 (1985): The Financial

Accounting Standards Board (FASB) introduced
Statement No. 87, which required companies to
disclose information about pension plans. While
not specifically focused on HRA, it marked a step
toward recognizing the significance of employee-
related costs.

4. International Accounting Standards (1990s):

International accounting standards, such as IAS 38,
began recognizing intangible assets like patents
and trademarks. Although this was a broader
acknowledgment of intangibles, it indirectly
influenced the discourse around HRA.

5. Knowledge Economy and Intellectual Capital

(2000s): The rise of the knowledge economy
highlighted the importance of human capital.
Intellectual capital frameworks, like the Balanced
Scorecard and the Skandia Navigator, incorporated
elements of HRA to measure intangibles' impact
on performance.

6. Measurement Challenges and Modern

Approaches (2010s-present): Quantifying the
value of human capital remains a challenge due to
the subjective nature of skills and knowledge.
However, modern approaches leverage advanced
data analytics, employee performance metrics,
and technology to provide more accurate
assessments of human capital's contribution to the
organization.

The evolution of HRA reflects a broader

recognition of the value of human capital in
organizations. As businesses continue to prioritize
talent management and development, the concept
of valuing employees as intangible assets remains
relevant and continues to evolve.

Importance of human resources accounting:

1. *Strategic Decision-Making*: HRA provides a

means to quantify the value of human capital,
enabling better-informed strategic decisions about
hiring, training, development, and workforce
planning. This helps align human resource
strategies with overall business goals.

2. *Resource Allocation*: With HRA, organizations

can allocate resources more effectively by
identifying areas where investments in human
capital can yield the highest returns, leading to
improved productivity and performance.
3. *Performance Measurement*: HRA allows for
the measurement of the contribution of human
capital to an organization's overall performance. It
provides a basis for evaluating the effectiveness of
human resource management initiatives and their
impact on the bottom line.

4. *Investor and Stakeholder Confidence*:

Transparent reporting of human capital values
through HRA can enhance investor confidence by
providing a more comprehensive view of the
organization's assets and potential for future
growth.

5. *Mergers and Acquisitions*: In mergers and

acquisitions, HRA helps in evaluating the value of a
target company's human capital, aiding decision-
makers in assessing potential risks and benefits
associated with workforce integration.

6. *Talent Management and Retention*: HRA

emphasizes the significance of employees as
valuable assets. This can lead to improved talent
management strategies, including employee
development, training, and retention efforts.
7. *Regulatory and Reporting Compliance*: As
accounting standards evolve, companies might
need to include intangible assets, including human
capital, in their financial reports. HRA can facilitate
compliance with evolving accounting rules and
guidelines.

8. *Employee Motivation and Engagement*:

Employees feel recognized and valued when their
contributions are accounted for in a tangible
manner. This recognition can enhance motivation,
job satisfaction, and overall engagement levels.

9. *Benchmarking and Best Practices*: By

comparing their human capital valuations with
industry benchmarks or best practices,
organizations can identify areas for improvement
and innovation in their human resource
management strategies.

10. *Long-Term Sustainability*: HRA promotes a

long-term perspective on human capital
management. Organizations that invest in and
develop their employees are better positioned for
sustainable growth and resilience in a rapidly
changing business environment.
In summary, Human Resource Accounting helps
organizations move beyond viewing employees as
mere expenses and recognizes them as valuable
assets that contribute to organizational success.

Objectives
The objectives of Human resource accounting are
as follows –

1.Measuring cost related to the human resource of

the organization
2.Enabling management to properly plan and
budget for training and other services for the
human resource.
3.To ensure proper utilization of resources is done
or not.
4.Increasing awareness and value about human
resources;
5.To proper accounting of retiring benefits and
other benefits over the service period;
6.For efficient and better human resource
planning;
7.For determining actual cost incurred by the
organization on human resources;
8.To determine whether an organization has
gained from inputs put on human resources,
training, recruitment, and other facilities.
9.To aid top management on human resource
analysis.

Limitation of human resources accounting:

Human Resource Accounting (HRA) has several
limitations that can impact its implementation and
effectiveness. Some of the key limitations include:

1. *Subjectivity in Valuation*: Valuing human

capital is inherently subjective and can vary widely
based on assumptions and methodologies used.
This subjectivity can undermine the credibility of
the calculated values.

2. *Lack of Consensus*: There is no universally

accepted method for valuing human capital,
leading to a lack of consensus among practitioners
and researchers. This makes comparisons across
organizations or industries challenging.

3. *Complexity of Measurement*: Measuring

human capital involves considering various factors
such as skills, knowledge, experience, and
potential. The complexity of these measurements
can lead to inaccuracies and inconsistencies.

4. *Inclusion of Intangibles*: HRA focuses on

intangible assets, which are challenging to quantify
and measure accurately, especially in monetary
terms.

5. *Short-Term Focus*: While HRA aims to

highlight the long-term value of human capital,
organizations often prioritize short-term financial
results. This can lead to limited attention on
human resource development.

6. *Changing Nature of Work*: The nature of

work and skills required are constantly evolving
due to technological advancements and changing
business environments. This makes it difficult to
accurately assess the long-term value of human
capital.

7. *Limited Financial Reporting Standards*:

Accounting standards and regulations have
historically focused on tangible assets. The lack of
specific guidelines for reporting human capital can
create inconsistencies in how it is valued and
disclosed.

8. *Privacy Concerns*: Collecting and analyzing

employee data for HRA purposes can raise privacy
concerns among employees and regulatory
authorities.

9. *Resistance to Change*: Traditional accounting

practices may resist incorporating HRA due to the
conceptual shift from treating employees as
expenses to valuing them as assets.

10. *External Factors Impacting Value*: External

factors such as changes in the labor market,
economic conditions, and industry trends can
impact the value of human capital, making it
challenging to predict accurately.

11. *Limited Adoption*: Due to the complexities

and challenges associated with HRA, many
organizations may choose not to adopt it, limiting
its potential impact on the field of human resource
management.
12. *Focus on Monetary Value*: HRA tends to
focus solely on the monetary value of human
capital, overlooking other qualitative aspects that
contribute to employee performance and
organizational success.