Role and Significance of Human Resource Accounting in the Era of Economic

Recession

INTRODUCTION

Of late the problem of unemployment has hit the globe like never before. With the global
downturn & economic slowdown two major sectors generating funds mostly were affected.
Suddenly within a couple of months the organizations throughout the world started looking at
their employees as liabilities & not assets. In this context, the concept of HR Accounting has
greater applicability to the various problems which are arising as a result of economic
recession.

With economic bubble bursting out the world is in the cauldron of economic crisis. Globally,
$500 billion has been lost in this way so far. The events of September 15 were unprecedented
in recent memory & there will be much uncertainty to come. Hence, the time has come for the
organizations to realize that the knowledge of the workforce/human capital is their prime
assets & not liabilities.

The present scenario is that, despite the global change, human resource has always been
considered as a 'soft issue' whose contribution could not be measured in tangible monetary
terms. It was thus but natural that conventional method of financial accounting neither
formally recorded investment in employees, nor did they deal with issues relating to
measurement, valuation & accounting of HR. of late there has been advancement in this area
with many models being developed to carryout HR Accounting.(HRA).

HRA: what it is-------

HRA seeks to measure the abilities of all employees in a company at all levels to produce value
by way of knowledge & capability. As recession forces consumers to stop investment,
producers are forced to go for employee curtailment. Hence, it is a time for the companies to
go for innovative methods to deal with economization of staff costs rather than downright
downsizing. HRA also involves accounting for investment in people & their replacement costs.
Information generated by HRA can be used for a host of managerial & Strategic decisions like
recruitment, turnover, personnel advancement analysis, training and capital budgeting.

Objectives of HR Accounting:-

* It furnishes cost/value information for making management decisions about acquiring,

allocating, developing & maintaining human resources in order to attain cost effectiveness.

* It allows management personnel to monitor effectively the use of human resources.

* It provides a sound & effective basis for human asset control, that is, whether the asset is
appreciated, depleted or conserved.

* It helps in the development of management principles by classifying the financial

consequences of various practices.

HRA Approaches:-

Assigning money values to different dimensions of HR costs, investments & the worth of
employees is the biggest challenge that the HRA is facing.

HR Accounting basically has two approaches.

* The Cost Approach--> involves methods based on the costs incurred by the company with
regard to an employee. Two types of costs are of special importance in HRA: original cost &
replacement cost.
Original/ historical costs of human resources is the sacrifice that was made to acquire &
develop the resource. These include the costs of recruiting, selection, hiring, placement,
orientation & on- the- job training.

The replacement cost of human resources is the cost that would have to be incurred if present
employees are to be replaced.

Other cost methods that may be used are the standard cost method & the competitive
method. In the standard cost method, the standard costs associated with the recruitment,
hiring, training & developing per grade of employees are determined annually.

* The Economic Value Approach which includes methods based on the economic value of the
human resources & their contribution to the company's benefits. The methods for calculating
the economic value of individuals are two types- monetary and non-monetary methods.

NEED FOR HR ACCOUNTING:

* HR Accounting is very much needed to provide effective & efficient management within the
organization.

* If there is any change in the structure of manpower, it is HRA which provides information on
it to the management.

* HRA provides qualitative information & also assess the cost incurred in personnel.

* It gives a platform to the management by providing factors for better decision-making for
future investment.

* The return on Investment on human capital is best evaluated through HRA.

* HRA communicates to the organization & public about the worth of human resources & also
its proper allocation within the organization.

* HR helps the management in developing principles by classifying the financial consequences

of the various practices.

The basic reason for developing HR Accounting is to overcome problems arising from the
valuation of intangible assets. We know that many organizations do not provide sufficient
information to invert investors in traditional balance sheet & HRA is a device to overcome this
difficulty. HRA provides an insight on employees as assets. HRA provides a profile to the
enterprise & thus improves its image. HRA probes to retain intelligent human capital.

The very importance of HRA in developing countries like India can be best judged through
government report which shows that in India, approximately 73% of National Income is
utilized to compensate employees.

In addition to wages and salaries, organizations often make other sizeable investments in their
human resources.

Despite all this, the concept of HRA in India is a recent phenomenon & struggling for its
acceptance. In India, HRA has not been introduced so far as a system. The Indian companies
act does not provide any scope for furnishing significant information in this regard in the
financial statement. However, some public sectors like BHEL, Cement Corporation of India,
ONGC, Engineers India Ltd, NTPC, MMTC, etc. have started disclosing some valuable
information regarding human resources in their respective financial statements. The IT majors
like Infosys also has applied HRA in a systematic manner.

However until now, the efforts made are to value human resources & to integrate & present
their value in the conventional financial statements. But if the real ability of human resource
accounting is to be derived, the whole concept of preparing financial statement have to be
prepared with a view which is based on human beings instead of the present view based on
capital.

To conclude, the HR Accounting system tries to evaluate the worth of human resources of an
organization in a systematic manner & record them in the financial statement to communicate
their worth with changes in time & result obtained from their utilization to the users of the
financial statement. Hence, looking at the importance of HRA, now it is required under law &
Government guidelines, for undertakings, to maintain a separate item in their balance sheet
about such HR activities undertaken by them.

Hopefully in future the HR practioners like us & the budding leaders of future enterprises
would work together to use HRA in every organization, which has helped to a great extent in
differentiating humans from mere operators of machines to intellectual capital. The journey
has thus begun as HRA is in its infancy & there are miles to go

The main challenges facing the objective of promoting comprehensive

development and the process of making progress and building modern state
represented in developing and promoting performance and productivity, and to
improve the quality of public services and to create a comprehensive change in
the conception of the governmental employment and the kind of relationship
between the employee on one hand and with the citizens and the community on
the other hand.

And to achieve this under increasing and branching tasks and the aspects
imposed by the duties of serving the various needs of the society and working on
developing it politically, economically and socially, within the increase and
quickening paces and the multitude of information in addition to the means and
technologies of dealing with it and within international and regional trends
pushing towards adopting new forms and relations ruled by the law and
democratic relations and to achieve Justice depending on transparency .

In a situation , where economic, productive and services sectors play an active

and growing role in addition to the role played by the private sector and civil
society institutions.

The process of running human resources in the governmental body in addition to

employees affairs and workers in various organizational , procedural ,
developmental and coordinating aspects needs a change , that conforms to the
facts and objectives that make such assignment as well as its tools main aspects
, whether in the Civil Service Bureau or ministries or various governmental
divisions ,in the process of managing and running governmental performance for
the purpose of achieving success and realizing policies, plans and general
programs .

The most necessary introduction for promoting performance level in

governmental management and a precondition for the success of plans,
programs, projects and tasks that put forward by divisions and governmental
bodies aiming at achieving it , is changing the common and traditional
perspective for employees affairs and for the directorates and assistant units for
running human resources and attracting cadres and working on promoting their
capacity and giving it the utmost care and attention and to put an end to the
minor and marginal point of view for these directorates and sections of
governmental divisions working structures and to support the efficiency of its
workers.

The Civil Service Bureau attempts to activate and develop employees affairs as a
main aspect among its activities and insures its commitment in supporting
various parts of this assignment in different institutions of the state so that it
would be able to contribute in promoting the efficiency and performance level and
the productivity of the governmental body and to develop public employment and
to serve the public employee through the following:-

1- To facilitate procedures related to employee's affairs by maintaining its

justice and transparency in appointments and various issues related to the
employees working course.

2- To develop and activate the concept of performance evaluation by setting

and determining standards and changing the conception and common
practices of this aspect, so that evaluation makes it lose its meaning and
its role in stimulating unique and outstanding performance, including the
activation of trials period evaluation, that is supposed to be a genuine
selective process for filling the vacant governmental job.

3- To continue in adopting an approach for creating promotions laws as a

condition for promoting the public employees efficiency, and to improve
his/her financial situation and to create living stability for the employee.

4- To contribute in outlining policies and programs for promoting the level of

the scientific qualification and efficiency through providing scholarships
and training programs, and to organize these activities and procedures for
achieving the maximum benefit of its scientific results and to facilitate
procedures and realize justice .

5- To find, activate and support the social, economic and human dimension
of the employee by encouraging and supporting the creation cooperative
institutions for achieving benefits for employees of the public sector.