Human Resource Accounting: Meaning, Definition, Objectives and Limitations!

Meaning:
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. In 1960s, Rensis Likert along with other
social researchers made an attempt to define the concept of human resource accounting
(HRA).

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.
3. According to Stephen Knauf, HRA is the measurement and quantification of human
organizational inputs such as recruiting, training, experience and commitment.

Need for HRA:

The need for human asset valuation arose as a result of growing concern for human
relations management in the industry.
Behavioural scientists concerned with management of organizations pointed out the
following reasons for HRA:
1. Under conventional accounting, no information is made available about the human
resources employed in an organization, and without people the financial and physical
resources cannot be operationally effective.

2. The expenses related to the human organization are charged to current revenue instead
of being treated as investments, to be amortized over a period of time, with the result that
magnitude of net income is significantly distorted. This makes the assessment of firm and
inter-firm comparison difficult.
3. The productivity and profitability of a firm largely depends on the contribution of human
assets. Two firms having identical physical assets and operating in the same market may
have different returns due to differences in human assets. If the value of human assets is
ignored, the total valuation of the firm becomes difficult.
4. If the value of human resources is not duly reported in profit and loss account and
balance sheet, the important act of management on human assets cannot be perceived.
5. Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting. All expenses on human resources are to be treated
as investments, since the benefits are accrued over a period of time.

Objectives of HRA:
Rensis Likert described the following objectives of HRA:
1. Providing cost value information about acquiring, developing, allocating and maintaining
human resources.
2. Enabling management to monitor the use of human resources.
3. Finding depreciation or appreciation among human resources.
4. Assisting in developing effective management practices.
5. Increasing managerial awareness of the value of human resources.
6. For better human resource planning.
7. For better decisions about people, based on improved information system.
8. Assisting in effective utilization of manpower.

Methods of Valuation of Human Resources:

There are certain methods advocated for valuation of human resources. These methods
include historical method, replacement cost method, present value method, opportunity cost
method and standard cost method. All methods have certain benefits as well as limitations.

Benefits of HRA:
There are certain benefits for accounting of human resources, which are explained as
follows:
1. The system of HRA discloses the value of human resources, which helps in proper
interpretation of return on capital employed.
2. Managerial decision-making can be improved with the help of HRA.
3. The implementation of human resource accounting clearly identifies human resources as
valuable assets, which helps in preventing misuse of human resources by the superiors as
well as the management.
4. It helps in efficient utilization of human resources and understanding the evil effects of
labour unrest on the quality of human resources.
5. This system can increase productivity because the human talent, devotion, and skills are
considered valuable assets, which can boost the morale of the employees.
6. It can assist the management for implementing best methods of wages and salary
administration.

Limitations of HRA:
HRA is yet to gain momentum in India due to certain difficulties:
1. The valuation methods have certain disadvantages as well as advantages; therefore,
there is always a bone of contention among the firms that which method is an ideal one.
2. There are no standardized procedures developed so far. So, firms are providing only as
additional information.

3. Under conventional accounting, certain standards are accepted commonly, which is not
possible under this method.
4. All the methods of accounting for human assets are based on certain assumptions, which
can go wrong at any time. For example, it is assumed that all workers continue to work with
the same organization till retirement, which is far from possible.
5. It is believed that human resources do not suffer depreciation, and in fact they always
appreciate, which can also prove otherwise in certain firms.
6. The lifespan of human resources cannot be estimated. So, the valuation seems to be
unrealistic.

Annual Report
What is an 'Annual Report'
1. An annual publication that public corporations must provide to shareholders to
describe their operations and financial conditions. The front part of the report often
contains an impressive combination of graphics, photos and an accompanying narrative,
all of which chronicle the company's activities over the past year. The back part of the
report contains detailed financial and operational information.
2. In the case of mutual funds, an annual report is a required document that is made
available to fund shareholders on a fiscal year basis. It discloses certain aspects of a
fund's operations and financial condition. In contrast to corporate annual reports, mutual
fund annual reports are best described as "plain vanilla" in terms of their presentation.

An annual report is intended to provide a snapshot of a business' performance with

investors, potential investors and other stakeholders. It should provide enough
information so that a potential investor understands the nature and scope of the
business, its recent developments and future outlook. The main sections of an
annual report typically include the financial statements and the "Management
Discussion and Analysis." The former gives a summary of the financial results over
the past year. For publicly traded companies, all financial results must be reported
for public consumption. Privately held companies are under no such obligation, but
most will share key financial information with investors.

Basics
The information contained in an annual report should give investors and other stakeholders a clear idea of how the
company is performing and how it plans to grow and improve its business in coming years. Publicly traded companies
mail reports to shareholders or provide a copy of the annual report on their websites. Investors who want the straight
financial data can also download copies of the company's 10-K it files with the Securities & Exchange Commission. If
you own a privately held business, you can provide copies of audited financial statements to investors.

Chairman's Letter
It is customary for the annual report to contain a letter from the chairman of the board of directors to shareholders. A
small business might not have a separate board of directors, but a letter from the chairman and CEO/president is
appropriate to give to investors and other stakeholders and should provide an overview of the past year's key
developments. The chairman's letter should provide details about the successes as well as the challenges of the past
year. It should also include the future outlook for the company, including insights about the market and growth
opportunities.

Management Discussion and Analysis

The Management Discussion and Analysis is a section of the annual report that discusses different aspects of the
business. Topics of discussion typically include new hires or appointments, new product introductions, updates on the
progress of business acquisitions, product launches and other information management believes to be important to
investors. It is an overview of the previous year's developments and how the company performed over that period. It
should be a good starting point for a new investor who wants to understand a business' fundamentals.

Financial Statements
The financial statements comprise the meat of the annual report. This is where the company provides the numbers
that investors use to determine how well the company performed financially. The financial statements consist of the
income or profit and loss statement, balance sheet and cash flow statement for the previous year and prior years so
investors can compare the performance from one year to the next. Publicly traded companies are required to provide
three years worth of financial statements in their annual reports. A privately held company is not bound by the same
regulations. However, investors will always welcome greater transparency. A privately held business that goes above
and beyond to publish prior-year financial results in its annual report increases its chances of attracting new money.

An annual report is a financial document that a public company prepares for its shareholders. These reports are can
be used by potential investors and securities analysts to evaluate a companys stock.
The report is usually the best source of information for most people to determine the financial health of a company.
An annual report gives a basic overview of the company over the past year. It usually includes: an opening letter from
the CEO, a business profile, a management analysis, and financial data.
Heres a basic overview of what is contained in an annual report:

Chairmans Letter
This is generally the first part of an annual report. The chairmans letter will set the tone, establish a theme, and most
importantly summarize the report for the readers. The letter will highlight the companys accomplishments for the
year, as well as the companys failures. The letter will state what led to the companys successes and will also
address how it dealt with its failures or issues.
The chairmans letter will provide an analysis of overall business performance, insights into the markets its in, and
any opportunities for growth. The letter will also point out any challenges or risks facing the company such as
changing market conditions, recent scandals, consumer trends, etc. The letter often ends by giving a sense of
corporate direction for the next year.

Business Profile
The business profile is a basic element of an annual report. This section describes the company including: what it
does to generate revenue, its products/services, its operations, subsidiaries it owns (if any), the market it is
competing in (including competitors), and risk factors for the business. Major changes made in the past year are also
highlighted such as new products, sales/marketing shifts, new services, seasonal factors (ex the holiday season), or
any special operating costs.

Managements Analysis
In this section, management discusses the companys operations in detail. Management will compare this years
results to results from the past. Management will often use charts and graphs to highlight the most important data.
Towards the end of the analysis, management will outline its own expectations and plans for the companys future
growth.

Financial Statements
Whats a report without numbers? In the report, the company presents the basic financial statements. Most
businesses wont provide all of the financial statements because that generally causes information overload and most
readers of the report wont go through everything.
The statements most companies will include are: the consolidated balance sheet, the income statement, the
statement of cash flows and the statement of shareholders. Some companies will include more financial information
depending on their industry and size. This section includes an independent auditors report to confirm that the
companys financial statements are fairly presented and in conformity with generally accepted accounting principles.