HUMAN RESOURCE ACCOUNTING

Posted: Aug 17, 2009 |Comments: 0 | Views: 3,651 |

Introduction
The past few decades have witnessed a global transition from manufacturing to service based economies. The fundamental difference between the two lies in the very nature of their assets. In the former, the physical assets like plant, machinery, material etc. are of utmost importance. In contrast, in the latter, knowledge and attitudes of the employees assume greater significance. For instance, in the case of an IT firm, the value of its physical assets is negligible when compared with the value of the knowledge and skills of its personnel. Similarly, in hospitals, academic institutions, consulting firms etc., the total worth of the organization depends mainly on the skills of its employees and the services they render. Hence, the success of these organizations is contingent on the quality of their Human Resource- its knowledge, skills, competence, motivation and understanding of the organizational culture. In knowledge driven economies therefore, it is imperative that the humans be recognized as an integral part of the total worth of an organization. However, in order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills, and contribution of the human element as well as that of the organizational processes, like recruitment, selection, training etc., which are used to build and support these human aspects, is developed. Human resource accounting (HRA) denotes just this process of quantification/measurement of the Human Resource.

Definition Assigning, budgeting, and reporting the cost of human resources incurred in an organization, including wages and salaries and training expenses. HRA scenario It is true that worldwide, knowledge has become the key determinant for economic and business success, but Indian companies focus on Return on Investment (RoI), with very few concrete steps being taken to track Return on Knowledge. What is needed is measurement of abilities of all employees in a company, at every level, to produce value from their knowledge and capability. Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business. HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organization, says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India. The current accounting system is not able to provide the actual value of employee

capabilities and knowledge. This indirectly affects future investments of a company, as each year the cost on human resource development and recruitment increases. Experts point out that the information generated by HRA systems can be put to use for taking a variety of managerial decisions like recruitment planning, turnover analysis, personnel advancement analysis and capital budgeting, which can help companies save a lot of trouble in the future. Information management in HRA Like any accounting exercise, the HRA too depends heavily on the availability of relevant and accurate information. HRA is essentially a tool to facilitate better planning and decision making based on the information regarding actual HR costs and organizational returns. The kind of data that needs to be managed systematically depends upon the purpose for which the HRA is being used by an organization. For example, if the purpose is to control the personnel costs, a system of standard costs for personnel recruitment, selection and training has to be developed. It helps in analyzing projected and actual costs of manpower and thereby, in taking remedial action, wherever necessary. Information on turnover costs generates awareness regarding the actual cost of turnover and highlights the need for efforts by the management towards retention of manpower. Accountability in the management process is often enhanced when information involving an evaluation of managerial effectiveness is generated. Finally, information on the intangibles like intellectual capital/human capital becomes necessary to measure the true worth of the organization. This information, though unaudited, needs to be communicated to the board and the stockholders

Measurement in HRA

The biggest challenge in HRA is that of assigning monetary values to different dimensions of HR costs, investments and the worth of employees. The two main approaches usually employed for this are: 1. The cost approach which involves methods based on the costs incurred by the company, with regard to an employee.

2. The economic value approach which includes methods based on the economic value of the human resources and their contribution to the companys gains. This approach looks at human resources as assets and tries to identify the stream of benefits flowing from the asset.

Economic value approach The value of an object, in economic terms, is the present value of the services that it is expected to render in future. Similarly, the economic value of human resources is the present worth of the services that they are likely to render in future. This may be the value of individuals, groups or the total human organization. The methods for calculating the economic value of individuals may be classified into monetary and non-monetary methods.

Monetary Measures for assessing Individual Value

a) Flamholtzs model of determinants of Individual Value to Formal Organizations According to Flamholtz, the value of an individual is the present worth of the services that he is likely to render to the organization in future. As an individual moves from one position to another, at the same level or at different levels, the profile of the services provided by him is likely to change. The present cumulative value of all the possible services that may be rendered by him during his/her association with the organization is the value of the individual. b) Flamholtzs Stochastic Rewards Valuation Model The movement or progress of people through organizational states or a role is called a stochastic process. The Stochastic Rewards Model is a direct way of measuring a persons expected conditional value and expected realizable value. It is based on the assumption that an individual generates value as he occupies and moves along organizational roles, and renders service to the organization. It presupposes that a person will move from one state in the organization, to another, during a specified period of time. Non- monetary methods for determining value The non-monetary methods for assessing the economic value of human resources also measure the Human Resource but not in dollar or money terms. Rather they rely on various indices or ratings and rankings. These methods may be used as surrogates of monetary methods and also have a predictive value. The non-monetary methods may refer to a simple inventory of skills and capabilities of people within an organization or to the application of some behavioral

measurement technique to assess the benefits gained from the Human resource of an organisation. 1. The skills or capability inventory is a simple listing of the education, knowledge, experience and skills of the firms human resources. 2. Performance evaluation measures used in HRA include ratings, and rankings. Ratings reflect a persons performance in relation to a set of scales. They are scores assigned to characteristics possessed by the individual. These characteristics include skills, judgment, knowledge, interpersonal skills, intelligence etc. Ranking is an ordinal form of rating in which the superiors rank their subordinates on one or more dimensions, mentioned above. 3. Assessment of potential determines a persons capacity for promotion and development. It usually employs a trait approach in which the traits essential for a position are identified. The extent to which the person possesses these traits is then assessed. 4. Attitude measurements are used to assess employees attitudes towards their job, pay, working conditions, etc., in order to determine their job satisfaction and dis satisfaction

Conclusion The accounting of human resources can be seen as just as much a question of philosophy as of technique. This is one of the reasons behind the variety of approaches and is further underlined by the broad range of purposes for which accounting human resources can be used, e.g. as an information tool for internal and/or external use (employees, customers, investors, etc.), and as a decision-making tool for human resource management (investments in human resources as well as personnel management in gene

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. References: 1. Dr. Mukesh Chauhan & Ms Shivani Gupta, Human Resource Accounting-concepts & practices in India; The management accountant, january2009; vol-44 2. American Accounting Association Committee of Accounting for Human Resources, Report of the committee on Human Resource Accounting,1973, The Accounting Review Supplement to vol.XLVIII. 3. D. Prabhakar Rao 1993, Human Asset Accounting: An Evaluation of the Indian Practices, ASCI Journal of Management,Vol.22. 4. Eric G. Flamholtz (1999; Third edition): Human Resource Accounting: Advances in Concepts, Methods & Applications; Kulwer Academic Publishers. 5. Journal of Accounting Review, Jaipur, Vol.2,1991. 6. VSP Rao:Human Resource Management Text & Cases; Second Eds;.Excel Book Publications.

Anita Mishra

Faculty Faculty Global Institute of Management Bhubaneswar

Monalika Rath