HUMAN RESOURCE ACCOUNTING

Economists consider human capital as a production factor, and they explore different ways of measuring its
investment in education, health, and other areas. Accountants have recognized the value of human assets for at
least 70 years. Research into true human resource accounting began in the 1960s by Rensis Likert. Likert
defends long-term planning by strong pressure on human resources' qualitative variables, resulting in greater
benefits in the long run.
Looking at different proposals the resource theory considers human resources in a more explicit way. This
theory considers that the competitive position of a firm depends on its specific and not duplicated assets. The
most specific (and not duplicated) asset that an enterprise has is its personnel. It takes advantage of their
interdependent knowledge. That would explain why some firms are more productive than others. With the same
technology, a solid human resource team makes all the difference.
The American Accounting Association [1970] defines human resource accounting as "The human resources
identification and measuring process and also its communication to the interested parties." There are two
reasons for including human resources in accounting. First, people are a valuable resource to a firm so long as
they perform services that can be quantified. The firm need not own a person for him to be considered a
resource. Second, the value of a person as a resource depends on how he is employed. So management style will
also influence the human resource value.
Human resource accounting (HRA) as an approach was originally defined as the process of identifying,
measuring and communicating information about human resources in order to facilitate effective
management within an organisation. It is an extension of the accounting principles of matching costs and
revenues and of organizing data to communicate relevant information in financial terms.
Human resource accounting systems also assist companies to evaluate and manage staff. The ability to record
employee performance details is a valuable source of information for performance evaluation and career
progression. By establishing key performance indicators, managers can record and track employee performance
on an individual level. Best examples of HRA are BHEL, ONGC, SAIL, NTPC, MMTC, ACC, and TATA.
HUMAN RESOURCE ACCOUNTING has three aspects:1.
2.

Evaluation of Human Resources.

Recording of Evaluation in the books of accounts.

3.

Presenting the information in the financial statements for need to the interested parties.

Basic premises of HRA

People are valuable resources.

They useful as manpower in an organisation is determined by the way in which it is managed.
Information or investment & value of human resource is useful for decision-making enterprise.

OBJECTIVES OF HUMAN RESOURCE ACCOUNTING

The human resource accounting systems main objective is to supply relevant information to meet the
demands of investors and managers.
HRA helps in determining the return on investment on Human Resources.
The hr accounting system provides a means to centralize financial information that is related to
employee management.
This assist companies to meet compliance standards, keep investors informed, meet taxation
requirements, evaluate ongoing resource requirements and assist with strategic decision-making.

ADVANTAGES OF HUMAN RESOURCE ACCOUNTING

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It will give us the cost of developing human resources.

Return on Investment.
Make the policies for HR (Recruitment, Selection & Training).
It can be seen whether business has made proper investments in terms of money or not.
It will help in improving the efficiency of employee.

Methods of valuing and accounting of human resources

The methods to value and account for human resources can be classified into the following categories:
1. Methods based on costs (which include costs incurred by the company to recruit, hire, train and develop
human resources) or Human Resource Cost Accounting.
2. Methods based on economic value of human resources and the capitalization of companys earnings or
Human Resource Value Accounting.

HUMAN RESOURCE COST ACCOUNTING

HRCA is defined as the measurement & reporting of the cost incurred to accurate and
develop people as original resources. It deal with according for investment made by an organisation in
acquisition & developing Human Resource as well as replacement cost of people presently employed. In cost of
HRA organisation deal: (1) Cost of Recruiting (2) Cost of Selection (3) Cost of Contracting (4) Cost of Placing (5) Cost of Training
(6) Cost of Orientation (7) Cost of Promotion (8)Cost of Improvement (9) Cost of Substitution (10) Exit Cost
(1) Historical cost method: Under this method, the cost of acquisition i.e. selection, hiring, training costs of employees are capitalized and
written off over the expected useful life of the employees. In case, the personnel leave the company before the
anticipated period of service, then the unamortised portion of costs remaining in the companys books is written

off against the profit and loss account in that year. If the period of service exceeds the anticipated time, then
amortisation of costs is rescheduled.

(2) Replacement cost method:Under this method, the human resources are valued at their replacement cost i.e. the monetary implications of
replacing existing personnel. Replacement costs could be positional i.e. replacing personnel for particular
positions or personal i.e. replacing specific talent or ability of particular persons.
(3) Competitive bidding method:This approach suggests competitive bidding for scarce employees in an organisation i.e. opportunity cost of
employees linked to scarcity. The approach proposes the capitalizing of additional earning potential of each
human resource within the company.
(4) Standard cost method :Under this method, standard costs of recruiting, hiring, training, and developing per grade of employees are
determined annually. The total standard cost for all personnel of the company is the value of human resources.

HUMAN RESOURCE VALUE ACCOUNTING

(!) Jaggi and Lau method:This method estimates the worth of human resources on a group-basis, as human resource groups account for
productivity and performance in organisations.

(2)Economic value method:Under this method, the net present value of incremental cash flows attributed to human resources is taken as the
asset value.

CHALLENGES
Until recently, the "value" of an enterprise as measured within traditional balance sheets, e.g. buildings,
production plant, etc., was viewed as a sufficient reflection of the enterprise's assets. However, with the growing
emergence of the knowledge economy, this traditional valuation has been called into question due to the
recognition that human capital is an increasingly important part of an enterprise's total value. This has led to two
important questions:
How to assess the value of human capital in addition to an enterprise's tangible assets and
How to improve the development of human capital in enterprises. The emergence of methods for
accounting human resources aimed at measuring, developing and managing the human capital in an
enterprise, can thus be said to reflect the need for improving measuring and accounting practices as well
as human resource management.