Human resource accounting

Objectives

The human resource accounting process was established to fulfill a number of objectives within the organisation. These include:

1. To furnish cost value information for making proper and effective management decisions about acquiring, allocating, developing, and maintaining human resources in order to achieve cost effective organizational objectives.
2. To monitor effectively the use of human resources by the management.
3. To have an analysis of the Human Asset, i.e. whether such assets are conserved, depleted, or appreciated.
4. To aid in the development of management principles and proper decision making for the future, by classifying financial consequences of various practices.

Methods

Approaches to human resource accounting (HRA) were first developed in 1691. The next approach was developed from 1691-1960, and the third phase was post-1960. There are two approaches to HRA. Under the cost approach, also called the "human resource cost accounting method" or model, there is an acquisition cost model and a replacement cost model. Under the value approach, there is a present value of future earnings method, a discounted future wage model, and a competitive bidding model under.

Cost approach

This approach is also called an acquisition cost model. This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition, formal training and familiarization, informal training and informal familiarization, and experience and development. This model suggests that instead of charging the costs to profit and loss statement (p&l) accounting, it should be capitalized in the balance sheet. The process of giving a status of asset to the expenditure item is called capitalization. In human resource management, it is necessary to amortize the capitalized amount over a period of time. So, here one will take the age of the employee at the time of recruitment and at the time of retirement. Out of these, a few employees may leave the organization before attaining the superannuation. This method is the only method of Human Resource Accounting that is based on sound accounting principles and policies.

Limitations

Replacement cost approach

This approach measures the cost of replacing an employee. According to Likert (1985) replacement cost includes recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.

Limitations

Present value of future earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees’ death/separation/retirement. This method helps in determining what an employee’s future contribution is worth today

Limitations

Value to the organization

Hekimian and Jones (1967) proposed that when an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that division’s investment base. For example, a value of a professional athlete’s service is often determined by how much money a particular team, acting in an open competitive market, is willing to pay him or her.

Limitations

Expense model

According to Mirvis and Mac (1976), this model focuses on attaching dollar estimates to the behavioral outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job performance are measured using traditional organizational tools, and then costs are estimated for each criterion. For example, in costing labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs.

Model on human resource accounting

This model prescribes the human resource accounting approach for two categories of employees:

Model arrives value of human resources as sum of below-mentioned three parts:

1. Real capital cost part
2. Present value of future salary/wages payments
3. Performance evaluation part

Limitations

1. Calculation process is lengthy and cumbersome.

2. Lev and Schwartz valuation principles have been used at one point of time, so this model contains a weakness from the Lev and Schwartz model. 3. Other limitations

Ravindra Tiwari has prescribed another approach to value human resources at the time of annual appraisal exercise, which suggests valuation of human resources on different appraisal parameters.

Limitations

Human Resource Accounting is the accounting methods, systems, and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in their knowledge, ability and motivation in the same organization as well as from organization to organization. It means that some employees become a liability instead of becoming a human resource. HRA facilitates decision making about the personnel i.e. either to keep or to dispense with their services or to provide mega-training. There are many limitations that make the management reluctant to introduce HRA. Some of the attributes are:

1. There are no clear cut and specific procedures or guidelines for finding costs and value of human resources of an organization. The systems that are being adopted have certain drawbacks.
2. The period of existence of human resources is uncertain and hence valuing them under uncertainty in the future seems to be unrealistic.
3. The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a tool of management facilitates better and effective management of human resources.
4. Since human resources are incapable of being owned, retained, and utilized, unlike physical assets, this poses a problem to treat them as assets in the strict sense.
5. There is a constant fear of opposition from the trade unions as placing a value on employees would make them claim rewards and compensations based on such valuations.
6. In spite of all its significance and necessity, Tax Laws don’t recognize human beings as assets.
7. There is no universally accepted method of the valuation of human resources.