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.
xpenses 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.
