ACCOUNTING

• Human Resources Accounting


  The process of identifying and measuring data about human resources and communicating this information to interested parties
• Human Resources Accounting


  • Involves measurement of all the costs/investments associated with the recruitment, placement, training and development of employees
  • Involves quantification of the economic value of the people in an organization
• Human capital


  A set of knowledge and competence, skills and training, innovation and capabilities, attitudes and skills, learning ability and motivation of the people who form the organization
• Definitions of Human Resources Accounting

  • The American Accounting Society Committee on Human Resource Accounting definition
  • Flamholtz et al definition
  • Woodruff Jr. definition
  • Baker definition
• Human Resources Accounting


  • Valuation of human resources
  • Recording the valuation in the books of account
  • Disclosure of the information in the financial statements of the business
• Intangible assets


  • Assets include the intellectual property rights of patents, trademarks, copyright and registered designs, as well as contracts, trade secrets and databases
  • Intangible resources, which are skills or competencies, include the expertise of employees, suppliers, distributors and the culture of the organization, enabling it to cope with change, put the customer first, etc.
• Categorization of intangible resources

  • Physical, human and monetary resources needed for business operations
  • Information-based resources, such as management skills, technology, consumer information, brand name, reputation and corporate culture
• Competence


  The ability to perform a given task and exists at both the individual and organisational level
• Relational resources


  Reputation, client loyalty, etc., which are conceived as being fundamental to the performance of the firm
• Objectives of Human Resources Accounting

  • Provides companies with information about the cost and value of its human resources
  • Provides companies with a guide for human resource decisions about acquiring, allocating, developing, and maintaining human resources to attain cost-effectiveness
  • Motivates managers and decision makers to look at decisions through a human resource point of view
  • Allows management personnel to monitor effectively the use of human resources
  • Provides a sound and effective basis of human asset control
  • Helps in the development of management principles by classifying the financial consequences of various practices
• Why Human Resource Accounting is useful

  • Helps the management in the Employment, locating and utilization of human resources
  • Provides a basis for planning of physical assets vis-à-vis human resources
  • Assists in evaluating the expenditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm
  • Helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it
  • Helps in locating the real cause for low return on investment
  • Helps in understanding and assessing the inner strength of an organization
  • Provides valuable information for persons interested in making long term investment in the firm
  • Helps employees in improving their performance and bargaining power
• Aspects of HRA system

  • The investment made in human resources
  • The value of human resources
• Measurement of the investments in human resources will help to evaluate the changes in human resource investment over a period
• The information generated by the analysis of investment in human resources has many applications for managerial purposes
• Human Resources Accounting (HRA)

  A system that consists of two aspects: 1) The investment made in human resources, 2) The value of human resources
• Purpose of HRA


  • Measure investments in human resources to evaluate changes over time
  • Evaluate organizational and human performance
  • Guide management in human resource management policies
  • Provide input for future planning and impact of present planning
• Prerequisites for effective HRA application

  • Management support
  • Time and financial/human resources for data collection, setting criteria, monitoring employees, HR valuing
  • Multi-functional team with diverse skills and thinking
  • Modern HR team that embraces changes
  • Awareness campaigns for employees
  • Development of knowledge-based measurement methodologies
  • Measurements highly relevant to strategic direction
  • Large company size (not economical for small firms)
  • Developed human resources information system
• Treatment of HRA from Financial Accounting Perspective

  Training costs can be treated as assets if future benefits are expected, but this is problematic due to lack of correspondence between real assets and those recognized in the balance sheet
• Treatment of HRA from Managerial Accounting Perspective

  Personnel are participating in a value-creation process, so their costs (along with raw materials and industrial plants) contribute to the organization's added value
• HRA Models


  • Present Value model
  • Original Cost model
  • Historic Cost model
  • Replacement Cost model
  • Total Organizational model
  • Bidding model
  • Economic Cost model
  • Stochastic Reward Valuation model
• Present Value model


  Values people at the present value of expected future services to the organization
• Original Cost model


  Capitalizes training and development costs as they provide ongoing benefits, but expenses other recruitment costs
• Historic Cost model


  Calculates employee worth using total historic costs of obtaining the employee, but has limitations in representing current worth
• Replacement Cost model


  Values employees based on the cost to replace them, including hiring, training, and moving costs
• Total Organizational model


  Values the company as a whole and divides it between different inputs, then further divides the labour portion between employee clusters
• Bidding model


  Values employees based on competitive bidding by managers, linking to scarcity and additional earning potential
• Economic Cost model


  Values employees based on the appropriately discounted net cash inflows they are expected to generate over their economic service lives
• Stochastic Reward Valuation model

  Values employees based on the discounted sum of the values of the service states they are expected to occupy during their career
• Economic value method


  Present value measuring technique or opportunity cost approach
• Stochastic Reward Valuation model


  Approach that focuses on HRA value rather than HRA cost, calculates the value of an employee as the discounted sum of the values of the service states that the individual will occupy during their career
• Information required for Stochastic Rewards Valuation model

  • Mutually exclusive service states that the individual may occupy
  • Value of each service state to the organization
  • Estimated tenure of the person in the organization
  • Probability that the individual will occupy each service state at specified future times
  • Discount rate to be applied to future cash flows
• Importance of developing methods for Human Resources Accounting

  • Measurement reflects the strategic and competitive importance of human resources
  • To earn credibility, human resources must be expressed in financial terms
• If properly implemented, the human capital planning and budgeting process will become a key driver of strategy
• The financial numbers are a lagging indicator of where a firm has been and should not be substituted for leading indicators of where the firm is going
• The value of human capital should be more fully considered when making decisions about the acquisition and disposal of people
• Criticisms of HRA methods

  • No single approach satisfies all organizational and professional interests
  • Firms engaging in production vs services may require different methods
  • Fear of management manipulation of financial statements
  • Assigning value to employees could demotivate them
  • Documentation of people as book assets presents employees as property
  • Estimation data susceptible to manipulation
  • Lack of uniform method across countries
• Management needs to be fully focused when applying HRA, consult HRA specialists, and provide proper auditing to avoid manipulation
• Impact of HRA on decision making and reporting

  • Managers are more likely to treat employees as long-term investments when going through HRA measurement process
  • HRA measurement process attempts to increase recognition that human capital is paramount to the organization's short and long-term productivity and growth
  • HRA can aid in making decisions that benefit the long-run strategic goals and profitability of the company
• Even if human assets are not reported on external financial statements, HRA can play a crucial role in internal managerial decision-making