Human Resource Accounting

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2.1 INTERPRETATIONS OF HUMAN RESOURCE ACCOUNTING

Perhaps the concept of human resource accounting can be better understood if one goes through some of the most important definitions given by the popular authors of the accounting field.

For example, the American Accounting Society Committee on Human Resource Accounting defines it as “Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.” In simple terms, it is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms.

Mr. Woodruff Jr. Vice President of R. G. Batty Corporation, on the other hand, defines it as “Human Resource Accounting is an attempt to identify and report investments made in human resources of an organization that are presently not accounted for in conventional accounting practice. Basically it is an information system that tells the management what changes over time are occurring to the human resources of the business.”

M.N. Baker defines Human Resource Accounting as "Human resource accounting is the term applied by the accountancy profession to quantify the cost and value of employees to their employer organization.”

Another management consultant Stephen Knauf has defined HRA as simply "The measurement of quantification of human organization inputs such as recruitment, training, experience and commitment."

Thus, if we add up more or less all these definitions, human resources accounting may be best defined as a process; the process of accounting which identifies, quantifies and measures human resources for the use of management to cope up with the changes in its quantum and quality so that equilibrium could be achieved in between the required resources and the provided human resources. In short, human resource accounting is the art of valuing, recording and presenting systematically the worth of human resources in the books of account of an organization.

All these definitions bring out a few very important features of human resource accounting, i.e. the actual valuation of the human resources, recording that in the books of account and of course, disclosure of the information in the financial statements of the business.

2.2 METHODS OF HUMAN RESOURCE VALUATION

When it comes to valuation of human resources, approaches to human resource accounting (HRA) were first developed in 1691. There are basically 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.

The Cost Approach is also called an acquisition cost model. And this method measures the organization’s investment in employees taking five factors into consideration: recruiting, acquisition, formal training & familiarization, informal training & informal familiarization, and experience & development. This model suggests that instead of charging the costs to profit and loss statement, 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 whole thing. This method is the only method of Human Resource Accounting that is based on sound accounting principles and policies.

However, the limitation of this valuation method is that, it is based on the false assumption that the currency is stable, which it is not. Not to mention, that this method measures only the costs incurred to the organization, but completely ignores any measure of the value of the employee to the organization.

On the other hand, the replacement cost approach value the human resources by the cost of replacing a particular employee. According to Likert (1985), replacement cost includes recruitment, selection, compensation, and training cost. The data derived from this method could be useful in deciding whether to dismiss or replace the staff.

The Present value of future earnings method is more of 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.

As dimensional as it seems, it is in fact objective because it uses widely based statistics such as census income return and mortality tables, and focuses more on averages than to the actual value of any specific group or individual.

Following this, we have what 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.

As expected, the limitation of this value to the organization approach is the very soundness of the valuation, which depends largely on the information, judgment, and impartiality of the bidder.

According to the expense model, it basically 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.

And lastly, model on human resource accounting prescribes the human resource accounting approach for two categories of employees:

- Employees, who are at strategic, key decision-making positions such as MD, CEO (Top Executives)

- Employees, who execute the decision taken by Top Executives

Model prescribes value of human resources as sum of below-mentioned three parts: the real capital cost part, the present