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.
Behavioral 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.
5. Expenses 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.
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