Human Resource Accounting and its Advantages- Net Exam.

Human Resource Accounting

Meaning: 

Human resource accounting is the process of identifying and reporting investments made in the human resources of an organization that are presently unaccounted for in the conventional accounting practices. It is an extension of standard accounting principles. Measuring the value of human resources can assist organizations in accurately documenting their assets.

Definition:

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’.

Objectives of HR Accounting

• 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 organisational objectives. 

• To monitor effectively the use of human resources by the management. 

• To have an analysis of the human assets i.e. whether such assets are conserved, depleted or appreciated. 

• To aid in the development of management principles. and proper decision making for the future by classifying financial consequences of various practices. 

Methods of valuation of human resource management

 

1. Historical Cost Approach                                                                                                           This approach was developed by William C. Pyle and R.G. Barry in 1967. In this approach, actual cost incurred on recruiting, hiring, training and development the human resources of the organisation are capitalised and amortised over the expected useful life of the human resources. Thus a proper recording of the expenditure made on hiring, selecting, training and developing the employees is maintained and a proportion of it is written off to the income of the next few years during which human resources will provide service.

2. Replacement Cost Approach 

              This approach was first suggested by Rensis Likert, and was developed by Eric G. Flamholtz on the basis of concept of replacement cost. Human resources of an organisation are to be valued on the assumption that a new similar organisation has to be created from scratch and what would be the cost to the firm if the existing resources were required to be replaced with other persons of equivalent talents and experience. It takes into consideration all cost involved in recruiting, hiring, training and developing the replacement to the present level of proficiency and familiarity with the organisation.

 3. Opportunity Cost                                                                                                                  

         This method was first advocated by Hc Kiman and Jones for a company with several divisional heads bidding for the services of various people they need among themselves and then include the bid price in the investment cost. Opportunity cost is the value of an asset when there is an alternative use of it. There is no opportunity cost for those employees that are not scarce and also those at the top will not be available for auction. As such, only scarce people should comprise the value of human resources.
 Advantages of HRA

1. Information for manpower planning 

HRA provides useful information about the cost and value of human resources. It shows the strengths and weakness of the human resources. All this information helps the managers in planning and making the right decisions about human resources. Thus, it provides useful information for Manpower Planning and Decision Making.

2. Information for making personnel policies
HRA provides useful information for making suitable personnel policies about promotion, favorable working environment, job satisfaction of employees, etc.

3. Utilization of human resources

HRA helps the organisation to make the best utilization of human resources.

4. Proper placements

HRA helps the organisation to place the right man in the right post depending on his skills and abilities.

5. Increases morale and motivation

HRA shows that the organisation cares about the employees and their welfare. This increases their morale and it motivates them to work hard and achieve the objectives of the organisation.

6. Attracts best human resources

Only reputed organisations conduct HRA. So, competent and capable people want to join these organisations. Therefore, it attracts the best employees and managers to the organisation.

7. Designing training and development programs

HRA helps the organisation to design (make) a suitable training and development program for its employees and managers.

8. Valuable information to investors

HRA provides valuable information to present and future investors. They can use this information to select the best company for investing their money.

Limitations of HRA

• The valuation of human assets is based on the assumption that the employees are going to remain with the organisation for a specified period. However, this assumption is wrong because employee mobility is very high.

• The human resource accounting may lead to the dehumanization in the organisation. If the valuation is not done correctly or the results of the valuation are not used properly.

• In the case of financial accounting, there are certain specified accounting standards which every organisation must follow. However, there are no standards for HRA. Each organisation has its own standards for it. So, there are no uniform standards for it. Therefore, the HRA of two organisations cannot be compared.

• There are no specific and clear cut guidelines for 'cost' and 'value' of human resources of an organisation. The present valuation systems have many limitations.