HUMAN RESOURCE ACCOUNTING
Introduction
The past few decades have witnessed a global transition from manufacturing to service based economies. The fundamental difference between the two lies in the very nature of their assets. In the former, the physical assets like plant, machinery, material etc. are of utmost importance. In contrast, in the latter, knowledge and attitudes of the employees assume greater significance. For instance, in the case of an IT firm, the value of its physical assets is negligible when compared with the value of the knowledge and skills of its personnel. Similarly, in hospitals, academic institutions, consulting firms etc., the total worth of the organization depends mainly on the skills of its employees and the services they render. Hence, the success of these organizations is contingent on the quality of their Human Resource- its knowledge, skills, competence, motivation and understanding of the organizational culture. In knowledge ?driven economies therefore, it is imperative that the humans be recognized as an integral part of the total worth of an organization. But, in order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills, and contribution of the human element as well as that of the organizational processes, like recruitment, selection, training etc., which are used to build and support these human aspects, is developed. Human resource accounting (HRA) denotes just this process of
quantification/measurement of the Human Resource.
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Definition
Assigning, budgeting, and reporting the cost of human resources incurred in an organization, including wages and salaries and training expenses.
HRA scenario
It is right that worldwide, knowledge has become the key determinant for economic and business success, but Indian companies focus on ?Return on Investment? (RoI), with very few concrete steps being taken to track ?Return on Knowledge?.
What is needed is measurement of abilities of all employees in a company, at every level, to produce value from their knowledge and capability. ?Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business. HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organization,? says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India. The current accounting system is not able to provide the actual value of employee capabilities and knowledge. This indirectly affects future investments of a company, as each year the cost on human resource development and recruitment increases.
Experts point out that the information generated by HRA systems can be place to use for taking a variety of managerial decisions like recruitment plotting, turnover analysis, personnel advancement analysis and capital budgeting, which can help companies save a lot of distress in the future.
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Information management in HRA
Like any accounting exercise, the HRA too depends heavily on the availability of relevant and accurate information. HRA is essentially a tool to facilitate better plotting and choice making based on the information regarding actual HR costs and organizational returns. The kind of data that needs to be managed systematically depends upon the purpose for which the HRA is being used by an organization.
For example, if the purpose is to control the personnel costs, a system of standard costs for personnel recruitment, selection and training has to be developed. It helps in analyzing projected and actual costs of manpower and thereby, in taking remedial action, wherever necessary. Information on turnover costs generates awareness regarding the actual cost of turnover and highlights the need for efforts by the management towards retention of manpower.
Accountability in the management process is often enhanced when information involving an evaluation of managerial effectiveness is generated.
Finally, information on the intangibles like intellectual capital/human capital becomes necessary to measure the right worth of the organization. This information, though unaudited, needs to be communicated to the board and the stockholders
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Measurement in HRA
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The largest challenge in HRA is that of assigning monetary values to different dimensions of HR costs, investments and the worth of employees. The two main approaches usually employed for this are:
1. The cost approach which involves methods based on the costs incurred by the company, with regard to an employee.
2. The economic value approach which includes methods based on the economic value of the human resources and their contribution to the company?s gains. This approach looks at human resources as assets and tries to identify the stream of benefits flowing from the asset.
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Economic value approach
The value of an object, in economic terms, is the present value of the services that it is expected to render in future. Similarly, the economic value of human resources is the present worth of the services that they are likely to render in future. This may be the value of individuals, groups or the total human organization. The methods for calculating the economic value of individuals may be classified into monetary and non-monetary methods.
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Monetary Measures for assessing Individual Value
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a) Flamholtz?s model of determinants of Individual Value to Formal Organizations
According to Flamholtz, the value of an individual is the present worth of the services that he is likely to render to the organization in future. As an individual moves from one position to another, at the same level or at different levels, the profile of the services provided by him is likely to change. The present cumulative value of all the possible services that may be rendered by him during his/her association with the organization is the value of the individual.
b) Flamholtz?s Stochastic Rewards Valuation Model
The movement or progress of people through organizational ?states? or a role is called a stochastic process. The Stochastic Rewards Model is a direct way of measuring a person?s expected conditional value and expected realizable value. It is based on the assumption that an individual generates value as he occupies and moves along organizational roles, and renders service to the organization. It presupposes that a person will go from one state in the organization, to another, during a specified period of time.
?Non- monetary methods for determining value
The non-monetary methods for assessing the economic value of human resources also measure the Human Resource but not in dollar or money terms. Rather they rely on various indices or ratings and rankings. These methods may be used as surrogates of monetary methods and also have a predictive value. The non-monetary methods may refer to a simple inventory of skills and capabilities of people within an organization or to the application of some behavioral measurement technique to assess the benefits gained from the Human resource of an organisation.
1. The skills or capability inventory is a simple listing of the education, knowledge, experience and skills of the firm?s human resources.
2. Performance evaluation measures used in HRA include ratings, and rankings. Ratings reflect a person?s performance in relation to a set of scales. They are scores assigned to characteristics possessed by the individual. These characteristics include skills, judgment, knowledge, interpersonal skills, intelligence etc. Ranking is an ordinal form of rating in which the superiors rank their subordinates on one or more dimensions, mentioned above.
3. Assessment of potential determines a person?s capacity for promotion and development. It usually employs a trait approach in which the traits essential for a position are identified. The extent to which the person possesses these traits is then assessed.
4. Attitude measurements are used to assess employees? attitudes towards their job, pay, working conditions, etc., in order to determine their job satisfaction and dis satisfaction
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Conclusion
The accounting of human resources can be seen as just as much a question of philosophy as of technique. This is one of the reasons behind the variety of approaches and is further underlined by the broad range of purposes for which accounting human resources can be used, e.g. as an information tool for internal and/or external use (employees, customers, investors, etc.), and as a choice-making tool for human resource management (investments in human resources as well as personnel management in gene
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Source: http://www.chrisritch.com/human-resources/human-resource-accounting/697
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