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Eric G. Flamholtz (The Anderson School, UCLA, Los Angeles, California, USA)
Wei Hua (The Anderson School, UCLA, Los Angeles, California, USA)
Abstract:
The purpose of this paper is to provide an overview and history of human resource
accounting (HRA) with the objective of promoting both continued academic research
and organizational applications. The history of HRA illustrates how academic
research can generate improvement in management systems. The paper defines HRA
and suggests implications of measuring human capital for financial reporting and
managerial uses. Recent Swedish‐based HRA applications with respect to measuring
human assets and intellectual capital, including the Skandia Navigator, illustrate how
intellectual history and developments in business schools can influence business
history.
Citation:
Eric G. Flamholtz, Maria L. Bullen, Wei Hua, (2002) "Human resource accounting: a
historical perspective and future implications", Management Decision, Vol. 40 Issue:
10, pp.947-954, https://doi.org/10.1108/00251740210452818
Question 2
DEFINITIONS
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 the human resources can assist organizations in accurately documenting
their assets.
Human resource accounting (HRA) is similar in principle to the financial accounting. That is,
just as financial accounting reflects the costs of assets such as building and machinery, human
resource accounting shows human resources as capital not as expenses. Thus, HRA shows the
investment the organization makes in its people and how their values change over a period of
- Woodruff
Question 3
OBJECTIVES OF HR ACCOUNTING
The human resource process was established to fulfill a number of objectives within the
organization. These include:
To enable management of the organization to effectively monitor the use of human resources.
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 organizational 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.
To create managerial awareness about the value of human assets.
To ascertain the conservation, appreciation and depreciation of human resources during any
given time period.
Question 4
Benefits of HRA
There are several benefits accrue from the human resources practices.
HRA provides a true picture about the human resources with their strengths and
weaknesses in the enterprise so that the recruitment or retrenchment policies can be
framed.
HRA facilitates comparison between enterprises or with the industry and enable the
investor to make a choice of enterprise to invest.
The organization records physical resources and value of human resources are ignored
which does not provide correct evaluation. HRA practices prevent the faulty evaluations.
Question 5
METHODS OF HRA
This approach was developed by William C. Pyle and R.G. Barry corporation, a leisure
In this approach, actual cost incurred on recruiting, hiring, training and development the human
resources of the organization are capitalized and amortized 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.
It takes into account a part of the employees acquisition costs and thus
expenditure is to be amortized.
This approach was first suggested by Resins 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 organization 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
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
4. Standard Cost:
Instead of using historical or replacement cost, many companies use standard cost for the
valuation of human assets just as its used for physical and financial assets. For using standard
cost, employees of an organization are categorized into different groups based on their
hierarchical positions.
Among these methods Historical Cost Principle is more appropriate because:
The concept of historical cost principle is that the assets are recorded base on the price at the
time they are purchased. And the liabilities are recorded based on the values that expected to pay
at the original value rather than market value or inflation adjusted value.
Example: The example of the historical cost principle in IFRS, PPE per IFRS is require to record
initially at cost, and the value will be subsequently reduce by depreciation or impairment.
approach. In our country, too, there is a need for establishing systems which can generate
monetary and non – monetary information about human beings in the organizations, particularly
about managerial talents whose dearth is felt by business organization.
This is due to the fact that human resource accounting offers following advantages:
1. It helps in giving valuable information to the management for effective planning and
managing human resources.
2. It helps in measurement of standard cost of recruiting, selecting, hiring and training people and
organization can select a person with highest expected realizable values.
3. Human resource accounting can change the attitude of managers completely, thereby, they
would try to maximize the expected value of human resources and effective use of human
resources in the organization.
4. It also provides necessary data to devise suitable promotion policy congenial work
environment and job satisfaction to the people.
Question- 6
3. No Evidence:
The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a
managerial tool facilitates better and effective management of human resources.
Though HRA is not practiced in BD but Success and failure of corporate undertakings
purely depends upon the human resources. Now-a-days human resource is a prime concern for
all the institutions especially for financial institutions as they have required investing a huge
practices in corporate sector i.e. banking sector in Bangladesh. For the convenience of
completing the research paper successfully it has been prepared based on a sample of 25
commercial banks and practice of human resource accounting has been measured on five broad
indicators which incorporates several sub indicators. In the survey it has found only few banks
had mechanism to practice of human resource accounting in 2010 and now in 2011 almost the
same number of banks has such mechanism and score improved by .09 due to the some
enhancement program in this regard and it has been found that banking sectors in Bangladesh are
often alleged as too vague in the issues of practicing human resource accounting.
Question-8
HRA Usage in various Countries
HRA usage in USA
“Human resource accounting is the measurement of the cost and value of the people for the
organisation.”
IT, hospital, sports club, research oriented and many organisations mostly depends on human
capital rather physical capital. When we have a look at service oriented organisations which are
creating more wealth to the society typically have greater significance to the human resources as
the value of the knowledge and skills of its personnel more than that of physical assets of the
organisation.
Conclusion
The concept of HRA is one of the branches of modern accounting system. Earlier, this account
system developed by an Italian Monk, Luca Paciolo who used his analytical skills to discuss the
system of double entry book keeping system. By laps of time, the span of accounting has been
accelerated and as part of it; the demand of the public and the organization have turned into
diversification in practicing in accounting system. Most of them want to know the actual cost of
human resources and future economic value of human resources because they have required
investing a huge amount of capital to develop human resources. As a result of this human
resource accounting has been developed.