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ISSN 2412-3218(Print) International
Scholar Journal of
Accounting and
International Scholar Journal of Accounting and
Finance,Volume-1, No.1(2015) 51-62
Finance

Valuation and Disclosure of Human Resource Accounting (HRA)

Mohammad Sharif Hossain *

*Senior Lecturer, Department of Business Administration, Uttara University, Bangladesh

ABSTRACT
Human resource is now considered to be the asset of the company, as it‟s the hard work
and intellect of the human resource, that a company earns profits. It is a reportable
investment that is not presently accounted for under the conventional accounting
practice. The monetary unit assumption of accounting does not allow reporting value of
company employees in company‟s financial report because value of HR is difficult to
measure in monetary unit. Though companies all over the world are showing their
expenses related to human resources in the financial statements, they are not being able
to show the expertise of their „Human Capital‟ and how these resources are utilized, in
the financial statements. Auditor certifies in his report that balance sheet shows true and
fair position of business in spite of the fact that it is not showing the value of knowledge
workers. The main purpose of preparing this paper is the accumulating different models
and assumptions and those models and assumptions have been cited and illustrated
here in order to proper valuation and disclosure of human resource in the financial
statements.
Copyright © 2015, Scholar Journals. All rights reserved.

Keywords: Accounting, Human Resource, Valuation, Disclosure

JEL classifications: M40, M41

1. INTRODUCTION
The objectives of financial accounting is to provide information that is relevant to the
decisions that users (investors) must make, including adequate information about one
neglected asset of a firm—the human asset. The conventional accounting treatment of
human-resource outlays consists of expensing all human-capital formation expenditures
and capitalizing similar outlays on physical capital. A more valid treatment would be to
capitalize human-resource expenditures to yield future benefits and to reveal when such
benefits can be measured. In fact, this treatment has created a new concern with the
measurement of the cost or value of human resources to an organization and has led to
the development of a new field of inquiry in accounting, known as human resource
accounting (Belkaoui, 2000). Human Resource Accounting (HRA) is the process of
identifying and measuring data about human resources and communicating this
information to interested parties (American Accounting Association, 1973). It means
accounting for people as an organizational resource. It involves measuring the cost
incurred by an organization to recruit, select, hire, train and develop human assets and

*
Corresponding Author: Mob. No. +8801719488693
Email address: sharif1400@gmail.com
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also involves measuring the economic value of people in the organization. It is an

extension of the accounting principles of matching costs and revenues and of organizing
data to communicate relevant information in financial terms. 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 or external use and as a decision-making tool for human
resource management. HRA, not only involves measurement of all the costs/ investments
associated with the recruitment, placement, training and development of employees, but
also the quantification of the economic value of the people in an organization. Human
Resource (HR) is though one of the valuable assets of the organization but there is no
statutory regulation to report it in the organization‟s annual report. But sometimes HR
value of an organization can exceeds its‟ tangible assets value but traditional accounting
systems provide little chance to record and recognize these values of HR. Edward Lawler
(1992) described human resources from investment perspective as ―to be competitive,
organizations in many industries must have highly skilled, knowledgeable workers. They
must also have a relatively stable labor force since employee turnover works directly
against obtaining the kind of coordination and organizational learning that leads to fast
response and high-quality products and services.
Human resources have certain distinct characteristics from other physical assets like
personality, self-control, devotion, quality, skill talents, loyalty and initiative. It is a basic
need of present time to improve productivity that can be improved by the human force.
Hence to encourage, it is necessary to account them and to take progressive decisions for
them.

2. OBJECTIVES OF HRA
 HRA helps in developing financial assessments for the people within the
organization. However, the specific objectives of HRA may be outlined as under:
 It delivers the HR professionals and management with information for managing
the human resources efficiently and effectively.

 It furnishes cost/value information for making management decisions about

acquiring, allocating, developing, and maintaining human resources in order to
attain cost effectiveness.

 It provides a sound and effective basis of human asset control, that is, whether the
asset is appreciated, depleted or conserved.

 Find out the true picture of the future prospects of the organization, as the
utilization of other resources are fully depend on the human resources.

 It assists senior management in understanding the long-term cost and benefit

implications of their HR decisions so that better business decisions can be taken.

 It reduces the risk of severe repercussions in future if decisions taken in the short
run that may improve profits.

 It is essential for performing the critical HR functions of acquiring, developing,

allocating, conserving, utilizing, evaluating and rewarding in a proper way.
In addition to facilitating internal decision making processes, HRA also enables critical
external decision makers, especially the investors in making realistic investment
decisions. Furthermore, in a business environment where corporate social responsibility
is rapidly gaining ground, HRA reflects the extent to which organization contributes to
society‟s human capital by investing in its development

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3. HRA IN THE CONTEXT OF BANGLADESH

As far as the statutory requirements go, the Companies Act, 1994 does not demand
furnishing of HRA related information in the financial statements of the companies. The
Institute of Chartered Accountants of Bangladesh (ICAB) too has not been able to bring
any definitive standard or measurement in the reporting of human resources costs. While
qualitative pronouncements regarding the importance of Human Resources are often
made by the chairmen of corporate entities in annual reports and also in the AGM
(annual general meeting), quantitative information about their contribution is rarely
recorded or communicated. There are a few organizations, however, that derecognizes the
value of their human resources, and furnishes the related information in their annual
reports. Several models have been developed but all models are suffering from some
limitationss at the time of their application. Here an in-depth analysis in addition to some
clarifications is given how our national companies can use and present the investment in
human resources. Syed Abdulla Al Mamun (2009) in his study on Human
Resource Accounting disclosure of Bangladeshi Companies and its association
with corporate characteristics said that the companies with higher profitability
intended to disclose more human resource accounting information and
demonstrated that companies averagely disclose 25% of the total HRAD items.

4. LITERATURE REVIEW
HRA was introduced in the accounting literature in the 1960s (Flamholtz, 1985). In 1968
Brummet, Flamholtz & Pyle used the term “human resource accounting” for the first
time. It provides information about human resource costs and values, serves to facilitate
to decision making, and motivates decision makers to adopt a human resource
perspective (Sackmann et al., 1989). There are two reasons for including human
resources in accounting. First, people are a valuable resource to a firm so long as they
perform services that can be quantified. Second, the value of a person as a resource
depends on how he is employed. So management style will also influence the human
resource value (Ripoll and Labatut, 1994).
HRA is at its emerging stage. Researchers are brainstorming to value human resources
which is very fundamental stage for study of any asset. Human beings are very complex
entity. Their efficiency varies from time to time. So expressing it in certain physical
measurement is very tough. According to Jan-Erik Grojer and Ulf Johanson (1998)
Human resource costing and accounting (HRCA) is a complex and poorly understood
process of accounting. Researchers have to evolve universally accepted method to
measure its value so that it may become possible to calculate return on this asset. Some
researchers have tried to give approaches to measure human resources. But we are not
able to evolve a mechanism that is free from limitations. Various models given by
researchers are some of the efforts in this direction. Academic world and practical world
are complementary for each other. This is true for every discipline. Scientific theories
have been basis for invention of various equipment which are useful in day to day world.
In HRA field educational institutions should develop measurement models which are
useful in practical Business scenario.
Academic research provides important inputs to HRA for industry applications. The
history of HRA illustrates how academic research can generate improvement in
management systems, what is an implication of measuring human capital for financial
reporting and its managerial uses. (Eric G. Flamholtz, Maria L. Bullen, Wei Hua, 2002).
Human resource management policy as laid down in company publication and actual
practice followed by company are not same in many cases. Main reason for this can be
that there is no proper record for human resources. This again confirms need for properly
developed HRA. Very few companies are trying to value their human resources. It is
practical fact that if we have to utilize asset to maximum possible extent then we have to
maintain proper records for it, which is completely missing in case of human resources.

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This also establishes the facts that human resources may be underutilized to a great
extent. The success or failure of every enterprise including multinational enterprises
(MNEs), is based largely on effective utilization of the entity's resources. . While there is
much concern for detailed information about the physical and financial assets of the
entity, managers and accountants tend to ignore or half-heartedly pursue similar
accountability for what are often intangibles .(William Brent Carper, 2000). Attempts are
made to probe into the gaps between the human resource management policies as laid
down in company publications and the actual practices, followed by companies in public
and private sector and by multinationals in India, (Hem C. Jain,1991).But this efforts can
fully materialize only with well developed system of HRA The rise of the “new economy”,
one principally driven by information and knowledge, international competitiveness and
changing patterns of interpersonal activities is attributed to the increased prominence of
intellectual capital as a management and research topic (James Guthrie, 2001).
Increasing importance of this topic is also driving researchers to do more research on
HRA. The measurement and reporting of intellectual capital has recently attracted a
growing interest from accounting researchers, promoting a lively and far-reaching debate
(Roslender and Fincham, 2001).
According to Flamholtz and Eric G (1999) Human resource accounting is a managerial
tool that can be used to gain valuable information by measuring the costs of recruiting,
hiring, compensating and training employees. It can be used to evaluate employee
training programs, increase productivity, and improve managerial decision-making
regarding promotions, transfers, layoffs, replacement and turnover. Tang Tang (2005) in
his article developed a heuristic frame addressing the link between human resource
replacement cost and decision-making. Management strategies including human
resource management have evolved over the centuries in response to economic and social
needs of individuals and organizations (Nash, Claire Y.; Flesher, Dale L, 2005). HRM
must be expressed in financial terms'. Senior management and financial managers'
support is important for measuring human resources (Shraddha Verma Dewe, Philip,
2004). Researches in HRA should be speeded up for fast development of HRM. Despite a
promising outlook in the 1970s, it has been claimed that human resource costing and
accounting have progressed at something less than snail‟s pace over the past two
decades. This is largely due to difficulties in the application of the concept (Ulf
Johanson,1999) so we cannot blame researchers for slow speed of research works. It is
complexities of human resources which makes concept of HRA tough. Researchers have
tried their level best to speed up work.
According to Punita Jasrotia (2000), While most organizations can readily give detailed
information about their tangible assets like plant and machinery, land and buildings,
transport and office equipment, there is no formal record of investment in employees.
Because of poor measurement and inadequate reporting, human resources run in the
risk of being undervalued internally by managers and externally by capital markets
(Hanson, 1997). Although academic research on human resource accounting has been
conducted for several decades, specific methods of measuring HR costs and values still
remains largely undeveloped.

5. DEVELOPMENT PHASES OF HRA

The traces of a rudimentary HRA can be found in the Medieval European practice of
calculating the cost of keeping a prisoner versus the expected future earnings from him.
The prisoners in those days were seen to be the general property of the capturing side.
Consequently, after the victory a quick decision regarding whether to capture a prisoner
or to kill him had to be taken based on the costs involved in keeping him and the benefits
accruing from killing him.
However, these represented very rough measurements with limited use. The development
of HRA as a systematic and detailed academic activity, according to Eric G. Falmholtz
(1999) began in sixties. He divides the development into five stages. These are:

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First stage (1960-66): This marks the beginning of academic interest in the area of HRA.
However, the focus was primarily on deriving HRA concepts from other studies like the
economic theory of capital, psychological theories of leadership-effectiveness, the
emerging concepts of human resource as different from personnel or human relations; as
well as the measurement of corporate goodwill.

Second stage (1967-70): The focus here was more on developing and validating different
models for HRA. These models covered both costs and the monetary and non-monetary
value of HR.

Third Stage (1971-77): This period was marked by a widespread interest in the field of
HRA leading to a rapid growth of research in the area.

Fourth Stage (1978-1980): This was a period of decline in the area of HRA primarily
because the complex issues that needed to be explored required much deeper empirical
research than was needed for the earlier simple models.

Stage Five (1981 and onwards): There was a sudden renewal of interest in the field of
HRA partly because most of the developed economies had shifted from manufacturing to
service economies and realized the criticality of human asset for their organizations.
Since the survival, growth and profits of the organizations were perceived to be dependent
more on the intellectual assets of the companies than on the physical assets, the need
was felt to have more accurate measures for HR costs, investments and value.

In Bangladesh, human resource valuation has not yet been institutionalized though, as
mentioned above, many public as well as private companies have adopted HRA.

6. METHODOLOGY
This study is qualitative in nature and do not use any quantitative tool to analyze the
data. It is conducted on the basis of the prior literatures and secondary information.
There are various research papers, articles and different books have been used for the
study.

7. VALUATION OF HUMAN RESOURCE

The biggest 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.

7.1 The Cost Approach

Different methods have been given for valuation of human resources. Under cost
approach, following are the applicable such as:
 Training and selection cost method,
 Historical Cost Method,
 Opportunity Cost method,
 Exit cost Method,

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 Replacement Cost Method, and

 Standard Cost Method and Competitive Bidding Method.

Cost is a sacrifice incurred to obtain some anticipated benefit or service. All costs have
two portions, viz., the expense and the asset portions. The expense portion is that which
provides benefits during the current accounting period (usually the current financial
year), whereas the asset portion is that which is expected to give rise to benefits in the
future.
Human resources, like any other asset bring with them several costs (Table 1). Using
criteria to determine elements that can be recorded [Financial Accounting Standards
Board, 1984, 1993; International Accounting Standards Committee, 1989, 1994].

Table 1: The Costs of Human Resources

Costs Definitions
Original Financial flows originating when hiring and training becomes necessary.
Substitution Incurred today to substitute resources used in a determined activity.
Opportunity The value of human resources in its most favorable, alternative use.
Source: Falmholtz (1976).

Training and Selection Cost Analysis: No doubt, when a firm invests in human
resources by acquisition and training, it anticipates a future generation of profits and
services that will be produced by these assets. Training in firms is an activity that
develops the worker's capacity to improve efficiency and job quality; therefore, the
enterprise increases its profitability. The training concept is generally used to define three
different issues, which, in practice, are difficult to distinguish: capacitating, training, and
development [Guzmán et al., 1996]. Capacitating is the worker's acquisition of knowledge
and skills necessary for his job. Training better adapts the worker to the job, and
development focuses on promotion to higher job levels. Even though there are different
training classifications, the one proposed by Marqués (1974) reports several criteria:
 When does training take place? It can be at the contracting moment or any
moment during employment.
 How long is the training period? It can take from one or two days to one or two
weeks. In some cases, it can take six months, one year, or more.
 Does this training relate to the nature of the job by updating an employee's
knowledge and teaching new techniques or does it open doors to new skills not
related to the worker's professional activity?
 Is there internal or external training taking place?
Historical or Acquisition Cost Model: This model of accounting of human resources
was first initiated by Rinses Likert at R.G.Bary Corporation in Ohio Columbia (USA) in
1967. This model involves capitalisation of the actual cost incurred on recruiting,
selecting, hiring, training and developing the human resources of the organisation. The
sum of such costs for all the employees‟ of the organisation represents the value of the
human resources of the organisation. This value is amortised over the expected length of
service of individual employees. The unexpired cost is considered to be the investment in
human resources. If an employee leaves the organisation due to resignation, death,
dismissal etc., whole of the amount not written off is charged to the current revenue.
The total cost of the investment includes those quantifiable expenditures associated with
recruitment, selection, hiring, training, placement, familiarisation and development. This
method simply capitalises human resource costs and does not seek to value people. It is
similar to the approach followed when valuing fixed assets and writing off their cost over
their useful life. The cost is capitalised, not being charged against current income and a
deferred taxation charge is made on the notional increase in profit. This method is simple
and meets the test of traditional principle of accounting i.e. matching of cost with
revenue.
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Substitution/ Replacement Costs: Likert (Bowers, 1973) imagines an extreme situation

for the firm's management:“Suppose that tomorrow all the jobs are empty, but you still
have available all the rest of the resources: buildings, factories, industrial plants, patents,
stocks, money, and so on; except, of course, for the personnel. How much time would it
take you to recruit the necessary personnel, train it until they are able to functions at the
present competitive level and integrate it in the organization in the same way they now
are?”
The mental exercise necessary to rebuild an organization is an excellent way to attract
attention to human resources, which is now seen in a new light. Certainly, Professor
Likert's fiction includes the implicit posing of human resource valuation under
substitution (or replacement) cost criteria.
Even though Likert's proposal is very unlikely, it enables calculating the cost of totally
substituting (or replacing) human resources. To calculate substitution cost, figure in the
cost of sacrifice to replace a human resource that is already employed. This cost includes
exit costs of the leaving employee and recruiting and training of the replacement.

Opportunity Costs: Some authors consider that opportunity costs are not the alternative
to historical costs nor substitution costs, but estimates these costs without mistake.
Opportunity costs are considered as "an asset value when [they are] the target of an
alternative use" (Hekimian and Jones, 1967).
Cost valuation is based upon the conflict of interest that can take place in a firm's
internal, fictitious market where several organizational units (divisions) participate. These
units must be profit centers, that is, their objectives must be expressed in terms of
profitability.

Exit Cost Analysis: Exit costs can be classified into the three categories (Ripoll and
Labatut, 1994) of lost efficiency prior to separation, job vacancy cost during the new
search, and termination pay. It is difficult to put a value on lost efficiency prior to
separation. Productivity per employee seems to be the most adequate measure. However,
this measure (generally calculated by means of a ratio) is not problem-free. For example,
consider administrative or management jobs where productivity is so hard (if not
impossible) to identify. The vacancy cost prevents taking into account how much the firm
ceases to gain because the employee is not working there anymore. If this loss is
expressed according to the productivity ratio, the same problems arise that were
discussed in previous points (except for the estimated wasted return percentage that, in
this case, becomes unnecessary). Regarding termination pay, accounting normally refers
to this as indemnities.
Referring to the indemnity accounting treatment, is it necessary to record a provision for
the total possible indemnities of the staff? That is, does an expense or loss exist, whether
potential or real, and is the provision necessary? Use the example of an employee who
spends his entire professional life in a firm from the beginning through retirement. It is
obvious that the provision is not necessary. The provision has been recorded to the debit
of expenses; therefore, it remains that the previous entry cannot possibly be recorded
because future events in this particular issue are unknown. The provision entry must not
be recorded for the entire staff because this would be acting against the accrual, register,
and prudent accounting principles. When is the best moment for recording a staff
indemnity provision? An indemnity provision must be recorded only when the enterprise
has decided to put an end to the existing contracts and has already estimated (based
upon the prevailing law) the quantity accrued. Recording the provision beforehand would
not be correct because the firm's decision is still needed, not just personal opinions.

Standard Cost Method and the Competitive Bidding Method: The standard costs
associated with the recruitment, hiring, training and developing per grade of employees
are determined annually. The total costs for all the personnel signify the worth of the
human resources. In Bidding Method, an internal market for labor is developed and the
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managers determine the value of the employees. Managers bid against each other for
human resources already available within the organization. The highest bidder „wins‟ the
resource. There are no criteria on which the bids are based. Rather, the managers rely
only on their judgment.

7.2 The 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.

7.2.1 Monetary Measures for Assessing Individual Value:

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. Typically, this value is uncertain and has two dimensions. The
first is the expected conditional value of the individual. This is the amount that the
organization could potentially realize from the services of an individual during his/her
productive service life in the organization. It is composed of three factors:
 Productivity or performance (set of services that an individual is expected to
provide in his/her present position);
 Transferability (set of services that he/she is expected to provide if and when he/
she is in different positions at the same level);
 Promo ability (set of services that are expected when the individual is in higher
level positions).

The second dimension of an individual value is the expected realizable value, which is a
function of the expected conditional value, and the probability that the individual will
remain in the organization for the duration of his/her productive service life.

b) Flamholtz’s Stochastic Rewards Valuation Model

The movement or progress of people through organizational „states‟ or roles 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. Use of this model necessitates
the following information:
 The set of mutually exclusive states that an individual may estimate of a person‟s
expected tenure in the organization
 The probability that in future, the person will occupy each state for the specified
time.
 The discount rate to be applied to the future cash flows.

A person‟s expected conditional value and expected realizable value will be equal, if the
person is certain to remain in the organization, in the predetermined set of states,
throughout his expected service life.

c) The Lev and Schwartz Model

This model is the basic model employed by organizations. According to this model, the
value of human capital embodied in a person who is „y‟ years old, is the present value of
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his/her future earnings from employment and can be calculated by using the following
formula:
E(Vy) = S Py(t+1) S I(T) /( 1+ r)t-y

Where, t = y

E (Vy) = expected value of a „y‟ year old person‟s humancapital

T = the person‟s retirement age

Py(t) = probability of the person leaving the organization

I(T) = expected earnings of the person in period I

r =discount rate.
The basic theme of Lev and Schwartz model is to compute the present value of the future
direct and indirect payments to their employees as a measure of their human resource
value. While doing so, the common assumptions set by the Indian companies are the
pattern of employee compensation, normal career growth, and weight age for efficiency.
Moreover, companies adapt this model to their practical requirements by making
necessary alterations. For instance, different organizations use different discount rates
for ascertaining the present value of future cash flows.

This method of accounting is basically oriented towards measuring changes in the

employees‟ value rather than employers‟ gains from the employees. Unless the employees‟
payments are directly linked to employee productivity or the company performance, the
changes in the value of employees will not reflect the changes in the employees‟
contribution.
Lev & Schwartz advocated the estimation of future earnings during the remaining service
life of the employee and then arriving at the present value by discounting the estimated
earnings at the cost of capital. The assumptions in this method are realistic and
scientific. The method has practical applicability when availability of quantifiable and
analyzable data is concerned, But this model is unable to give any method to record the
value of human resources in the Books of Accounts.
Arguments in favour of Lev and Schwartz Model: In this model wages and salaries are
taken as surrogate for value of human assets and therefore it provides a measure of
future estimated cost. So this model gives somewhat realistic assessment of value of
human resources. According to economic theory, the value of an asset to a firm lies in the
rate of return to be derived by the firm from its employment, Lev and Schwartz model
surrogated wages and salaries of the employees for the income to be derived from their
employment. They felt that income generated by the workforce is very difficult to measure
because income is the result of group efforts of all factors of productions.
To overcome the shortcomings of Lev and Schwartz Model, a model is recommended by
Dr. Amitabh DeoKodwani and Ravindra Tiwari (2007) which can be broadly categorized
for two types of employees:
1. Method for employee who are whole sole for organization such as MD, CEO etc.
2. Method for employees who are not whole sole for organization.
Accounting process and valuation should contain three parts in both methods which are
as follows:
 Real Capital Cost part,
 Present value of future salary/wages payments, and
 Performance evaluation part.

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Total value of Human Resource will be total of above three parts. First two part will be
same for both method. Valuation for second part will be according to Lev and Schwartz
method (although method to account for it in books has also been suggested).Third part
is different for both methods and reflects performance (beyond normal) for that employee.
For normal performance first and second part is sufficient.

7.2.2 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 the Human resource of an organization.
 The skills or capability inventory measurement technique to assess the benefits
gained from is a simple listing of the education, knowledge, experience and skills
of the firm‟s human resources.
 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 superior‟s rank
their subordinates on one or more dimensions, mentioned above.
 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.
 Attitude measurements are used to assess employees‟ attitudes towards their job,
pay, working conditions, etc., in order to determine their job satisfaction and
dissatisfaction.
8. Necessity of HRA Information
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 planning and
decision 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 true worth of the organization. This information, though un-
audited, needs to be communicated to the board and the stockholders.
9. CRITICISMS REGARDING HRA
Following are some common criticisms with respect to HRA:
 Estimation of the values of the service states, the expected tenure, and the
probability that the individual will occupy the state for the specified period of time is
somewhat difficult.
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 As pointed out by Prabhakara Rao (1993) under the Lev and Schwartz model, the
value of human resources will be more or less increasing, even if the organizations
continuously incur losses/decrease in profitability. The attitude and morale of the
employees, the contribution of the employees to the organization, and such other
factors are out of Schwartz model.
 The actual earnings of the most recent year as the basis for calculating human
assets, thereby, ignoring the forecasts of future earnings that are equally relevant
for managerial decision making.
 Limited recognition of human resources to the amount of earnings in excess of
normal, the human resource base that is required to carry out normal operations is
totally ignored.
 It ignores the probability that people may make role changes during the career.
 Ignorance of the possibility and probability that individual may leave an
organization for reasons other than death or retirement.
 A person‟s value to organization is determined not only by the characteristics of the
person himself (as suggested by Lev and Schwartz) but also by the organizational
role in which the individual is utilized. An individual‟s knowledge and skill is
valuable only if these are expected to serve as a means to given organizational ends.

10. CONCLUSION
During the past decade, the concept of HRA has been tuned to the requirements of a
knowledge economy by focusing on such intangible assets as intellectual capital,
relationship capital, etc. Various tools for this purpose have been developed, some of
them being Skandia Navigator, HR Balance Score Card, Knowledge Capital Earnings,
Economic Value Added, Intellectual Asset Valuation, Knowledge Audit Cycle etc.

Whatever the tool or approach to HRA, much of the potential for developing human
resource accounting capability and gaining its advantage depends upon the availability of
and accessibility to the required data. In those organizations, where the data is not
readily available or routinely maintained, the first step towards HRA will have to be HRIS
(Human Resources Information Systems).

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