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1st Draft : 2011
2nd Draft: 2015



It is widely recognized that human resources are no lesser

important than any other productive resources

However, the recognition of importance of people in organizations as

productive resources by the accountants is a recent origin

It was in late 1960s that the behavioral scientists pointed out

that the failure of accountants to value human resources was
a serious handicap for effective management

As a consequence, valuation of human resources has received

widespread recognition
In the course of time, a number of accounting models have been
developed to value and report human resources of an organization
In the management terminology, this is called as Human Resources
Accounting (HRA)


The area of
HR Costing &
for the
as human
capital or
assets that

Traditional accounting has treated costs

related to a companys human resources
as expenses on the income statement
that reduce profit, rather than assets on
the balance sheet that have future value
for the company

With economic shift from physical-based to

knowledge-based, more focus is given to
develop accounting for human assets
Wayne Cascio, a professor at Universitiy of
Colorado, has realized as far back as 1982,
that cost accounting techniques could
easily be applied to HR activities

Concept of Human Resources Accounting

According to American Accounting Association,

HRA is a process of identifying and measuring
data about human resources and communicating
this information to interested parties
HRA is the measurement of cost value of people for
HRA is the systematic recording of the transactions
relating the value of the human resources
The productivity of a companys investment is
known for the rate of return, which is calculated on
the basis of physical assets investment only

There is a need to find out productivity of

investment on human beings in any organizations

Concept of Human Resources Accounting

Human resources have certain distinct

characteristics from other physical assets like
personality, self control, devotion, quality, skill
talents, loyalty and initiative-ness

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

Basic Premises of HRA

The basic premises underlying the theory of HRA


People are valuable resources of an enterprise

The usefulness of manpower as an organizational
resource is determined by way in which it is
managed, and
Information on investment and the value of
human resource is useful decision making in the

Reasons to Measure Human Resources

The four most important reasons for measuring

human resources are;

The human resource function should be

accountable, just like any other function
The knowledge and skills of their people are their
most important sources of sustained competitive
Measurement of human resources gives
management needed information about the
people resources in the organization and if the
resources are there to support business strategies
Measurement helps with strategic planning

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;

To assist the management in taking suitable decisions

regarding investment on human resources
To provide information to all people concerned regarding
the earning potential of human resources of the
To assess efficiency of human resources in obtaining
productivity and profitability, and
To provide comparative information regarding costs and
benefits associated with investment in human assets

Objectives of HRA

It is an attempt to identify and report

investments made in the human resources of the
organization that are not presently accounted for
under conventional accounting practice
Basically, it is an information system that tells
the management what changes over time are
occurring to the human resources of the business
In a nutshell, HRA involves;

Measurement & valuation of human resources

Communicating the information so generated
for internal & external decision makers

Benefits of HRA

HRA helps the company ascertain how much

investment it has made on its employees and how
much return it can expect from this investment
The ratio of human capital to non-human capital
computed as per the HRA concept indicates the
degree of labor intensity of an organization
HRA provides a basis for planning of physical
assets vis--vis human resources
HRA provides valuable information to investors
interested in making long-term investment in an

Significance of HRA

HRA as a managerial tool can be used for effective

management of human resources
In the field of managerial decision-making, the human
resource data as part of management information
system helps in making meaningful choices between
various types of human investments and investments in
other assets
By measuring the value of human resources at different
points of time, HRA can reveal whether the
management is building up human resources or
depleting them
The information generated through HRA can help the
management in formulating policies and programs for
the development of human resources

Significance of HRA

Such information can be of utmost help for

making decisions in the following areas;

Manpower planning
Appraisal of human resource development programs
Identification of training needs
Usefulness of cost reduction programs in view of their
possible impact on human relations
Studying the impact of budgetary control on
motivation and morale of employees
Facilitating allocation, conservation and reward of
human resources

Early HRCA Research On External

Decision Making

A study by Elias (1972) determined that external users

decisions on investments in common stocks were made
differently with the inclusion of HRCA information
Schwan (1976) found that the firm with HRCA information
was considered better prepared, and that the inclusion of
HRCA information resulted in statistically significant
prediction of a companys net income
Acland (1976) reported that financial analysts prefer a
firm with improving financial operating performance but
with declining behavior indicators, and that such
preference will decrease when the human resource
indicators are provided

Early HRCA Research On Internal

Decision Making

Zaunbrecher & Spiceland (1974) indicated that HRCA

information was used & fully considered even when
somewhat conflicting traditional information was
presented along with it
Harrel & Click (1980) found that participants placed
significantly greater weight on the monetary information,
and the decisions made were significantly more
consistent when the monetary information was used

Effects of HRCA Measurement Process in

Decision Making

managers go
through the
process of
resources as
assets, they
are more
likely to make
decisions that
employees as

In potential layoff decision with the use of

HRCA measures rather than only
traditional accounting measures,
management is better likely to see hidden
costs to the companys human resources
& long term complications to the human
If the management quantified actual
costs of layoffs, management might be
less inclined to use layoffs as a way to cut
costs & boost short term profits at the
expense of long run productivity & profits

Problems Using HRCA In External Financial


HRCA has
s for both
reporting &

It is recognized that there are problems

with reporting human assets on the
balance sheet for external financial

Some people have objected to HRCA as it

implied ownership of human beings
Accounting rules (GAAP) do not allow for
these intangible assets to be reported as
Jensen (2001) found that the most severe
barriers to measuring intangibles
included lack of concrete tools, time &
resources and lack of recognized
valuation approach

HRCA in Managerial Reporting & Decision


Hermanson &Ivancevich (1992) commented on pitfalls

of layoff decisions made based solely on traditional
financial accounting measures

While some downsizings were justified, some have gone

Financial accounting emphasized on good side of layoffs
ignored the bad side of human asset depletion


Flamholtz, Bullen & Hua (2003) found that employees

participation in management development program
increased the value of the individuals to the firm

HRCA measures provided upper level management with an

alternative accounting system to measure the cost & value
of the people to the organization

HRCA Practices in USA

Analysis of
traded in
the United
state of

Although firms spend 36% of their

revenues on human capital, few tell
their shareholders about how that
money is spent
Only about 20% discuss human
capital & its contribution to business
success in their annual reports
Roughly 25% provide only limited
references to the workforce
And other do not mention their
people at all

HRCA Practices in Malaysia

concept of
still at
in Malaysia

Study on Top 100 companies on Bursa

Malaysia (2008)

Disclosure practices of Malaysian top

companies are relatively low
Descriptive information on training &
development was disclosed but no
reports on related training benefits
Very few companies disclosed human
capital statistics (ratios or indicators)
Much effort need to be put in to educate
human resource managers on how to
calculate human resource costs, values,
ROIs & its outcomes

Limitations for Management

to Introduce HRA

There is no proper clear-cut and specific procedure or guidelines

for finding cost and value of human resources of an organization
-- the systems which are being adopted have certain drawbacks

The period of existence of human resource is uncertain and

hence valuing them under uncertainty in future seems to be

There is a fear that HRA may dehumanize and manipulate


The much needed empirical evidence is yet to be found to

support the hypothesis that HRA as a tool of the management
facilitates better and effective management of human resources

Their value to be included in the financial statement is the

question yet to be classified on which there is no consensus in
the accounting profession.

Limitations for Management

to Introduce HRA

As human resources are not capable of being owned, retained

and utilized, unlike the physical assets, there is problem for
the management to treat them as assets in the strict sense

There is constant fear of opposition from the trade unions as

placing a value on employees would make them claim rewards
and compensations based on such valuation

Another question is, on value being placed on human

resources how should it be amortized. Is the rate of
amortization to be decreasing, constant or increasing? Should
it be the same or different for different categories of

In spite of all its significance and necessity, tax laws do not

recognize human beings as assets

There is no universally accepted method of human asset


HRCA Goals & Future

1 the
management of human
resources from an
Aspirations from
perspective by
human resource
increasing the
specialists, labor
Attempts to improve
transparency of HR
unions, etc to use
the bases for
costs, investments &
investors companyoutcomes in the
arguments when
accounting rituals, such
investments in
as profit & loss
human resources
accounts, balance
sheets & investments
The future
of HRCA may well be to link
it to Balanced Scorecards (BSC)
To-date, HRCA suffers from not being
grounded in business strategy
Linking HRCA to BSC would solve this problem &
conversely, the BSC could utilize measures
within HRCA framework


HRCA is valuable for both internal & external purposes

The applicability of HRCA is supported by several
studies, as we discussed earlier
The consequences of an application of HRCA are

An increase in the efficiency of HR Management processes

The possibilities to evaluate HR in monetary terms
A better access to HR information for financial decision

Whats Next?

We will discuss in further

details each individual
subjects related and of
significance to HRA in
the following chapters:

Human Resources
Accounting Models
Costing Employee
Downsizing Measuring
costs of failures
Costing Absenteeism
Costing OSH Programs

Costs & Benefits of HR

Development Programs
Measuring Human
Measuring Employee
Human Resources Audit