is human resource accounting?
resource accounting aims at depicting the human resources
potential in money terms while casting the organisations
With the emergence of the knowledge economy, recognition
of human capital as an important part of the enterprises
total value has gained importance. This has led to two important
methods to assess the value of human capital
methods to improve the development of human capital in
trying to reflect the value of its people
are using different approaches.
of valuing and accounting of human resources
methods to value and account for human resources can be
classified into the following categories:
Methods based on costs (which include costs incurred by
the company to recruit, hire, train and develop human resources)
Methods based on economic value of human resources and the
capitalisation of companys earnings.
based on cost:
this method, the cost of acquisition i.e. selection, hiring,
training costs of employees are capitalised and written
off over the expected useful life of the employees. In case,
the personnel leave the company before the anticipated period
of service, then the unamortised portion of costs remaining
in the companys books is written off against the profit
and loss account in that year. If the period of service
exceeds the anticipated time, then amortisation of costs
this method, the human resources are valued at their replacement
cost i.e. the monetary implications of replacing existing
personnel. Replacement costs could be positional i.e. replacing
personnel for particular positions or personal i.e. replacing
specific talent or ability of particular persons.
approach suggests competitive bidding for scarce employees
in an organisation i.e. opportunity cost of employees linked
to scarcity. The approach proposes the capitalising of additional
earning potential of each human resource within the company.
this method, standard costs of recruiting, hiring, training,
and developing per grade of employees are determined annually.
The total standard cost for all personnel of the company
is the value of human resources.
based on value:
and Lau method
method estimates the worth of human resources on a group-basis,
as human resource groups account for productivity and performance
this method, the net present value of incremental cash flows
attributed to human resources is taken as the asset value.
and implications of human resource accounting
resource accounting provides quantitative information about
the value of human assets, which helps the top management
to take decisions regarding the adequacy of human resources.
Based on these insights, further steps for recruitment and
selection of personnel are taken.
the organisation, quantitative data on the most valuable
asset has an impact on the decisions of the investors, clients,
and potential staff of the company.
proper valuation and accounting of the human resources is
not done then the management may not be able to recognise
the negative effects of certain programs, which are aimed
at improving profits in the short run. If not recognised
on time, these programs could lead to fall in productivity
levels, high turnover rate and low morale of existing employees.
resource accounting in India
The companies act, 1956 does not explicitly
provide for disclosure on human assets in the financial
statements of the companies. But sensing the benefits derived
from valuing and reporting the human assets, many companies
have voluntarily disclosed all relevant information in their