What is human resource accounting?

Human resource accounting aims at depicting the human resources potential in money terms while casting the organisation’s financial statements.
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 issues:

• The methods to assess the value of human capital
• The methods to improve the development of human capital in enterprises.

Organisations, trying to reflect the ‘value’ of “its people” are using different approaches.

Methods of valuing and accounting of human resources

The methods to value and account for human resources can be classified into the following categories:

1. Methods based on costs (which include costs incurred by the company to recruit, hire, train and develop human resources)

2. Methods based on economic value of human resources and the capitalisation of company’s earnings.

Methods based on cost:

Historical cost method

Under 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 company’s 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 is rescheduled.

Replacement cost method

Under 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.

Competitive bidding method

This 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.

Standard cost method

Under 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.

Methods based on value:

Jaggi and Lau method

This method estimates the worth of human resources on a group-basis, as human resource groups account for productivity and performance in organisations.

Economic value method

Under this method, the net present value of incremental cash flows attributed to human resources is taken as the asset value.

Impact and implications of human resource accounting

Human 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.

Outside 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.

When 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.

Human 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 books.