Quest International Multidisciplinary Research Journal
Volume I , Issue II December 2012 ISSN : 2278 4497
Available online at www.mahidachintan.com
ORIGINAL ARTICLE
Human Resource Accounting : Brief History and Popular Models
Bhavin M. Badiyani Assistant Lecturer Government Arts and Commerce College Gadhada- 364 750 Gujarat (India) Abstract With the overall transition from manufacturing to service sector, most of economies in the world have felt the need of assessing the economic value of human assets. The growth of International Financial Reporting Standards (IFRS) has triggered the wider acceptance of the concept of Human Resource Accounting. The academic application of HRA finds its roots in sixties. Later in eighties, a number of organisations started applying various models of HRA like Flamholtz's model of determinents of individual value to formal organisation, Flamholtz's model of stochastic rewards valuation, the Lev and schwartz model etc. in their regular accounting practices. The paper focuses on the brief history and the popular models of assessing the value of human resources in the organisation. Keywords : Human Resource Accounting, Human Capital, Human Assets, Intellectual Capita Introduction The past few decades have witnessed an overall transition from manufacturing to service-based economies. The importance of service sector and its contribution in a country's economic development is increasing day by day in this
era of globalisation. The most vital part of any
organisation in this era is, 'Human resource'. Nowadays human resources are the most considerable part of any organisation to achieve the desired goals successfully. Human resource accounting is the concept of recent origin and is struggling for wide acceptance. It involves accounting for expenditures related to human resources as assets as opposed to traditional accounting which treats these type of costs as operating expences that reduces firm's operating profit. The growth and wide acceptance of International Financial Reporting Standards (IFRS) has triggered the necessity of considering human resources as an asset of the firm.This paper provides a brief overview of the history and concept of human resource accouunting and its popular models.
Concept of HRA According to the american Accounting Association's Committee on Human Resource Accounting (1973), "It is the process of identifying and measuring data about human resources and communicating this information to interested parties."
Copyright 2012. Bhavin M. Badiyani . This is an open access refereed article distributed under the Creative Common Attribution License which permits unrestricted use, distribution and reproduction in any medium, provided the original work is properly cited. 155
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Thus, HRA involves measurement of all the
costs related with the employees such as expences incurred for recruitment, placement, training, development etc. Moreover, it includes the quantification of the economic value of the employees. Ransis LIkert, who is famous for his contribution in the vfield of leadership and management, says that the role of HRA in any organisation can be described as follows: (1) It provides the information regarding cost of recruitment, selection, placement, training etc. which helps management in decision-making . (2) The analysis of the information provided by HRA can help in attaining cost-effectiveness. (3) It provides the strong basis for controlling the human-assets. (4) It helps in the development of management principles by classifying the financial consequences of various practices. Thus, HRA can be said a technique that assists management for the effective human resource management as well as in achieving the desired goals of the organisation. The current environment having wide acceptance of International Financial Reporting Standards (IFRS) have encouraged the consideration of non-traditional approach towards the human resources. There is a possibility that future financial reports may include more and more non-traditional measurements such as value calculated of human resources using various HRA models. History of HRA According to Falmholtz (1999), the development of HRA as a systematic academic activity began in sixties. He divides the development process of HRA in five stages. Stage-1: (1960-1966) In this period, the HRA concepts were primarily derived from other management studies such as psychological theories of leadership, economic theory of capital, the concepts of human resources etc. This was the beginning of the academic interest in HRA.
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Stage-2: (1966-1971) During this era, the main concentration was on devveloping the various models of HRA. There was a need of HRA models, which could help the management bodies in assessing and managing the human resources of their respective firms. Especially, a number of research projects were undertaken to develop the methods and models of HRA, by the researchers being inspired by Roger Hermanson. Stage-3: (1971-1976) There was a rapid growth of research in the field of HRA during these yearrs. The prime focus was on the problems of application of HRA in various organisations. Stage-4: (1976-1980) The issues related to application of HRA were being more and more critical and needed much wider and deeper researches in this field. Though the organisations were impressed with HRA, they didn't found it needful to invest big amounts in this type of researches. So, the progress of this concept was slow during these years. Stage-5: (1980 onwards) After 1980, more and more economies were shifting from manufacturing to service economies. They felt the need for having consideration towards human assets. This change was obvious because the growth and profits of most of organisations was being more and more dependent on the intellectual assets than on the physical assets. So there was a sudden zoom in attention towards the HRA after 1980. This resulted in the shift of focus from the academic application to the greater application of HRA to management. Today, the intellectual capital are believed to be the strategic resources and therefore, the clear estimation of their value is now very important. The increased pressure of ethical issues and codes of conduct demanding for transparency in accounting have helped the need to develop the methods of measuring value of human asseets. In India, many public and private firms have adopted HRA. Below is given the list of such firms:
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Compulsive Use of Internet and Some Personality Characteristics of College Students
o o o o o o
Bharat Heavy Chemicals Ltd. (BHEL)
Oil India Ltd. (OIL) Steel Authority of India Ltd. (SAIL) Hindustan Lever Ltd. (HLL) TELCO Ltd. Infosys
Approaches to HRA There are a number of approaches have been developed and suggested for the measurement and valuation of human resources. These approaches may broadly be classified into two types: (A) The cost approach (B) The economic value approach (A) The cost approach There are two types of costs that are of special importance in HRA: (1) Original or Historical cost and (2) Replacement cost. The original cost of human resources is the sacrifice that was made to acquire and develop the resource. We can include the costs of recruitment, selection, placement, orientation and training in the original cost. Sometimes, Opportunity cost is also used. Opportunity cost means a calculation of what would have been the returns if the money spent on human resources was spent on something else. However, this method is restricted only to internal reporting. The replacement cost means the cost that would have to be incurred if present employees are to be replaced. If an employee leaves the organisation, various costs of recruitment, selection, placement, orientation and training would have to be incurred in order to replace him. There are some other cost methods like standard cost method, the competitive bidding method etc. (B) The economic value approach The economic value of human resource is the present worth of the services that they are likely to render in future.. The methods for calculating the economic value of individual employee may be classified into two partts:
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(i) Monetary measures
There are severals models given by experts to assess the value of an individual. (a) Flamholtz's model of determinants of individual value to formal organisations: Flamholtz says that the value of an individual is the present worth of the services that he is likely to render to the organisation in future. The present cumulative value of all the possible services that he may be render during his association with the organisation is the value of that individual. This value has two dimentions. The first is the expected conditional value of the individual. It means the amount that the organisation could potentially realize from the sevices of the individual during his productive service life with the organisation. The second one is the expected realizable value. It means the expected conditional value of the probability that the individual will remain in the organisation during his productive service life. (b) Flamholtz's stochastic rewards valuation model Stochastic process means the progress of an individual through organisational roles during his service life. This model directly measures an individual's conditional value and expected realizable value. This model assumes that an individual generates value as he takes different roles in the organisation. An individual's expected conditional value and expected realizable value will be equal, if he is certain to remain in the organisation in the predetermined roles throughout his expected service life. (c) The Lev and Schwartz model According to this model, the value of an individual who is 'r' year old, is the present value of his future earnings from employment. It can be calculated by using the formula below: E(Vr)=I(t) / (1+R)t-r where, E(Vr)=expected value of an 'r' year old individual's human capital t = the individual's retirement age R = discount rate I = expected earnings of the individual in period I
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Compulsive Use of Internet and Some Personality Characteristics of College Students
This method basically depends on measuring
changes in the individual's value rather than employer's gain from that individual. (ii) Non-monetary measures There are several non-monetary measures that assesses the economic value of human resources, but not in terms of money. They depends on various ratings and rankings. Below are given the non-monetary measures: (a) The skills inventory: It is a listing of the education, skills and experience of human resources. (b) Performance evaluation: It includes ratings and rankings which reflects an individual's performance.
given by the experts in this field like
Flamholtz's model of determinents of individual value for formal organisation, Flamholtz's model of stochastic rewards valuation, the Lev and schwartz model etc. Different organisations are using various models according to their need and the nature of their human resources. In short, nowadays no economic growth can be made without giving importance to the human resources and without considering them as an asset. References
(c) Assessment of potential: It measures an
individual's capacity of promotion and development. 'Trait approach' is used here to assess the potential of the individual.
(d) Attitude measurement: It assesses the
individual's attitude towards the job, work and organisation and determines the job-satisfaction or dissatisfaction. The field of Human Resource Accounting is still developing and the new models are being created to fulfil the need of having a better approach of assessing the value of human resources.
Conclusion In this era of modernisation and globalization, it is essensial for an organisation to consider its human resources as an asst. The gradual development have been witnessed in this field and still the new approaches and models are being given. There are several methods and models currently in use to determine the value of an individual such as cost approach and the economic value approach. Several models are
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Lev B, Schwartz B A (1971): On the
Economic Concept of Human Capital in Financial Statements. The Accounting Review. American Accounting Association Committee of Accounting for Human Resources, Report of the Committee on Human Resource Accounting, 1973, The Accounting review Supplement to vol. XLVIII Mukesh Chauhan & Shivani Gupta, "Human Resource Accounting-Concepts & Practices in India". The management accountant. January 2009. Vol.44 Eric G. Flamholtz (1999: 3rd Edition) "Human Resource Accounting: Advances in concepts, methods & applications". Kulver Academic Publishers Eric G. Flamholtz (1971): A Model for Human Resource Valuation: A Stochastic Process with Service Rewards. The Accounting Review Likert R. (1971): Human Organisational Measurements: Key to Financial Success. Michigan Business Review, May 1971, 15. D. Prabhakar Rao (1993), Human Asset Accounting: An Evolution of the Indian Practices, ASCI Journal of Management, Vol.22.
Please Cite this Article as :
Badiyani, Bhavin M. Human Resource Accounting : Brief History and Popular Models Quest International Multidisciplinary Research Journal 1.2 (2012) : 155 158. <www.mahidachintan.com>. Quest International Multidisciplinary Research Journal Vol - I , Issue - II December - 2012
