Human resource of an organization

Human resource of an organization is indispensable and considered as more valuable resource as compared with tangible and intangible asset. “People are obviously a vital asset and even technology does not ‘replace’ the people.³ Human Resource Accounting (HRA) involves accounting for the company’s management and employees as human capital that provides future benefits. In the HRA approach, expenditures related to human resources are reported as assets on the balance sheet as opposed to the traditional accounting approach which treats costs related to a company’s human resources as expense on the income statement that reduce profit. HRA suggests that in addition to the measure themselves, the process of measurement has relevance in decision-making involving organizations⁴ Flamholtz, who has done considerable work in the area of human resource accounting, has defined it as follows.

“Human resource accounting is accounting for people as an organizational resource. It involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organisation”Thus human resource accounting is primarily involved in measuring the various aspects related to human assets. Its basic purpose is to facilitate the effective management of human resources by providing information to acquire, develop, retain, utilize, and evaluate human resource.⁵

In support of the new way of thinking, Likert (1967) said that absence of human resource as an asset in the balance sheet, violates the accrual principles of disclosure, underrates the firm’s net worth and current income and thereby not reflect the true and fair view of the organization Ashutosh Kumar (1999)⁶. Hermanson (1964) elaborated the views of people favoring the presentation of human assets on the balance sheet. Thus in early 1960s the debate shifted from the ownership of an item to the deferred charges and ownership of value for identification of an asset. This further led to considering human resource as an asset.⁷

This conceptualization provided foundation for the blossoming of the concept and a new academic branch of accounting emerged as Human Resources Accounting. Thus such discussion created a wide base for developing the methods of human resource valuation and reporting as a necessity for the decision makers, so as to enable them to formulate human resource policies in a scientific manner and implement human resource decisions without creating disfunctionality, besides providing value discovery information in strategic decision in market for corporate control.

With the passage of time, the concept and definitions of HRA got refined and it is accepted that this new accounting discipline must help the external users also and therefore it must work like a full proof accounting system. Thus the idea of HRA further developed. The American Accounting Association in its report published in 1966, defined accounting as, the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.⁸

To have human resource accounting as systematic and effective language of the business transactions dealing with the most valuable asset of the business i.e., Human resources, it must perform the following four functions:

1.                  Identification of human resources as an asset.

2.                  Measuring the Human resources value.

3.                  Recording the transactions related to human resource  assets in the books of accounts, and

4.                  Presenting and communicating the information to the decision makers.

The well established system which helps in generation of data related to human resources of an organization is the responsibility assigned to Human Resources Accounting (HRA). This generation of data is necessary to fulfill the needs of internal as well as external decision makers. Even after a number of years of debate, HRA is still in its infancy due to lack of systematic efforts in the direction of developing the valuation and recording practices. Sikula argues that, ‘Human Asset Accounting’ has existed in theory for decades, but it has never caught on or been implemented much in actual business practice’. Hence there is clearly an obligation on accountants to make the efforts to develop a systematic approach for valuation of human resources which can help to put such an important resources as an asset on the balance sheet. With all such arguments Human Resource Accounting identified as an important and promising area of research in the second half of the last century.⁹