Research Design:

In this research design an attempt is made to review the literature consisting of studies in India and abroad regarding human resource accounting.  Based on the literature, the need for study is sought to be established and design of the study in terms of objectives and methodology is attempted. The research methodology which is adopted in this study has been discussed under the following heads, methods of data collection, questionnaire design, and selection of the sample and techniques of analysis.  Finally, the plan of presentation of the study is also given. 

Review of Literature:

Quantification of knowledge, skill and attitude of human force is called as human resource accounting. A few researchers have studied the concept of human resource accounting from different angles and suggested different measures.

Anita Mishra and Monalika Rath (2010) stated that the HR accounting system tries to evaluate the worth of human resources of an organization in a systematic manner & record them in the financial statement to communicate their worth with changes in time and result obtained from their utilization to the users of the financial statement. Hence, looking at the importance of human resource accounting, now it is required under law and government guidelines, for undertakings, to maintain separate item in their balance sheet about such human resource activities undertaken by them.²¹

Chiran Jib Das (2009) examined that intellectual capital is becoming more and more valuable for firms to retain their competitive advantages. As technology continues to transform the workplace and markets, intellectual capital will become one of the most critical issues CMAs will have to grapple with in order to continue providing clients and employers high – quality, value added services and advice. The growing focus on lean enterprise, creating value stream is mainly dependent on the optimum utilization of intellectual capital, especially in emerging knowledge – intensive economies like our nation.²²

Dr. C. K. Sonara and Ashav Patel (2009) expressed their opinion regarding human resource accounting is that today is the environment of corporate reporting. Every business unit is a social institution. Quite often, it is called a child of environment. It is the environment that shapes the nature of business. Besides most critical resource – the human resource. So human resource reporting is most necessary in business organizations. He gave a quotation “Our Employees – Our Greatest Assets”.²³

Dr. Mukesh Chauhan and Mrs. Shivani Gupta (2009) examined that, in knowledge – driven economies therefore, it is essential that the humans be recognized as an integral part of the total worth of an organization. However in order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills and contribution of human element as well as that of the organizational processes, like recruitment, selection training etc., which are used to build and support these human aspects, is developed. Human resource accounting denotes just this process of quantification/ measurement of human resource. He emphasized that human resources should be treated like physical assets and should be shown in the balance sheet of the enterprise.²⁴

Dr. Arindam Ghosh and Prof. Asit Gope (2009) described that Human Resource Accounting (HRA) a scaling tool that generates the quantitative control information about the contribution of human resources for promoting industrial productivity.²⁵

Maria Bullen (2008) explained that traditional accounting treats costs related to a company’s human resources as expenses on the income statement that reduce profit, rather than as assets on the balance sheet that have future value for the company. Alternatively, Human Resource Accounting (HRA) involves accounting for the company’s management and employees as “human capital” or assets that provide future benefits and suggests that the measures themselves, as well as the process of measurement, have relevance in decision-making. Capital budgeting decisions have focused on investment decisions involving traditional assets, such as land, buildings and equipment and he emphasized that human resource accounting value measures in capital budgeting decisions utilizing excel-based sensitivity analysis applied to the net present value and internal rate of return methods.²⁶

Maria Bullen (2008) explained that “globally the transformation continues from industry-based economies dependent on physical assets such as factories, machines and equipment to service-based human capital intensive economies focusing on advanced technologies, information and innovation. Increasingly dependent on the expertise, experience, skills, talents, knowledge and creativity of human resources. Recognizing this change, in the 1960s a growing body of theoretical, empirical and field research began to develop in the area of human resource accounting. Where as costs related to an organization’s human resources have been treated in traditional accounting as expenses that reduce profit on the income statement, human resource accounting involves accounting for human resource expenditures on the balance sheet as human capital or assets that provide future benefits and value to the company and it also suggests that the process of measurement, as well as the measures themselves, have relevance in decision making.²⁷

According to Abhayawansa, S and I. Abeysekara (2008) disclosed his opinion that the importance of human capital in firm value creation is firmly established in the literature, the level of emphasis places on human capital disclosure by preparers of financial statements in minimal. External financial reporting is utilized in financial statements in organization’s annual reports distributed to external users such as stock holders, bankers, and potential investors and lenders. External reports of  public companies and often for private companies seeking financing, must follow “Generally Accepted Accounting Principles” (GAAP) in order to encourage objective, reliable and verifiable measurement to facilitate assessment of the company’s financial standing and comparability among organizations. It is recognized that there are problems with reporting human assets on the balance sheet for external financial reporting in that there is subjectivity in measuring human assets. The same problems holds true for reporting intangible assets such as goodwill and patents that have been internally generated rather than paid for through as corporate acquisition.  Just as GAAP does not allow reporting of human resources as assets, accounting rules do not allow for these intangible assets to be reported as assets.²⁸

Moore (2007) suggests that the value of human capital should be more fully considered when making decisions about the acquisition and disposal of people—and notes that the accounting practices currently employed by companies can have an undue influence in driving the strategic decisions of these companies. Moore notes that there are parallels between the processes of acquiring an employee (a human capital asset) and that of acquiring a fixed capital asset. However while most companies acknowledge the contributions of its employees, they do not think of the acquisition or disposal of human capital assets in the same way or with same thoughtful planning or strategic thinking as they do fixed capital assets.²⁹

(Bullen, 2007) The HRA measurement process as a dual function attempts to increase recognition that human capital is paramount to the organization’s short and long-term productivity and growth. When managers go through the process of measuring human resources , they are more likely to focus on the human side of the organization and are more likely to consider human resources as valuable organizational resources who should be managed as such however even if human assets are not reported on the face of external financial statements, HRA can play a crucial role in internal managerial decision-making, and HRA measures can be used to show that investments in a company’s human resource may result in long-term profit for the company. In addition to external financial reporting, HRA may be useful as a managerial tool to aid in making managerial decisions that will benefit the long-run strategic goals and profitability of the company. As opposed to external financial reporting, managerial reporting does not require adherence to a strict set of GAAP in specific financial statements in acceptance format reported to the public.³⁰

Dr. P. James Prem Kumar (2007) explained that Human Resource Accounting (HRA) as an approach was originally defined as the process of identifying, measuring and communicating information about human resources in order to facilitate effective management within an organization. It is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms. The subject of offering measures of the value of people to the organization through human resource accounting has tempted human resource professionals and academics alike.³¹

Atkinson (2007) expressed his opinion regarding Human Resource Accounting (HRA), surveys indicated that 60 per cent to 70 per cent of companies world wide use some of the balanced scorecard approach; and that the balanced score card has adapted in public sector and nonprofit organizations as well. In a potential lay off decision with use of HRA measures included in the learning and growth component of an organization’s balanced score card, rather than only traditional accounting measures, management is better likely to see the hidden costs to the company’s human resources and the long-term implications to the human assets. This is because HRA views human resources as assets or investments which must be maintained for long-term productivity.³²

Ravindra Tiwari (2006) expressed his opinion regarding Human Resource Accounting, (HRA) it is an attempt to identify, quantify and report investment made in human resources of an organization that are not presently accounted for under conventional accounting practice. Businesses which require a considerable creativity or are science-based show a significant difference between market value and net book value. This difference is for intangible assets (including human skills). However the human resources are yet to get recognition in balance sheet. Business are not properly accounting for it in books of accounts. Auditor certifies in his report that balance sheet shows the true position of business in spite of the fact that it is not showing the value of human resources. Researches in this field have been slow and researchers are not able to develop a model which is free from major limitations. Major limitation of existing models is that they are not able to identify two effects on human capital creation which is back bone of accounting, and he proposed model for valuation and accounting of human resources. This proposed model is not altogether new model but it is an extension of Lev and Schwartz model (L & S), because at one point it uses Lev and Schwartz valuation principles.³³

Tang, T. (2005) explained that, Human Resource Accounting (HRA) can play a crucial role in internal managerial decision-making and its measures can be used to show that investments in a company’s human resources may result in long-term profit for the company. Over the years of its development, HRA has been shown to be useful tool in measurement and management in organizations.³⁴

Toulson & Dewe (2004) conducted a survey study utilizing component analysis and found two reasons why measuring human resources is important. The first is that measurement reflects the strategic and competitive importance of human resources, and the second suggests that to earn credibility, human resources must be expressed in financial terms³⁵.

Shraddha V and Phillip D (2004) examined that, nevertheless, despite some of the problems faced in recording human resource value, there was a revived interest in the concept in the 90’s. Further, in a consultation paper by the UK government, Accounting for people, the UK Government advocated the view that human resource and human capital management could be usefully disclosed in the annual report and account package. As such, it is believed that disclosure of human resource value is likely to be demanded in future accounting reports.³⁶

Flamholtz, Bullen & Hua (2003) utilized the HRA measure of expected realizable value, and found that employees’ participation in a management development program increased the value of the individuals to the firm. In addition the authors noted that the HRA measures provided upper level management with an alternative accounting system to measure the cost and value of people to an organization. Thus HRA represented both a paradigm and way of viewing human resource decisions, and the set of measures for quantifying the effects of human resource management strategies upon the cost and value of people as organizational resources³⁷.

Kee F. Richard Y. (2003) observed that research among top UK organizations, as well as similar investigations carried out in the US and other European countries, further confirms that human resource measurement and reporting can lead to the improved profitability and competitiveness of an organization.³⁸

Ramakanta Patra & Khatik (2003) observed that human resources play the most important part in the development of an enterprise. Human Resource Accounting (HRA) helps to measure the value of employees, which helps management, take the vital decisions related to human resources in order to increase production. It requires the measurement of the performances of an organization and the optimum use of the resources under its direct and indirect control. HRA has been analyzed for a profit making heavy engineering public sector company, Bharat Heavy Electricals Limited (BHEL) Bhopal, India. The economic value model of Lev and Schwartz has been used for this study of BHEL to evaluate the HRA. The obtained results are verified by using the T-test. And they examined the correlation between the total human resources and the personnel expenses for their fitness and their impact on important for decision making in order to achieve the organizational objectives and to improve the output.³⁹

David Robinson (2003) examined that Human Asset Accounting (HAA) is not an accepted tool of long range planning. Indeed many planners probably look skeptically on the possibility that it will ever become a technique which is important to them in their work. Unlike many other methods which have been successfully developed over the last few years. HAA involves concepts which are so new that as yet relatively few people have come into contact with them”.⁴⁰

McKenzie & Melling (2001) suggest that, if properly implemented, the human capital planning and budgeting process will become a key driver of strategy in that strategic human capital planning and budgeting ensures that the best resources are mobilized for each internal process. They indicate that too often organization focus 100 per cent on meeting the financial budget first without consideration of the effect the cost slashing will have on strategy, and note that the financial numbers are a lagging indicator of where a firm has been and should not be substituted for leading indicators of where the firm is going. Rather management should focus clearly on causal, leading indicators that drive successful financial measures, and that it is through skills-based budgeting that the fallacy of financial focus can be avoided.⁴¹

Richard Petty, James Guthrie (2000) expressed that Intellectual capital is implicated in recent economic, managerial, technological and sociological developments in a manner previously unknown and largely unforeseen. Whether these developments are viewed through the filter of the information society, the knowledge based economy, the network society, or innovation; there is much to support the assertion that intellectual capital is instrumental in the determination of enterprise value and national economic performance. First, we seek to review some of the most significant extant literature on intellectual capital and its developed path.⁴²

Dzinkowski (2000) states that the traditional accounting models were designed to inform the organization’s management and stake holders on the stock and flows of financial value; most of these are quantifiable and subject to generally accepted accounting principles and practices. In contrast, intellectual capital is a relatively new and enigmatic concept, relating primarily to the intangible, highly mutable assets of an organization. As such, the traditional accounting model does not adequately capture its value nor represent it in a concise, meaningful format. The traditional accounting valuation can be viewed as a sufficient reflection of an organization’s tangible assets, for example, the building, plant and machinery, but it is yet to recognize human capital, which is an increasingly dominant feature of an organization’s total value.⁴³

Gratton (2000) who looked at selected high performing organizations, shows that the financial out comes of human resource investment has a significant positive correlation with an increase in an organization’s competence share and added value⁴⁴

Flamholtz (1999) noted that the concept of human resource value is derived from general economic value theory, and like all resources people possess value because they are capable of rendering future service. Thus as Flamholtz notes, an individual’s value to an organization can be defined as the present value of the future services the individual is expected to provide for the period of time the individual is expected to remain in the organization  and also  there is a dual aspect to an individual’s value. First, the person’s “expected conditional value”, is the amount the organization could potentially realize from his or her services if the person maintains organizational membership during the period of his or her productive service life. Second, the person’s “expected realizable value” is the amount actually expected to be derived, taking into account the person’s likelihood of turnover.⁴⁵

Carme Barcons – Vilardell, Soledad  Moya – Gutierrez, Antonio, Somoza – Lopez , Josep vallveru – Calafell and Carlos  Griful – Miquela (1999)  were revealed that, the main costs related to human resources are training and selection costs and exit costs.  This analysis is made from the points of view of external and internal (or managerial) accounting and from historical costs and opportunity costs, and they concluded that training costs can be treated in a similar way as any other capitalized expenses.⁴⁶

Eric G. Flamholtz (1999) examined that, human resource accounting theory considers that the competitive position of a firm depends on its specific and not duplicated assets. The most specific (and not duplicated) asset that an enterprise has its personnel. It takes advantage of their interdependent knowledge.⁴⁷

Johanson & Mabon (1998) indicate that expressing human resource interventions in financial terms and / or cost benefit terms is more effective than using soft accounting information such as data on job satisfaction. Because the classical function of accounting is the determination of the value of the economic activity, performing analysis with hard numbers such as cost-benefit analyses helps us determine how resources should be used by human resources for various interventions.⁴⁸

Jan – Erik Grojer, Ulf Johansson (1998): Human resource costing and accounting (HRCA) is a complex and poorly understood process of accounting. The behavioral impact of HRCA, the many diverging internal forces of an organization, the increasing need of information from the capital market and action from organizations, such as the organization for the economic co – operation and development(OECD) and European commission (EC), are all part of this accounting change process. With Sweden as a starting point, forces stimulating and inhibiting the development of HRCA are discussed⁴⁹.

Cascio (1998) proposed a method for measuring human capital based on indicators of human capital of innovation, employee attitudes and the inventory of knowledgeable employees. According to this method, innovation commands a premium and therefore needs to be measured, for example by comparing gross profit margins from new products to the profit margins from old products. Employee attitudes predicting customer satisfaction and retention are an important indicator of human capital and therefore need to be measured, as well as measures of tenure, turnover, experience and learning⁵⁰.

S. Kwiatkowski (1998) who highlights an increasing intellectual factor in services, products and enterprises. He writes, the growing role of intellectual products is visible on both consumer and industrial markets. On both these markets almost purely intellectual products, often devoid of their material supplement, successfully compete with those which clearly dominated several years ago. Thus, in manufacturing we witness expansion of technical consultancy a purely intellectual and markable component contributing to value creation in a client organization through technology development”.⁵¹

D. J. Cooper and T.M. Hopper (1998) also suggest internal social accounting. This means that employee accounting is part of an overall strategy, open management”, reports are to include information on job satisfaction and career opportunities as well as existing management information which could be used by trade unions. This form of accounting should also be useful for improvement of the collective bargaining process.⁵²

There is also research by Sveiby (1997) that shows that some companies measure their human resources but do not include the value in the annual report as they see that it is pointless given the current accounting concept, which has no model, rules and regulations for this kind of reporting. Further more companies are also afraid to give away to much information, and he also attempts to convert people or competencies into financial terms, although theoretically, interesting had not yet proved useful to managers.⁵³

Turner (1996) refers to the framework issued by the International Accounting Standards Committee and recommended the use of the present value of the value added by enterprise, and measures assets by the four methods of historical cost, current cost, realizable value and present value.⁵⁴

Archel (1995) stated that the most specific asset (and not duplicated) that an enterprise has its personnel. It takes advantage of their interdependent knowledge. That would explain why some firms are more productive than others, with the some technology; a solid human resource team makes all the difference.⁵⁵

Y. Ijiri (1995) examined that in order to synthesis the measurable model of human and/or intellectual capital, he considers the following variables physical human capital (involves a particular set of genes as discussed by Schultz and Hudson). The value of the variable can be measured as capitalized cost of living, education which creates an important part of intellectual capital (measured by capitalized costs) and experience which definitely depends on time and personal skills.⁵⁶