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[edit] Human Resource Accounting
Human Resource Accounting (HRA) procedures are the first step towards developing sophisticated measurement and valuation procedures to enable a company to report accurately the worth of the organization’s human assets. The question here is what is the most important set of assets in your organization? The answer to this question may vary across organization depending on how labor intensive operations are with regards to different business units. The economic value of Human Resources is derived from their service rendering ability which can be expensive to acquire, retain and develop.
[edit] Definition:
American Accounting Association’s Committee defines Human Resource Accounting as the process of identifying and measuring data about human resources and communicating this information to interested parties.
[edit] History
According to Frey & Buhofer (1986), the genesis of human resource valuation can be traced back to the medieval European wars in 1642. During this period a prisoner was conceived of as the general property of the capturing soldier. A quick decision had to be reached on the battlefield whether to kill or spare the prisoner’s life depending on the costs of keeping the prisoner as compared with expected future income.
The modern concept of human resource accounting was originally developed by Rensis Liker (1966) at the University of Michigan, Institute of Social Research. Although HRA is a fairly new concept its development has passed through several stages:
Stage 1(1960 – 1966): The first stage of development could be marked by interest in HRA and derivation of basic HRA concepts.
Stage 2 (1966 – 1971): This period involved basic academic research to develop and assess the validity of models for the measurement of human resource cost and value. It also included a few experimental applications of HRA in actual organizations.
Stage 3 (1971 – 1976): This was a period of rapid growth of interest in human resource accounting. The academic interest spread across the western countries and also in Australia and Japan. Attempts were made to apply HRA in business organizations. During this stage the American Accounting Association established committees on human resource accounting which published reports on the development of HRA. In the year 1974, a book presenting the state of the art of HRA was published by the American Accounting Association’s Committee on Human Resource Accounting.
Stage 4 (1976 – 1980): A period when declining interest in HRA was seen both in academia and in the corporate world.
Stage 5(1980 – present): This period involves the beginning of a resurgence of interest in the theory and practice of Human resource accounting. During this period one of the significant events that served as a catalyst to the renewal of the interest in HRA was a decision by the U.S. office of Naval Research to sponsor a research project dealing with the feasibility of the application of HRA to naval human management issues.
[edit] Human Resource Valuation Methodologies
[edit] Historical cost approach:
This was the first attempt towards employee valuation made by R. G. Barry Corporation of Columbus, Ohio in the year 1967. This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition; formal training and familiarization; informal training, Informal familiarization; experience; and development. The costs were amortized over the expected working lives of individuals and unamortized costs (for example, when an individual left the firm) were written off.
[edit] Limitations:
• The valuation method is based on false assumption that the dollar is stable.
• Since the assets cannot be sold there is no independent check of valuation.
• This method measures only the costs to the organization but ignores completely any measure of the value of the employee to the organization (Cascio 3).
[edit] Replacement Cost Approach
This approach measures the cost of replacing an employee. According to Flamholtz (1985) replacement cost include recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.
[edit] Limitations:
• Substitution of replacement cost method for historical cost method does little more than update the valuation, at the expense of importing considerably more subjectivity into the measure.
• This method may also lead to an upwardly biased estimate because an inefficient firm may incur greater cost to replace an employee (Cascio 3-4).
[edit] Present Value of Future Earnings
Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees’ death. This method helps in determining what an employee’s future contribution is worth today.
[edit] Limitations:
• The measure is an objective one because it uses widely based statistics such as census income return and mortality tables.
• The measure assigns more weight to averages than to the value of any specific group or individual (Cascio 4-5).
[edit] Value to the organization
Hekimian and Jones (1967) proposed that where an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that division’s investment base. For example a value of a professional athlete’s service is often determined by how much money a particular team, acting in an open competitive market is willing to pay him or her.
[edit] Limitations:
• The soundness of the valuation depends wholly on the information, judgment, and impartiality of the bidder (Cascio 5).
[edit] Expense Model
According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job performance are measured using traditional organizational tools, and then costs are estimated for each criterion. For example, in costing labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs.
[edit] Conclusion
HRA has a potential to contribute to an organization’s culture and make management believe that people are valuable resources and manifest this belief in their decisions and policies. We are at the forefront of what is still an unpopular accounting and measurement technique that will have a profound effect on the way people are managed and valued in an organization.
[edit] References
1. Blau, Gary E. Human Resource Accounting, 1st ed. Scarsdale, N.Y.: Work in America Institute, 1978.
2. Caplan, Edwin H. and Landekich, Stephen. Human Resource Accounting: Past, Present and Future. New York: National Association of Accountants, 1974.
3. Cascio, Wayne F. Costing Human Resources: The Financial Impact of Behavior in Organizations, 3rd ed. Boston: PWS-Kent Pub. Co., 1991.
4. Flamholtz, Eric. Human resource accounting : [advances in concepts, methods, and applications]. 2nd edition San Francisco : Jossey-Bass, 1985.
5. Monti – Belkaoui Janice and Riahi – Belkaoui Ahmed. Human Resource Valuation: A Guide to Strategies and Techniques. Quorum Books: Westport, Connecticut – London, 1995.
6. Ulf Johanson, Gunilla Eklöv, Mikael Holmgren, Maria Mårtensson School of Business Stockholm University, Human Resource Costing and Accounting versus The Balanced Scorecard: A literature survey of experience with the concepts 1998 PDF. Available on http://www.oecd.org/dataoecd/16/48/1948006.pdf
Ssmani80 (talk) 14:29, 22 April 2008 (UTC)
Declined. The proposed article is not suitable for Wikipedia. The article currently reads like an original research essay on the topic and is, therefore, not suitable for Wikipedia. Please rewrite the article in a more formal, secondary source oriented tone, and submit again. Redfarmer (talk) 17:15, 22 April 2008 (UTC)