HR accounting.pdf

Overview of Human Resource Accounting

1. HUMAN RESOURCE
ACCOUNTING

2. MEANING
•Human resource accounting is a process of measuring
the cost incurred by the organization to recruit, select,
train, and develop human assets.
•The American Accounting Society Committee on Human
Resource Accounting defines it as
“Human Resource Accounting is the process of identifying
and measuring data about human resources and
communicating this information to interested parties.”

3. OBJECTIVES OF HUMAN RESOURCE
ACCOUNTING
To furnish cost value information for
making proper and effective
management decisions about
acquiring, allocating, developing,
and maintaining human resources
in order to achieve cost effective
organizational objectives.
To monitor effectively the use of
human resources by the
management
To have an analysis of the Human
Asset, i.e. whether such assets are
conserved, depleted, or
appreciated.
To aid in the development of
management principles and
proper decision making for the
future, by classifying the financial
consequences of various
practices.

4. NEED OF HUMAN RESOURCE
ACCOUNTING
•Formulating policies and programs for the development of human resources.
•Decisions regarding cost reduction programs.
•Training and development.
•Recruitment and selection.
•Manpower planning and control.
•Conservation and reward of human resources.
•Making a choice between various types of human investment and investments in other
assets, etc.

5. BENEFITS OF
HUMAN
RESOURCE
ACCOUNTING
The system of HRA discloses the value of human resources, which
helps in proper interpretation of return on capital employed.
Managerial decision-making can be improved with the help of HRA.
The implementation of human resource accounting clearly identifies
human resources as valuable assets, which helps in preventing misuse
of human resources by the superiors as well as the management.
It helps in efficient utilization of human resources and understanding
the evil effects of labor unrest on the quality of human resources.
This system can increase productivity because the human talent,
devotion, and skills are considered valuable assets, which can boost
the morale of the employees.
It can assist the management for implementing best methods of
wages and salary administration.

6. LIMITATIONS
OF HUMAN
RESOURCE
ACCOUNTING
1.There is always a bone of contention
among the firms which method is an
ideal one.
2.There are no standardized
procedures. So, firms are providing
only as additional information.
3.All the methods of accounting for
human assets are based on certain
assumptions.
4.It is believed that human resources do
not suffer depreciation, and in fact
they always appreciate, which can
also prove otherwise in certain firms.
5.The lifespan of human resources
cannot be estimated. So, the
valuation seems to be unrealistic.

7. METHODS
1.Capitalization of Historical Costs Method.
2.ReplacementCostMethod.
3.OpportunityCostMethod.
4.Economic Value Method.
5.StandardCost.
6.Cost-Benefit Method.

8. CAPITALIZATION OF HISTORICAL
COST METHOD
•This method is also called an Acquisition cost model
•This method measures the organization's investment in employees
using the five parameters: recruiting, acquisition, formal training and
familiarization, informal training and informal familiarization, and
experience and development.
•This model suggests that instead of charging the costs to profit and
loss (P&L) accoount, it should be capitalized in thebalance sheet.
•The process of giving a status of asset to the expenditure item is
called capitalization.

9. LIMITATIONS
CAPITALIZATION
OF HISTORICAL
COST METHOD
It considers a part of the employees’
acquisition costs and thus ignores the
aggregate value of their potential services.
It is difficult to estimate the number of years
over which the capitalized expenditure is to be
amortized.
The economic value of human resources
increases over time as people gain experience.
But in this approach, the capital cost
decreases through amortization.
This method measures only the cost of the
organization but ignores completely any
measure of the value of the employee to the
organization.

10. REPLACEMENT COST
METHOD
•Rensis Likert first developed this approach based on the
concept of the replacement cost.
•This method measures the cost to replace an organization’s
existing human resources.
•It indicates what it would cost the concern to recruit, hire,
and train, and develop human resources to match the
present level of efficiency.
•It is more realistic as it incorporates the current value of firms’
human resources in its financial statements prepared at the
end of the year.

11. LIMITATIONS OF
REPLACEMENT
COST METHOD
This method is at variance with the
conventional accounting practice of valuing
assets.
There may be no similar replacement for a
similar certain existing asset. It is difficult to find
an identical replacement of the existing human
resource in actual practice.
Consider more subjectivity into the measure.
This method may also lead to an upwardly
biased estimate because an inefficient firm
may incur a greater cost to replace an
employee.

12. THANK YOU