Human Resource Accounting

What’s inside?

1. Introduction-2
2. Literature review
&Theoretical framework-10
3. Human Resource Accounting-17
4. Investment & rate of return on
human resources-23
5. Human assets & methods of
valuation-27
6. Models & accounting treatment
of human resource accounting-38
7. Practice of HRA in banking sector
of Bangladesh-45
8. HRA disclosure in BD-53
9. Conclusion-62
References-67
Appendix-69

Introduction

 BACKGROUND OF
HUMAN
RESOURCE
ACCOUNTING
 OBJECTIVES OF
HUMAN
RESOURCES
ACCOUNTING
 OBJECTIVES OF
THE STUDY
 METHODOLOGY OF
THE STUDY
 SCOPE OF THE
STUDY
 LIMITATIONS OF
HUMAN RESOURCE
ACCOUNTING
 Historical
Development of HRA

1

1.1 INTRODUCTION

Adam smith, in his classic work,“Wealth of Nation”,classified the factors of production into land
labour & capital. The modern management reclassified them as 4Ms, i.e., men, machine, material
and money. Men, materials, machines, money and methods are the resources required for an
organization. These resources are broadly classified into two categories, viz., animate and
inanimate (human and physical) resources. Men, otherwise known as the human resources, are
considered to be animate resources. Others, namely, materials, machines, money and methods
are considered to be inanimate or physical resources.
The term ‘Labour’ and ‘Men’ have now been christened ‘Human resource’, popularly known as
HR, the human resource is not just the number of pairs of hands engaged in any organization but
aboveall,it may be thought of as the total knowledge, skills, creative abilities, talents & aptitudes
of an organization’s workforce.
The success or otherwise of an organization depends on how best the scarce physical resources
are utilized by the human resource. What is important here is that the physical resources are
being activated by the human resources as the physical resources cannot act on their own.
Therefore, the efficient and effective utilization of inanimate resources depends largely on the
quality, caliber, skills, perception and character of the people, that is, the human resources
working in it. The term Human resource at macro level indicates the sum of all the components
such as skills, creative abilities, innovative thinking, intuition, imagination, knowledge and
experience possessed by all the people. An organization possessed with abundant physical
resources may sometimes miserably fail unless it has right people, human resources, to manage
its affairs. Thus, the importance of human resources cannot be ignored. Unfortunately, till now
generally accepted system of accounting this important asset, viz., the human resources has not
been evolved.

It is worth recalling what Alfred marshal said long ago, “The most valuable of all capital is that i
nvested in human beings”. It is very common that capital base of even new undertakings are over
subscribed if it is controlled by competent person. This is because, the investor in the capital mar
ket place high value in the human ability rather than any other factors, like, net worth, yield, pric
e‐earning ratio which are not available in case of new company. The past few decades have witn
ess a global transition from manufacturing to service based economics. In the former, the physica

l assets, like, plant, machinery, material etc. are of utmost importance, whereas, in latter, knowle
dge and attitude of the employees matters. For instance, in the case of an IT firm, the value of its
physical assets is negligible when compared with the value of the knowledge and skills of its hu
man resources. Hence, the success of these organizations is contingent on the quality of their hu
man resources, i.e., its knowledge, skills, competence and motivation. However, in order to estim
ate and project the worth of the knowledge, motivation, skills and contribution of the human ele
ment as well as that of the cost of recruitment, selection, training, etc., which are used to build an
d support these human aspects is developed. Human resources accounting
To ensure growth and development of any organization, the efficiency of people must be
augmented in the right perspective. Without human resources, the other resources cannot be
operationally effective. The original health of the organization is indicated by the human
behavior variables, like group loyalty, skill, motivation and capacity for effective interaction,
communication and decision making.

For a long period, the importance of human resource was not taken care of seriously by the top
management of organizations. Therefore, at this juncture, it becomes imperative to pay due
attention on the proper development of such an important resource of an organization. Let us
now concentrate our discussion on the conceptual framework of the Human Resource
Accounting.
1.2 BACKGROUND OF HUMAN RESOURCE ACCOUNTING
“Human Resource Accounting” is the derivative of various research studies conducted in the
areas of accounting and finance. Human resource is an asset whose value gets appreciated over
the period of time provided placed, applied and developed in the right direction. Till the recent
past, organizations took few efforts to assign monetary value to human resource in its accounting
practice. Behavioral scientists initiated efforts to develop appropriate methodology for finding
out the value of human resource to the organization. They were against the conventional
accounting practice for its failure to value the human resource of an organization along with
physical resources.

The traditional concept suggested that expenditure on human resource is treated as a charge
against revenue as it does not create any physical asset. At present there is a change in this
concept and the expenses incurred on any asset (as human resources) should be treated as capital
expenditure as it yields benefits which can be derived for a long period of time and could be
measured in monetary terms.
The following are the reasons why Human Resources Accounting has been receiving so much
attention in the recent years.
 Firstly, there is genuine need for reliable and complete management of human resources.
 Secondly, a traditional framework of Accounting is in the process to include a much
broader set of measurement than was possible in the past.
Human Resource Accounting is the measurement of the cost and value of people to the
organization. It involves measuring costs incurred by the organizations to recruit, select, hire,
train and develop employees and judge their economic value to the organization.
1.3 OBJECTIVES OF HUMAN RESOURCES ACCOUN TING
he aim of HRA is to portray the potential of HR in monetary terms, while casting the
organization's financial statements. The concept can be examined from two
dimensions:
(i) The investment in HR; and
(ii) the value of HR.
The expenditure incurred for recruiting, staffing and training and developing the HR quality is
the investment in HR. The fruits of such investments are increased productivity and profit to the
organization. The yield that the investment generates is considered as the basis for HR value.
Putting in a capsule the main objectives of HRA are to
 Improve management by analyzing investment in HR
 Consider people as its asset
 Attract and retain qualified people
 Profile the organization in financial terms.
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1.4 OBJECTIVES OF THE STUDY
1.4.1 PRIMARY OBJECTIVES
The primary objective of the study is to complete the partial requirement of the awarding of the
BBA degree from the school of business & economics, United International University. As the
classroom discussion alone cannot make a student perfect in handling the real business situation,
therefore, it is an opportunity for the student to know about the real life situation through this
program.
1.4.2 SECONDARY OBJECTIVES
The project of human resources management is secondary objects are below...

1. To identify the magnitude of Human Resource Accounting Disclosure (HRAD) by
Bangladeshi listed companies.
2. To study position of human resource reporting in Bangladesh.
3. To find out relationship between corporation size and HRAD.
4. To examine the relationship of profitability and HRAD of the listed companies in
Bangladesh
5. Further, it is to help the organization in decision making in the following areas:
a) Direct Recruitment vs. promotion.
b) Transfer vs. Retention.
c) Retrenchment vs. Retention
d) Impact on budgetary controls of human relations and organizational behavior.
e) Decision on reallocation of plants, closing down existing units and developing
overseas subsidiaries etc.
Here the adequate disclosure means a minimum amount of disclosure so that financial
reporting is not misleading and useless. Gul et al. (1984) study found that large
companies made more disclosures about employees but disclosures about community
involvement were spread across firms of all size. Generally the big firm are expected to
report comprehensively on HRAD and vice versa. So it is interesting to find out whether
the big corporations of Bangladesh are reporting more on HRAD.

The following model contemplates the aims and objective of HRA:

1.5 METHODOLOGY OF THE STUDY
rom my educational background I have learnt different methodology to collect data
from different sources and analyze them. Relevant data for this report has been collected
primarily by direct investigation of different records, papers, Documents, operational
process and different personnel. The study is essentially based on Bangladesh only. The reasons
for selection of Bangladesh are firstly the authors’ access to the Bangladeshi annual reports;
secondly it helps to shed light on HRA in the developing countries in general and South Asian
countries in particular. The data year is 2015. All the selected companies are the listed
companies of DSE. The sample selection is influenced by the objectives of the study and is
constrained by the availability of the reports. The research methods involved an initial scrutiny
of recent annual reports to observe the incidence of HRA. For this purpose, all sections of the
annual report were carefully examined to note the presence of any HR disclosures. Given the
time and resource constraints, the nature of the study tends to be mainly exploratory and
descriptive. Although there are a number of ways in which HRA may be made. This study will
only take account of the disclosures made in the annual reports because this is the most common
and popular document produced by the companies regularly. The present study also has
considered primary data in order to assess the awareness of the respondents as to the
environmental accounting and reporting practices. The primary data relating to the problems
Better HR
Planning
Effective
Manpower
Utilization
Greater HR
Accountability
Better Decision
About HR
Increased
Managerial
Awarness of
the HR Value
F

involved in HRA and suggestion of some measures as to the overcome the problems were also
collected.
1.6 SCOPE OF THE STUDY

hile working with this report paper I feel that the analyzing of data is the most
important area. The technique of "how to measure and record Human Resource in
the accounting system is important. I take time above two month for completing
report purpose. But it is not enough time to complete the whole process of HRA. But I try as my
best in sort time and I can deeply discuss about HRA. I will therefore stress on the measurement
method of Human Resource Accounting. The various measurement methods are comprised of
Cost-based measurement. Value-based measurement and Non-monetary measurement. Those
measurement methods are then subdivided into different cost approach.
As a result of non implementation of HRA in the accounting system in all the organization in
Bangladesh I tried to focus on the importance of this Human Resource Accounting.
Benefits and limitations of HRA is the major scope that should be covered as it is the main topic
of this study. The author will discuss these benefits and limitations if applied to any organization.
1.7 LIMITATIONS OF HUMAN RESOURCE ACCOUNTING
uman Resource Accounting is the term used to describe the accounting methods,
system and techniques, which coupled with special knowledge and ability, assist
personnel management in the valuation of personnel in financial terms. It presumes
that there is great difference among the personnel in their knowledge, ability and
motivation in the same organization as well as from organization to organization. It means that
some become liability too instead of being human assets. HRA facilitates decision making about
the personnel i.e., either to keep or dispense with their services or to provide training. There are
many limitations which make the management reluctant to introduce HRA. Some of the
attributes are:

1. There is no proper clear-cut and specific procedure or guidelines for finding cost and
value of human resources of an organization. The systems which are being adopted have
certain drawbacks.
W
H

2. The period of existence of human resource is uncertain and hence valuing them under
uncertainty in future seems to be unrealistic.
3. There is a fear that HRA may dehumanize and manipulate employees.
4. For e.g., an employee with a comparatively low value may feel discouraged and develop
a complex which itself will affect his competency to work.
5. The much needed empirical evidence is yet to be found to support the hypothesis that
HRA as a tool of the management facilitates better and effective management of human
resources.
6. In what form and manner, their value to be included in the financial statement is the
question yet to be classified on which there is no consensus in the accounting profession.
7. As human resources are not capable of being owned, retained and utilized, unlike the
physical assets, there is problem for the management to treat them as assets in the strict
sense.
8. There is constant fear of opposition from the trade unions as placing a value on
employees would make them claim rewards and compensations based on such valuation.
9. Another question is, on value being placed on human resources how should it be
amortized. Is the rate of amortization to be decreasing, constant or increasing?
10. In spite of all its significance and necessity, tax laws do not recognize human beings as
assets

1.8 HISTORICAL DEVELOPMENT OF HRA
he traces of a rudimentary HRA can be found in the Medieval European practice of
calculating the cost of keeping a prisoner versus the expected future earnings from him.
The prisoners in those days were seen to be the general property of the capturing side.
Consequently, after the victory a quick decision regarding whether to capture a prisoner or to kill
him had to be taken based on the costs involved in keeping him and the benefits accruing from
killing him. However, these represented very rough measurements with limited use. The
development of HRA as a systematic and detailed academic activity, according to Eric G
Falmholtz (1999) began in sixties. He divides the development into five stages. These are:

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First stage (1960-66): This marks the beginning of academic interest in the area of HRA.
However, the focus was primarily on deriving HRA concepts from other studies like the
economic theory of capital, psychological theories of leadership- effectiveness, the emerging
concepts of human resource as different from personnel or human relations; as well as the
measurement of corporate goodwill.

Second stage (1966-71): The focus here was more on developing and validating different
models for HRA. These models covered both costs and the monetary and non-monetary value of
HR. The aim was to develop some tools that would help the organizations in assessing and
managing their human resource/asset in a more realistic manner. One of the earliest studies here
was that of Roger Hermanson, who as part of his Ph.D. studied the problem of measuring the
value of human assets as an element of goodwill. Inspired by his work, a number of research
projects were undertaken by the researchers to develop the concepts and methods of accounting
for human resource.

Third Stage: (1971-76): This period was marked by a widespread interest in the field of HRA
leading to a rapid growth of research in the area. The focus in most cases was on the issues of
application of HRA in business organizations. R.G. Barry experiments contributed substantially
during this stage.

Fourth Stage (1976-1980): This was a period of decline in the area of HRA primarily because
the complex issues that needed to be explored required much deeper empirical research than was
needed for the earlier simple models. The organizations, however, were not prepared to sponsor
such research. They found the idea of HRA interesting but did not find much use in pumping in
large sums or investing lot of time and energy in supporting the research.

Stage Five (1980 onwards) : There was a sudden renewal of interest in the field of HRA partly
because most of the developed economies had shifted from manufacturing to service economies
and realized the criticality of human asset for their organizations. Since the survival, growth and
profits of the organizations were perceived to be dependent more on the intellectual assets of the

companies than on the physical assets, the need was felt to have more accurate measures for HR
costs, investments and value.

An important outcome of this renewed interest was that unlike the previous decades, when the
interests were mainly academic with some practical applications, from mid 90s the focus has
been on greater application of HRA to business management.

Different types of models to suit the specific requirements of the organizations have been
developed incorporating both the tangible and the intangible aspects. Also, larger number of
organizations actually began to use HRA as part of their managerial and financial accounting
practice.

Today, human and intellectual capitals are perceived to be the strategic resources and therefore,
clear estimation of their value has gained significant importance. The increased pressures for
corporate governance and the corporate code of conduct demanding transparency in accounting
have further supported the need for developing methods of measuring human value.

Creating such portfolio by every company creates the necessity of accounting for the same.
Human resources is one of the most valuable assets and needless to say that the human beings
co-ordinate the best of machines, men and money. Computers, of course, may challenge the
human resources but computer is not a brain and it simply carries out human commands.
Therefore, Accounting for such human resources is very essential for the organization.

LITERATURE
REVIEW AND
THEORETICAL FRAMEWOR K

2

2. LITERATURE REVIEW AND THEORETICAL FRAM EWORK
his chapter contains the theoretical framework for the research work. It sets the state of
the art as far as the concepts of Human Resource Accounting (HRA) and corporate
financial reporting are concerned. Literatures relevant and related to the field of HRA
and corporate financial reports are reviewed for the purpose of bringing the research
into a proper perspective. Areas that are covered in this chapter include the concept and
definition of HRA and its historical developments, measures proffered for valuing human
resource, evidence of, and problems associated with HRA application, and the theoretical
framework upon which this study is based and model developed.
Most social science researches are surrounded by concepts which are either applied based on
their general interpretation or based on the way they are used in the research. According to Eric
(2009), concepts covered by any research should be adequately explained whether used based on
their general meaning or operational zed to suit the research. Under this section, the concepts
used in this study are explained and discussed so that the target audience would comprehend
their meaning and appreciate their usage. The concepts explained and discussed here are divided
into three heading. The first heading considered the Human Resource Accounting (henceforth
referred to as HRA); while the second 32heading is dedicated to financial reporting and the issue
of quality and value relevance of accounting information contained in the financial reports of
organizations.
Human resource (HR) is a term used to describe the individuals who comprise the workforce of
an organization, although it is also applied in labor economics to business sectors or even whole
nations. Human resource is also the name of the function within an organization charged with the
overall responsibility for implementing strategies and policies relating to the management of
individuals (i.e. the human resource). This function title is often abbreviated to the initials ‘HR’.
Human resources is a relatively modern management term, coined as early as the 1960s -when
humanity took a shift as human rights came to a brighter light during the Vietnam era (Nadler,
1984). The origins of the function arose in organizations that introduced 'welfare management'
practices and also in those that adopted the principles of 'scientific management'. From these
terms emerged a largely administrative management activity, coordinating a range of worker
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related processes and becoming known, in time as the 'personnel function'. Human resources
progressively became the more usual name for this function, in the first instance in the United
States as well as multinational or international corporations, reflecting the adoption of a more
quantitative as well as strategic approach to workforce management, demanded by corporate
management to gain a competitive advantage, utilizing limited skilled and highly skilled
workers.
On the other hand, accounting is viewed as a child of production (Melville, 2009). Production
can be either the creation of tangible goods or the provision of services to satisfy human wants.
The major factors of production are the land, labor, capital and entrepreneur. While every
organization reports on and includes land, capital and entrepreneur in its financial statements,
labors not given much attention and hence, its expenditure only represents periodic cost made by
the organization. The laborer employees are the human assets or resources organizations have.
HRA considers human resource as equivalent to other assets in the organization. They require
investment over time to make them productive. Such investment relates to the hiring, training,
and development costs, which are capitalized and amortized over an assumed probably
productive life for the human resource, taking into account attrition and eventual deterioration
(Young &Jung, 2003; Myers, 1976). The concept of HRA has been defined in so many ways but
the basic feature of the system remains the same in every definition.
The American Accounting Association (1973:23) defined HRA as “the process of identifying,
measuring and communicating information about human resource in order to facilitate effective
management within an organization”. This definition considers HRA as the process involving
recognition and the quantification of human resource for the purpose of assisting the effective
management of an organization. The definition is not specific as to what constitutes the human
resource expenditures and how it is to be recognized.
A more specific definition of HRA is the one given by Flamholtz (1974), which refers HRA as
the process, which involves measuring the cost incurred by business firms and other
organizations to recruit, select, hire, train and develop human asset. This gives a view as to what
expenditure on the human resource should be recognized for valuation and reporting purposes.

This definition, in other words, regards HRA as involving the measurement of economic value of
people to organizations.
HRA is also seen as an important aspect of management information system. In this view, Gupta
(1991) defines the concept as basically an information system that tells management what
changes are occurring overtime to the human resource of the business. It involves accounting for
investment in people and their replacement costs, and also the economic value of people in an
organization. This definition regards HRA as an information system capable of assisting the
management in effective decision-making relative to the hiring and retention of employees.
Therefore, HRA provides a comprehensive look at one method of using human resource cost and
value information in the decision-making process.
According to Newman (1999), HRA refers to the measurement of the abilities of all employees
of a company, at every level –management, supervisory and ordinary employees –to produce
value from their knowledge and the capabilities of their minds. This definition considers the
current growth in the service industry where the knowledge and intellectual capabilities of
employees are the key elements to success. As such, HRA is seen as the wealth of the
employees’ knowledge and intellectual capabilities added to the organization thereby making it
to earn profit and to succeed.
Jasrotia (2004), also views HRA as a measurement and reporting of the cost and value of people
as organizational resources. This definition rests on the premise that knowledge and intellectual
capabilities of employees are becoming more and more important in corporate investment
decision-making. This is due to the fact that service industries are now overtaking the
manufacturing industries and in service delivery business, the knowledge and intellectual
capabilities of employees matter more than any other tangible asset.
According to Kodwani and Tiwari(2007), HRA 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”. This definition centered on three key areas of human
resource: identification of what constitute it, quantification of it in monetary terms, and reporting
it in the financial reports of organization. From the perspective of this definition, human resource

is crude in nature, but needs refining in order to determine what constitute HR for accounting
purposes.
Accounting for human resource entails the capitalization of investments and other expenditures
on employees excluding salaries and wages. However, only investments that can improve the
quality and productivity of employees should be capitalized (Jasrotia, 2004; Roslender, 2004;
Lev, 2001). But Gates (2002) and Jasrotia (2004) opined that the extent of capitalizing the
investments on human resource should better be left with the reporting companies. Their
argument showed that capitalization of human resource expenditure is better when a voluntary
operational environment is created.
Looking at the trend of definitions in the field of HRA, as highlighted above, this study therefore
considers the definition of HRA by Flamholtz (1974) and Jasrotia (2004) as explaining the
concept better. This is for the fact that HRA is a combination of cost and value, and does not
consider all expenditure on human resource in the capitalization process. In other words, the
study views HRA as the measurement process which recognizes cost and value of employees in
the financial statements of an organization, as an intangible asset, to the extent of those
expenditure that bring benefit to the organization for more than one accounting year, so that the
true value of the organization can be established thereby assisting the various users of the
financial statements in making their respective decisions.
The purpose of this subsection is to define and provide a basic understanding of financial
reporting in the corporate environment. Corporate financial reporting is largely an effort to assess
financial performance in terms of how well or how poorly the reporting entity performed during
a particular date (van Beest, Braam &Boelens, 2009). It is a process of making information
public through the use of reports that are considered financial in nature. Many types of financial
reports can be generated from the financial reporting of an entity such as balance sheet; profit
and loss account; cash flow statement; value added statement; notes to the accounts; statement of
accounting policies; and auditors’ report. These reports are called financial statements and
classified as either quantitative or qualitative. However, considerable amount of attention is
given to the quantitative financial statements, which are usually the major reports within the
context of financial reporting.
Corporate financial reporting, according to Nzekwu (2009), refers to the supply of key
quantitative representation of individual corporations that support a wide range of contractual

relationship and enhance the information environment more generally. He added that the quality
of financial reporting of an entity impact on the firm's cash flow as well as influencing the cost
of capital on which the cash flows are discounted. It can also aid managers and investors in
identifying and evaluating investment opportunities. This definition concentrated on the supply
of information by an entity and how such information impact on the cash flow of the reporting
entity.
In another perspective, corporate financial reporting is regarded as an important and effectual
means of dissemination of financial information. Salawu (2009), define corporate financial
reporting as the public reporting of operating and financial business data by a business enterprise
via the annual reports and accounts. It is a process with ample of advantages to the users of the
reports, who use them more often in making various decisions. However, Beuselinck and
Manigart (2007) identified increased cost associated with printing, limited copies available to
only selected market, less timely information, historical disclosure, and the use of obsolete
technology as major problematic features of corporate financial reporting.
For more than half of a century, accounting for human resource continued to appear in the
accounting literature. Since the idea or approach was first conceived, it continues to be debated
upon by both accounting scholars and practitioners. The interest shown by scholars led to many
researches been conducted, which open the way to the development of the concept. HRA passes
through many developmental stages before reaching its current status; and this trend is expected
to continue until the approach or concept is universally accepted and applied as wide as possible.
Initially, the idea of recognizing human resources as assets was regarded as impossible. This is
due to the fact that human beings are only hired for production purpose and paid accordingly
without much consideration on improvement and development of the workforce. The notion of
hiring, training and retaining employees was not favored. Entrepreneurs and proprietors of
businesses hire and fire at will. For these reasons, it was difficult to convince people that human
resource or employees are assets to organizations and also ownership cannot be established. An
item or thing can only become an asset if the organization has ownership of the asset and the
item has value to that organization.
However, the findings in the studies of Stewart (1991), Sveiby (1997), Dingman (1998), Von
Krogh, Roos and Kleine (1998), and Lev (2001) have substantiated the claim for the

categorization of human resource as asset. They established that an asset is something or
somebody useful; and usefulness in the sense of organizations means the capacity of generating
income. According to their studies, the relevance criterion should always come first before
reliability. A human resource even though cannot be owned in person, his services can be owned
in so far as he is working for the organization (Bagudo, 2010). This is a form of ownership and
can be used as substitute to the ownership included in the definition of asset as contained in the
Statement of Accounting Standard No. 2 (SAS2), released by the Nigerian Accounting Standards
Board (Now Financial Reporting Council).
More recently, the concept of HRA experienced several developmental processes, which aided
the transformation of the concept to a more realistic one. These developmental stages, as
captured by Batchelder and Scarbrough (1992), Dawson (1994), Batra (1996), Carper (2002),
Flamholtz, Bullen, and Hua (2002), rested on the factors or events that gave impetus to the
development of HRA. In a more concise way, the development stages and their underlying
events are presented and discussed below:
a) Stage I -Derivation of the Concept: This is referred to as the initial stage of accounting for
human resources. The concept human resources accounting derive its substances from the theory
of human capital and the organization psychology. This stage covers the period prior to 1960 and
up to the early 1960s.
b) Stage II -Development and Validation Period: This is the period where scholars tried to
develop and validate the concept of human resources accounting. The period covered took effect
from the mid 1960s up till the beginning of 1970. The researches conducted in this period were
centered on developing approaches on the basis of historical cost and replacement cost as well as
monetary and non-monetary values.
c) Stage III -Organization Application Period: This stage started from the early 1970s through
to the middle of the decade. This period was characterized by broad attempts to bring the
developed approaches into operation. Most of the organizations that attempted its practice were
mostly service oriented and information technology oriented organizations.
d) Stage IV -The Empirical Research Investigation Period: This stage witnessed the
empirical investigation of the concept of human resources accounting. This was triggered by the
complexity associated with the methods of quantifying human resources in monetary terms,
which led to few organizations attempted its practice. This period extended to the present day

where researches and investigation are carried out in order to make the concept m ore practicable
and less complex.
e) Stage V-The Growth of Service Organizations: In recent years, service organizations and
their activities continue to grow at a faster rate. Knowledge and skill of employees are the
distinctive features of these organizations. “It is no longer the sheer size or the number of
tangible assets these organizations control that matter most but their intellectual capital” (Harari,
1994).
The objective of this section is to account for some notable researches in the area of Human
Resource Accounting (HRA) so that the efforts of earlier and recent studies could be
comprehended and appreciated. As discussed in section 2.4, the early stages of HRA
conceptualization took place from the later part of 1950s to the early 1960s. Likert (1967) was
one of the early researchers in the field of HRA. He stressed that short-term company profits are
too often obtained through automatic “system I” methods, which result in the wastage of human
resource through neglect of training and development, turnover, reduced co-operation, amongst
others. His argument was that conventional accounting procedures ignore human assets, even
though their decline in value and productivity almost inevitably lead to reductions in profit. He
challenged the accountants to develop measures for valuing the human resource so that changes
could be recorded on the scorecard that counts, the profit and loss statement. The changes that
could be recorded as depreciation or amortization.

HUMAN
RESOURCE ACCOUNTING
 DEFINITION
 Meaning of Human Resource Accounting
 HRA for Managers and HR Professionals
 Challenges to Organizations and HR
Professionals

3

3. HUMAN RESOURCE ACCOU NTING
3.1 DEFINITION

uman 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 expenses on the income statement that reduce profit.
HRA suggests that in addition to the measures themselves, the process of measurement has
relevance in decision-making involving organizations. Although the origins and early
development of HRA occurred mostly in the United States, interest and contributions to growth
in the field have been evident in a number of other countries. This paper provides a brief
overview of HRA from an international perspective.

In recent years, the financial reporting standards used in the United States, often referred to as
Generally Accepted Accounting Principles (GAAP), have been moving toward adoption of more
complex measurement methods compared with the traditional historical cost approach to asset
measurement. The strong growth of international financial reporting standards (IFRS) is another
indication that the environment for financial accounting reporting is one that potentially
encourages the consideration of alternative measurement and reporting standards. Accountants
and others in the financial reporting environment have become accustomed to using more
complex measurement approaches to the financial statement reported amounts. This would lend
support to the possibility that future financial reports may include nontraditional measurements
such as the value of human resources using HRA methods.
3.2 MEANING OF HUMAN RESOURCE ACCOUNTING
The American Accounting Association’s Committee on Human Resource Accounting (1973) has
defined Human Resource Accounting as “the process of identifying and measuring data about
human resources and communicating this information to interested parties”. HRA, thus, not only
involves measurement of all the costs/ investments associated with the recruitment, placement,
H

training and development of employees, but also the quantification of the economic value of the
people in an organization.

The concept of human resource accounting can be better understood if one goes through some of
the important definitions given by the competent authors in the accounting field.

 The American Accounting Society Committee on Human Resource Accounting defines it
as follows: “Human Resource Accounting is the process of identifying and measuring
data about human resources and communicating this information to interested parties.” In
simple terms, it is an extension of the accounting principles of matching costs and
revenues and of organizing data to communicate relevant information in financial terms.

 Mr. Woodruff Jr. Vice President of R. G. Batty Corporation defines it as follows:
“Human Resource Accounting is an attempt to identify and report investments made in
human resources of an organization that are presently not accounted for in conventional
accounting practice. Basically it is information system that tells the management what
changes over time are occurring to the human resources of the business.”

 M.N. Baker defines Human Resource Accounting as follows: "Human resource
accounting is the term applied by the accountancy profession to quantify the cost and
value of employees to their employing organization"

 Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as “the
measurement and reporting of the cost and value of people in organizational resources”.

Human capital becomes the most important asset in the organization. In our traditional accountin
g practices, the heavy amount incurred on the recruitment, placement, selection, training and dev
elopment of the personnel is generally treated as revenue expenditure and hence, it is debited to p
rofit and loss account of the period during which such amount is incurred. But today, it is argued
that these expenditures incurred by an enterprise, to get the benefit of the services of its manpow
er force in future, are against the accounting principles to treat them completely of a revenue nat

ure. In fact, such expenditure should be capitalized and be shown in the balance sheet. The failur
e of accountants to treat human resources as assets just like physical and financial assets attracted
the attention of academics and in 70’s concept of HRA was evolved. The objectives of HRA are
as follows:
1. Furnishes cost/value information for making management decisions.
2. Effectively monitoring of Human resources.
3. Sound & effective basis of human asset control.
4. Provide comparative information regarding costs and benefits associated with
investment in human assets.
5. Provide information
Also we can say, Human resource Accounting is the process of identifying and reporting the
Investments made in the Human Resources of an Organization that are presently not accounted
for in the conventional accounting practices. In simple terms, it is an extension of the Accounting
Principles of matching the costs and revenues and of organizing data to communicate relevant
information in The Quantification of the value of Human Resources helps the management to
cope up with the changes in its quantum and quality so that equilibrium can be achieved in
between the required resources and the prove Human Resource Accounting provides useful
information to the management.
3.3 HRA FOR MANAGERS AND HR PROFESSIONALS
Professionals must perform a wide variety of functional roles. A functional
role is a specific set of tasks and expected output for a particular job. We
will briefly discuss the roles played by two HR Professionals: the HR
Executive/ Manager and the HR Practitioners.

The HR executive/manager has primary responsibility for all HR activities. This person must
integrate the HRD programs with the goals and strategies of the organization, and normally
assumes a leadership role in the executive development program, if one exists. The outputs of
this role include long-range plans and strategies, policies, and budget allocation schedules.

HR

One of the important tasks of the HR executive is to promote the value of HRD as means of
ensuring that organizational members have the competencies to meet current and future job
demands. If senior managers do not understand the value of HRD, it will be difficult for the
HRD executive to get their commitment to HRD efforts and to justify the expenditure of funds
during tough times. Historically during financial difficulties, HRD programs and HRM has been
a major target of cost-cutting efforts. Unless the HR executive establishes a clear relationship
between HRD expenditures and organizational effectiveness (including profits), HRD programs
will not receive the support they need.

As organization has adjusted to environmental challenges, the roles played by HR professionals
have changed. Based on the ASTD (American Society for Training and Development) study
results, Pat Mclagan states that contemporary professionals perform nine distinct roles, which are
described below:

1. The HR strategic adviser consults strategic decision makers on HRD issues that directly
affect the articulation of organization strategies and performance goals. Output includes HR
strategic plans and strategic planning education and training programs.

2. The HR systems designer and developer assist HR management in the design and
development of HR systems that affect organization performance. Outputs include HR program
designs, intervention strategies, and implementation of HR Programs.

3. The organization change agent advises management in the design and implementation of
change strategies used in transforming organizations. The outputs include more efficient work
teams, quality management, intervention strategies, implementation, and change reports.
4. The organization design consultant advises management on work systems design and the
efficient use of human resources. Outputs include intervention strategies, alternative work
designs, and implementation.

5. The learning program specialist (or instructional designer) identifies needs of the learner,
develops and designs appropriate learning programs, and prepares materials and other learning
aids. Outputs include program objectives, lesson plans, and intervention strategies.

6. The instructor/facilitator presents materials and leads and facilitates structured learning
experiences. Outputs include the selection of appropriate instructional methods and techniques
and the actual HRD program itself.

3.4 CHALLENGES TO ORGANIZATIONS AND HR PROFESSIONALS
Many challenges face organizations as a new century unfolds before us Michael Hitt and his
colleagues have identified increasing globalization and the technological revolution, in
particular, the internet has a two primary factor that make for a new competitive landscape they
suggest a number of actions that organizations can take to address the uncertainty and turbulence
in the external environments. These actions include developing employee’s skills, effectively
using new technology, developing new organizational structures and building cultures that
fosters learning and innovation. These obviously have a great deal to do with human resource
development. We will add to and build upon that list to present five challenges currently facing
the field of HRD. These challenges include:

I. Changing workforce demographics
II. Competing in a global economy
III. Eliminating the skills gap
IV. Meeting the need for lifelong individual learning
V. Facilitating organizational learning.

Each of these challenges has potential impact on HRD.

Though HRA has had its inception in the 1960s, it is an evolving concept, which is still at
nascent stage. Nonetheless, its relevance to organizations is immensely gaining ground. Armed
with various measures and figures, managers and firms can focus on decisions regarding

investments in areas of intellectual capital that will have the greatest payoff for the firm.
Internally and externally, HRA would provide information to investors and other staff, of the
value of human resources, the returns on investments in training and development and also the
link between HR interventions and financial results. As a way to assess human capital, HRA
represents a new way of thinking strategically.

Boudreau has noted that measures of HRA and benefits can serve a variety of purposes. It acts as
a catalyst for change. It tends to enhance the credibility of the HR functioning for it was not long
back that this function was looked down disdainfully as only a department to organize picnics for
its staff. HRA also helps persuade others to support investment in HR and also to improve the
quality of HR decisions.

Change is taking place at the tremendous rate. To make it effective and in order to make the
team, HR professionals need to develop the business skills of strategic planning and process
technology. And the first step towards the sustainable growth is accounting HR in financial terms

INVESTMENT AND RATE OF
RETURN ON HUMAN RESO URCES
 INVESTMENT IN HUMAN RESOURCES
 COST OF HUMAN RESOUR CE
 RATE OF RETURN ON HU MAN RESOURCES

4

4. INVESTMENT AND RATE OF RETURN ON HUMA N
RESOURCES

4.1 INVESTMENT IN HUMAN RESOURCES

here is much debate as to whether the human resources of an organization can be
considered as an asset and treated accordingly in the accounting system. There are two
schools of thought. One says that human resource is an asset and the other does not
agree with this. Now let us see what is an asset? Asset is anything which is owned by
the entity to derive service in future and should have legally enforceable claim.

As such there is no guarantee of deriving benefits from the existing human resources in future
and has no sales value like other assets. Therefore, legally, human resource is not an asset claims
one school of thought. Besides, company law also does not consider it as an asset.

But the other school is of the opinion that the "human resource is an asset". This school of
thought puts forth two contentions in favor of its opinion as follows:

l) There is a legal ownership on the "human resource" which could in practice prevent him from
joining the other organizations unless properly relieved by complying with some formalities like
giving advance notice of resignation, etc.

2) Uncertainty of deriving benefits is a common problem to all assets, not only with the human
resources. Deriving future benefit may be a big question mark in other assets too due to many
factors. ‘Obsolescence’ may be the on.

4.2 COST OF HUMAN RESOURCE

As human resource is considered as an asset, any expenditure incurred in the acquisition and
accumulation of human resource will be treated as an investment. Cost of human resources
represents sacrifice that will have to be incurred today to acquire and develop people in future.
The cost of human resource otherwise called Historical cost of human resources is the
T

investment in human resources which has both Revenue (expense) and Capital (asset)
components. This cost may be classified as follows:

The following paragraphs give a detailed enumeration of the various costs involved in the human
resources accounting.

4.2.1 Acquisition Cost
It refers to the costs incurred in acquiring the right man for the right job at the right time and in
right quantity. It includes the expenses incurred on recruitment, selection; entire cost is taken into
consideration including those who are not selected.
4.2.2 Training and Development cost

It refers to the sacrifice that must be made to train a person either to provide the expected level of
performance or to enrich the individual's skill. Training improves the productivity potential of
both the individual and the organization. The training cost includes the following:

Acquisition
Cost
Training
(Development)
Cost
Welfare Cost
Other Costs

a) Formal training cost: It refers to the cost incurred in conventional training for the orientation
of an individual so that he can operate the work. The remuneration to the training staff and the
fixed cost of the training schools are essentially Human Resource Investment items.

b) On the job training cost: Once the employee is placed on the job, he must be trained to do the
job efficiently and effectively and in this regard the employee learns while he is on his job. In the
process, the costs of mishandling the job, the payments to the employee more than what he
actually contributes are on the job training cost. Thus it is an Investment in Human Resource.

c) Special training cost: To achieve the performance standards sometimes specific training
programs may be devised. Such training gets a distinct human resource to the organization. The
costs of such training are called special training costs fall under the human resource investment
of the organization.

4.2.3 Welfare cost
Management is after all creation and maintenance of an environment. Therefore, it is a vital
function of an employer to provide an atmosphere to the employees to perform their work in
healthy, congenial climate conducive to good health and high morale. The expenses incurred for
this purpose will facilitate the employee to increase the quality of his civic life. These welfare
costs can be classified as follows:

i) Welfare and amenities within the organization: Crèches, rest shelters and canteens, latrines
and urinals, washing and bathing facilities, drinking water and occupational safety etc. are the
welfare facilities provided by the employer within the organization.

ii) Welfare outside the organization: Social insurance measures, maternity benefit, medical
facilities, education facilities, housing, recreational facility holiday homes and leave travel
facilities are some of the welfare measures, provided outside the establishment.
4.2.4 Other Cost

There are some other costs which include expenditure on employee safety, ex-gratia, multi-trade
incentives and others. In Bangladesh, Industrial Law Act 1990 has made statutory provisions
with regard to employees' health, safety and welfare as follows:

I) Health of workers
 Cleanliness, Disposal of waste and effluents
 Ventilation and temperature
 Dust and fumes
 Artificial humidification
 Overcrowding
 Lighting
 Drinking water
 Latrines and urinals, spittoons etc.
II) Safety of the workers
 Fencing of machinery
 Work on machinery in motion
 Employment of young persons
 Casing of new machines
 Hoists and lifts

III) Welfare of the workers
 Washing facilities
 Facilities for storing and drying clothing
 Facilities for sitting

4.3 RATE OF RETURN ON HUMAN RESOURCES
The calculation of the rate of return on human resources is vital. When large amount of
investment is made on human resource building by not capitalizing such expenditure, the profits
of the organization are understated. Rate of return can be used as a performance measure. The
rate of return can be calculated on the basis of the following premises:

a) Measurement of return on organization building.

b) Measurement of return on organizational utilization.

Human assets & methods of valuation 5

 Enumerating the Asset
 Valuation and Types of Human Assets
 Methods of Valuation of Human Resources

5. HUMAN ASSETS & METHODS OF VALUATION

5.1 ENUMERATING THE ASSET

Until recently, Human Resource Management (HRM) activities have commonly been evaluated
in behavioral and statistical terms. In this competitive climate the need to evaluate HRM
activities in economic terms is becoming increasingly apparent. Developing such measures
requires an inter- disciplinary approach wherein information from accounting, finance,
economics and behavioral science has to be incorporated and delivered in the language
understood by the business world.

The next step is to transform generated data into the only language the business world
understands-Money.

According to the theory of accounting for HR propounded by Flamholtz EG (i) people are
valuable resource of an enterprise and; (ii) information on the investment and value of human
resource is useful for internal and /or external decision-making. According to the suggestions
given by Brummer RL, a firm has to capitalize on its expenditure on HRM's functions namely
recruitment, selection, orientation, training and development of people and treat them as assets
for the purpose of HRA. The amounts so capitalized can be shown in the balance sheet as human
assets as distinguished from physical assets.

When we refer to assets, we remember only two assets, viz, fixed assets and current assets. Fixed
assets are valued at historical cost basis and current asset at current price. But the growing
awareness of the importance of intangibles is also reflected in accounting for assets. There is a
widening gap between the perceived value and the accounting value of the business. It
necessitated the accounting for intangibles and the accountants have handled several such areas
of accounting the intangibles too

Prof. N. Dasgupta has suggested in his total cost approach the following mode for disclosure of
human resources in the balance sheet of an organization.

According to him, the human resources valued as per his model should be shown both on the
‘assets’ as well as ‘liabilities’ sides of the balance sheet. On the assets side, it should be shown
after the fixed assets as Human Assets classified into two parts – (i) value of individuals, (ii)

value of firm’s investment. On the ‘Liabilities’ side, it should be shown after the capital as
Human Assets Capital by that amount at which it has been shown on the asset side against ‘value
of individuals.’ He has given the following example to clarify his point.

Example: A firm has started its business with a capital of Rs. 1000000. It has purchased fixed
assets worth Rs.5, 00,000 in cash. It has kept Rs. 260000 as working capital and incurred Rs.
240000 on recruiting, training and developing the engineers and few workers. The value of
engineers and workers is assessed at Rs. 800000.

The above items will be shown in the balance sheet as follows:
Balance Sheet
(Including Human Resources)

5.2 VALUATION AND TYPES OF HUMAN ASSETS

Valuation of human assets is the most important aspect of human resource accounting. A recent
trend in today’s corporate world is to measure the value of intangible assets of the companies
such as goodwill {valuation of goodwill is quite old}, brands, patents, and now human assets.
Consultants in HRM emphasize the need for valuation of human assets. For example, Brian
Friedman Human capital consultant with Arthur Anderson, views that “if you treat human
resources as your most valuable assets. “Before we go through the mechanism of valuation go
human assets, let us see the types of various human assets.

Human assets are in intangible form and are within the inside of human resources.
Therefore, there may be different ways in which these can he classified. For example, Sumantra
Ghoshal has classified these into three categories intellectual capital, social capital and emotional
capital. Besides, there is recent emphasis on spiritual capital. Let us briefly discuss these to
identify how these contribute to individual effectiveness.
5.2.1 HUMAN CAPITAL
LPG - Liberalization, Privatization and Globalization all over the world, has created the need for
quality products and quality service. It in turn necessitated organizations to compete with one
another to improve the quality and device cost reduction measures to exist in the industry. That
could be done only with the development of human capital which is evidenced by the rapid
economic growth of Japan and other East Asian countries. The investment in human capital
cannot be easily measured as it differs from one person to another.
Basically, when we talk of human capital it refers to the human knowledge, their inner
capabilities and creativity. The development of technology cannot be fully utilized without
knowledge and skill. The capabilities of the human capital in relation to the needs of the
organization should be improved by creating a climate in which the human knowledge, skill,
capabilities and creativity can be developed. How do we develop our human capital and put it to
optimum use is the challenge faced by the present day corporate sector. Technological
improvements, business strategies, quality concerns etc., will have no meaning without people
(human capital). So it is people who make all the difference.
5.2.2 INTELLECTUAL CAPITAL
The first element of the human capital is intellectual capital which can be defined at individual
level as well as at organizational level.

At the individual level, it refers to his knowledge, skills and expertise. It may be in the form of
specialized knowledge, tacit knowledge and skills, cognitive complexity and learning capacity.

At the organizational level, intellectual capital consists of both the stock of knowledge, skills and
expertise that members of the organization collectively possess, and the knowledge and expertise

that may be embedded in or owned by the organization including patents. Information
technology based knowledge systems, or specialized processes of work. Ghoshal observes that
“in the recent past, much management attention has been paid to this issue of intellectual capital,
and rightly so. Knowledge certainly in service industries like consulting, investment banking. IT
services, consumer electronics, and electrical machinery.

5.2.3 SOCIAL CAPITAL
Social capital is derived from the network of relationships, both internally and externally. From
organization’s point of view, social capital relates to structure, quality, and flexibility of the
human networks which can be created through cohorts, joint departments and functions, long-
term employment and internal culture.

5.2.4 EMOTIONAL CAPITAL
Emotional capital involves self-confidence, ambition, courage, risk taking ability and resilience.
It is reflected in what is described as a ‘can do’ spirit. Individuals need self-confidence based on
self-esteem, courage, and resilience to convert their kn0owledge and relationships into effective
actions.

Organizations require high internal energy and an environment of pride, trust, and openness to
create a bias for speed and action in rapidly changing environment. In today’s context, more
companies are involved in developing emotional quotient {EQ} as the individuals in an
organization depend more on their emotional capital for effectiveness than their intelligence and
technical skills. Emotional capital helps in controlling such emotions as anger, hatred,
frustration, confusion, sadness, etc. which affect the job performance adversely. Further, it helps
in reducing stress, a major problem of the modern organizations
5.2.5 SPIRITUAL CAPITAL
Spiritual capital is the recent development in the practice of human resource management. First,
it was intelligent quotient (IQ) followed by emotional quotient (EQ), and now has come spiritual
quotient (SQ). Ullhas Pagey, Director {HR and OD}, Aptech limited, views that “whereas with a
high IQ you may get hired: with a high EQ, you get promoted. But this is a short – term
perspective and long-term growth is linked to SQ. “spiritual capital is assuming increasing

values, ego, and approach to work match those of the organization. All these forms of human
capital are not isolated rather these are interrelated. Therefore, while measuring human capital,
all these must be taken together. Human resource accounting makes attempt to measure this
capital.

5.3 METHODS OF VALUATION OF HUMAN RESOUR CES

There are a number of methods suggested for the valuation of human assets. Many of these
methods are based on the valuation of physical and financial assets while others take into
account human consideration. Major methods of valuation of human asserts are historical cost,
replacement cost, standard cost present value of future earnings and expected realizable value.

The major developments in HRA were started only during l96o's by some of the organizations in
USA. Of course, the first attempt to value the human being in monetary terms was made by
William Potty who opined that labor was the father of wealth and it must be taken into account
while making an estimate of wealth. On scanning through literature, the approaches to HRA can
be broadly classified as follows:

5.3.1 COST BASED APPROACHES:
 Replacement Cost:
Rensis Likert & Eric G.Flamholtz propounded it. This is a measure of cost to replace a
firm’s existing human resources. Human Resources are to be valued on the assumption
that a new similar organization has to be created from scratch and the cost to the firm is
calculated if the existing resources were required to be replaced with other persons of
equivalent talents and experience. It takes into account all costs involved in recruiting,
hiring, training and developing the replacement to the present level of efficiency.

H.R. Cost Accounting
H.R Cost Based
Approaches
Historical
cost
Replaceme
nt cost
Opportunity
cost
Standard
cost
H.R Value Accounting
Monetary Value Based
Approaches
Lev and
Schwartz
Model
The Eric
Flamholtz
Model
Morse
Model
Non-Monetary Value Based
Approaches
Likert
Model
The
Flamholtz
Model
Ogan's
Model

As against historical cost methods which take into account the actual cost incurred on
employees, replacement cost takes into account the notional cost that may be required to
acquire a new employee to replace the present one. Replacement cost is generally much
higher than the historical cost. For example, Friedman has estimated that the replacement
cost of an executive in middle management level is about 1.5 to 2 times the current salary
paid in that position.

Limitations
1. There may be no similar replacement for certain existing assets.
2. The replacement value is affected by subjective considerations and therefore the value
is likely to differ from one another.
3. It is against conventional accounting practice.

 Opportunity cost method:
Heckiman and Jones first advocated this approach. This is also known as “Market Value
Method”. This method of measuring the value of human resources is based on the
economist’s concept of ‘opportunity cost’.

Opportunity cost is the value of an asset when there is an alternative opportunity of using
it. In this method there is no opportunity cost for those employees who are not scarce. As
such only scarce people should form part of the value of human resources. The employee
is considered as scarce only when the employment in one division of an individual or
group denies this kind of talent to another division. Thus the opportunity cost of an
employee in one department is calculated on the basis of offer made by another
department for the employees working in this department in the same organization.

LIMITATIONS
1. The total valuation of human resource on the competitive bid price may be
misleading and inaccurate. A person may be a valuable person for the department in
which he is working and may have a lower price in the bid by other departments.

2. Only scare employees are included in this method and as a result unsecure employees
may lose their morale, as they are not counted.
3. It would be difficult to identify the alternative use of an employee in the organization.

 Standard cost method:
David Watson has suggested this approach. Instead of using historical or replacement
cost, many companies use standard cost for the valuation of human assets just as it is
used for physical and financial assets. For using standard cost, employees of an
organization are categorized into different groups based on their hierarchical positions.

Standard cost is fixed for each category of employees and their value is calculated. This
method is simple but does not take into account differences in employees put in the same
group. In many cases, these differences may be quite vital.

5.3.2 MONETARY VALUE BASED APPROACH:
According to this approach, the value of human resources of an organization is determined
according to their present value to the organization. For determination of the present value, a
number of valuation models have been developed. Some of the important models are as follows
–

 The Lev and Schwartz Model (Present value of future earnings method):
This model has been developed by Lav and Schwartz (1971). According to this model,
the value of human resources is ascertained as follows –

1. All employees are classified in specific groups according to their age and skill.
2. Average annual earnings are determined for various ranges of age.
3. The total earnings which each group will get up to retirement age are calculated.

4. The total earnings calculated as above are discounted at the rate of cost of capital. The
value thus arrived at will be the value of human resources/assets.

Limitations
1. This model implies that the future work condition of the employee will not change
over the span of his working life, but will remain the same as at present.
2. The approach does not take into account the possibility that the employee will
withdraw from the organization prior to his death or retirement. It is therefore not
realistic.
3. It ignores the variable of thee career movement of the employee within the
organization. An engineer will be an engineer throughout his career in the organization.

 Flamholtz Model (Reward Valuation method):
This model has been suggested by Flamholtz (1971). This is an improvement on ‘present
value of future earnings model’ since it takes into consideration the possibility or
probability or an employee’s movement from one role to another in his career and also of
his leaving the firm earlier, that his death or retirement.

According to this model, the ultimate measure of an individual’s value to an organization
is his expected realizable value. Expected realizable value is based on the assumption that
there is no direct relationship between cost incurred on an individual and his value to the
organization at a particular point of time. An individual’s value to the organization can be
defined as the present worth of set of future services that the expected to provide during
the period he remains in the organization.

.

The model suggests a five-step approach for this purpose –
1. Determination of the period for which a person is expected to serve the organization.

2. Identification of ‘service states’ (i.e. roles or posts) that the employee might occupy
during his service career including the possibility of his quitting the organization.
3. Estimation of the value derived by the organization when a person occupies a
particular position. Such value can be determined either by multiplying the price of the
services with the quantity of the services to be rendered or the income expected to be
derived from the services to be rendered.

Limitations
The model suffers from nearly all the drawbacks from which the present value of future
earnings models suffers. Moreover, It is difficult to obtain reliable data for determining
the value derived by an organization during the period a person occupies a particular
position. The model also ignores the fact that individuals operating in a group may have a
higher value for the organization as compared to individuals working independently.

 Morse Model (Net Benefit Model):
This approach has been suggested by Morse (1973). According to this approach, the
value of human resources is equivalent to the present value of net benefits derived by the
organization from the service of its employees. The method involves the following steps
–
1. The gross value of services to be rendered in future by the employees in their
individual as well as their collective capacity is determined.
2. The value of future payments (both direct and indirect) to the employees is determined.
3. The excess of the value of future human resources (as per 1 above) over the value of
future payments (as per 2 above) is ascertained. This, as a matter of fact, represents the
net benefit to the organization on account of human resources.
5.3.3 NON MONETARY VALUE BASED APPROACHES
 Pekin Ogan (Certainity Equivalent Net Benefit Model):
This approach has been suggested by Pekin Ogan(1976). This, as a matter of fact, is an
ext4nsion of “net benefit approach” as suggested by Morse.

According to this approach, the certainty with which the net benefits in future will accrue
should also be taken into account, while determining the value of human resources. The
approach requires determination of the following –

1. Net benefit from each employee as explained under ‘net benefit approach’.
2. Certainty factor at which the benefits will be available
3. The net benefits from all employees multiplied by their certainty factor will give
certainty equivalent net benefits. This will be the value of human resources of the
organization

Models and accounting treatment
of human resource accounting
 Standard Cost Model
 Accounting Treatment of Human Resource Accounting

6

6. MODELS AND ACCOUN TING TREATMENT OF HU MAN
RESOURCE ACCOUNTING
6.1 SOME OTHER MODELS OF HUMAN RESOURCE ACCOUNTING
6.1.1 STANDARD COST MODEL:

To avoid complication of calculation under the replacement cost, standard cost or recruiting,
hiring, training and developing per grade of employees are developed and established and made
up-to-date every year. The standard cost so arrived at for all human beings are treated as value of
human resources for accounting purposes. In case of new entrants the total standard costs would
be increased by standard cost relating to that entrant.

Current Purchasing Power Model:
Under current purchasing power method, instead of taking the replacement cost to capitalize, the
capitalized historic cost of investment in human resources is converted is converted into current
purchasing power of money with the help of index numbers. If there is an increase in the index
number, it will result in a corresponding increase in the value of human resources.
The standard cost method and the current purchasing power method also suffers from all
drawbacks of the replacement cost except they are simpler calculation.
6.1.2 THE LEV AND SCHWARTZ MODEL:

Lev & Schwartz advocated the estimation of future earnings during the remaining service life of
the employee and then arriving at the present value by discounting the estimated earnings at the
cost of capital. The assumptions in this method are realistic and scientific. The method has
practical applicability when availability of method to record the value of human resources in the
Books of Accounts. (Ravindra Tiwari). According to this model, the value of human capital
embodied in a person who is ‘y’ years old, is the present value of his/her future earnings from
employment and can be calculated by using the following formula –

Where, E (Vy) = expected value of a ‘y’ year old person’s human capital
T = the person’s retirement age
Py (t) = probability of the person leaving the organization
I (t) = expected earnings of the person in period I
r = discount rate

Moreover, companies adapt this model to their practical requirements by making necessary
alterations. For instance, different organizations use different discount rates for ascertaining the
present value of future cash flows.

This method has some limitations, which are as follows –
1) This method has no indication about the accounting treatment of human resource.
2) This method only considers wages and salary, but wages and salaries are not only the
costs associated with the employees. There are other costs that are associated with the
employees.
3) The Model ignores the possibility and probability that individual may leave an
organization for reason other than death or retirement. The model’s expected value of
human capital is actually a measure of expected ‘conditional value’ of a person’s human
capital-The implicit condition is that the person will remain in organization until death or
retirement. This assumption is not practical.
6.1.3 FLAMHOLTZ’S MODEL OF DETERMINANTS OF INDIVIDUAL VALUE TO FORMAL
ORGANIZATIONS:
According to Flamholtz, the value of an individual is the present worth of the services that he is
likely to render to the organization in future. As an individual moves from one position to
another, at the same level or at different levels, the profile of the services provided by him is
likely to change. The present cumulative value of all the possible services that may be rendered
by him during his/her association with the organization is the value of the individual.

Typically, this value is uncertain and has two dimensions. The first is the expected conditional
value of the individual. This is the amount that the organization could potentially realize from
the services of an individual during his/her productive service life in the organization. It is
composed of three factors:

1. Productivity or performance (set of services that an individual is expected to provide in his/her
present position);

2. Transferability (set of services that he/she is expected to provide if and when he/ she is in
different positions at the same level);

3. Portability (set of services that are expected when the individual is in higher level positions).

These three factors depend, to a great extent, on individual determinants like activation level of
the individual (his motivation and energy level) and organizational determinants like
opportunity to use these skills or roles and the reward system.

The second dimension of an individual value is the expected realizable value, which is a
function of the expected conditional value, and the probability that the individual will remain in
the organization for the duration of his/her productive service life. Since individuals are not
owned by the organization and are free to leave, ascertaining the probability of their turnover
becomes important.

The interaction between the individual and organizational determinants mentioned above, leads
to job satisfaction. The higher is the level of job satisfaction; the lower is the probability of
employee turnover. Therefore, higher is the expected realizable value.

Flamholtz proposes three methods for valuation of expense centre groups. In all these measures,
the surrogate value is used for estimation. The three methods are:

Capitalization - The capitalization method involves capitalizing a person’s salary and using it as
a surrogate measure of human value. This value may be ascertained for groups as well as
individuals. The value of the group is essentially the aggregate value of the individuals
compromising the group. Capitalization of compensation method is not considered an ideal
method of group valuation because it ignores the possible effects of synergy. However, this
method may be used to arrive at an approximation of a group’s value to the firm.

Replacement cost valuation - The replacement cost of a group is defined as the sacrifice that
would have to be incurred today to recruit, select, hire, train and develop a substitute group
capable of providing a set of services equivalent to that of a group presently employed. This
method involves considerable subjective estimates, which reduce its validity and reliability.

Original cost valuation - The original cost valuation method involves estimation of the original
cost of recruiting, selecting, hiring, training, and developing a firm’s existing human
organization. The need for using original costs to value groups arises out of the necessity of
estimating the cost of developing an effectively functioning team. Teamwork is essential for
effective communication, decision making, coordination and several other critical organizational
processes. Yet, when the original costs are used to make an estimation of the value of the
expense centre, the costs of generating this teamwork are largely ignored.
6.1.4 NON-MONETARY METHODS FOR HRA:
The non-monetary methods for assessing the economic value of human resources also measure
the Human Resource but not in dollar or money terms. Rather they rely on various indices or
ratings and rankings. These methods may be used as surrogates of monetary methods and also
have a predictive value. The nonmonetary methods may refer to a simple inventory of skills and
capabilities of people within an organization or to the application of some behavioral
measurement technique to assess the benefits gained from the Human resource of an
organization.

1. The skills or capability inventory is a simple listing of the education, knowledge, experience
and skills of the firm’s human resources.

2. Performance evaluation measures used in HRA include ratings, and rankings. Ratings reflect a
person’s performance in relation to a set of scales. They are scores assigned to characteristics
possessed by the individual. These characteristics include skills, judgment, knowledge,
interpersonal skills, intelligence etc. Ranking is an ordinal form of rating in which the superiors
rank their subordinates on one or more dimensions, mentioned above
3. Assessment of potential determines a person’s capacity for promotion and development. It
usually employs a trait approach in which the traits essential for a position are identified. The
extent to which the person possesses these traits is then assessed.

4. Attitude measurements are used to assess employees’ attitudes towards their job, pay, working
conditions, etc., in order to determine their job satisfaction and dissatisfaction.
6.1.5 HERMANSON’S UNPURCHASED GOODWILL MODEL:
ccording to Hermanson, the un purchased goodwill notion is based on the premise that
‘the best available evidence of the present existence of un-owned resources is the fact
that a given firm earned a higher than normal rate of income for the most recent year.
Here Hermanson is proposing that supernormal earning is an indication of resources
not shown on the balance sheet, such as human assets. Even though his method of valuing human
resources is explicitly intended for use in a company’s published financial statements rather than
for internal consumption, this would necessarily involve forecasting future earnings and
allocating any excess above normal expected earnings to human resources of the organization.
However, the assumptions would be subject to the uncertainties involved in any forecast of
future events.
6.2 ACCOUNTING TREATMENT OF HUMAN RESOUR CE ACCOUNTING

The accounting treatments of human resource under various methods can be done in three parts –

Real Capital Cost Part –
A

All capital cost associated with the human resource, such as – training cost, should be capitalized
by
Human Resource Capital (HRC) Dr.
Bank Cr.

And the cost should be written off during the working life of the employee, as –
Income Statement Dr.
Human Resource Capital (HRC) Cr.

Present Value of future salary/wages payment –
At the time of capitalizing value of human resource according to Lev & Schwartz valuation
(whether at the yearend or at the during year, whenever) we hire human asset or company want
to begin accounting for human asset
Human Resource Capital Dr
Human Resource Reserve Cr

At the time of salary payments
Salary Dr
Cash Cr
At the yearend we should calculate HRC value according to Lev & Schwartz model. Now
difference of HRC in books and HRC now calculated shall be debited in the form of HRR and
balance amount should be debited in Income Statement to close salary.
Human Resource Reserve Dr
Income Statement Dr
Salary Cr

If difference is more than salary then balance should be credited to P&L A/C
Now amount debited in HRR should be charged in form of depreciation / amortization from
Income Statement.
Income Statement Dr

Human Resource Capital Cr
Suggested Use of fund for HRC –
Fund for HRC should be used only for some specific purposes such as - training of employees,
writing off of abnormal losses caused Due to leaving/death of employee, welfare of Employees
so that they may be more satisfied etc entry for transferring will be –
Income Statement Dr
Fund for HRC Cr

Entry for capitalization of human resource with the same amount will be –
Human Resource Capital Dr
Human Resource Adjustment Cr
In case of abnormal losses generate for many years after leaving/death of Employee these losses
can be written off from this fund over these years. Entry will be –
Fund for HRC Dr
Income Statement Cr
Reverse entry at the time of leaving/death of employee will be –
Human Resource Adjustment Dr
Human Resource Capital Cr
Amount capitalized in previous year (in this part) should be basis for incentive for current year.
Though the different model and methods have already proposed for the human resource
accounting, it is still extremely difficult to determine the actual value of the human resource of
the organization. And the proposed have some limitations too. There is no standard proposed by
any accounting standard committee for this regard. So there is no certain guideline for HRA. On
the other hand, by this process an organization has the chance of manipulation the financial
statement. But this concept is gaining importance day by day as the human resource play the
main part of operation and production.

7

Practice of HRA
in banking sector
of Bangladesh

 General Discussion
 Explanation, Weight Allocation and Scoring of
Indicators
 Findings and Analysis
 Barriers for Implementing HRA Practice in Banking
Sector
 Suggestions to Overcome the Barrier

7. PRACTICE OF HRA IN BANKING SECTOR OF BAN GLADESH

7.1 GENERAL DISCUSSION

The concept of HRA is one of the branches of modern accounting systems. Earlier, this
accounting system developed by an Italian monk, Luca Paciolo who used his analytical skills to
discuss the system of double-entry accounting. By laps of time, the span of accounting has been
accelerated and as a part of it; the demand of the public and the organizations have turned into
diversification in practicing of accounting systems. Most of them want to know the actual cost of
human resources and future economic value of human resources because they have required
investing a huge amount of capital to develop human resources. As a result of this human
resource accounting has been developed.
However, from the various sources of data it is agreed that Rensis Likert, R. Lee Brummet,
William C. Pyle and Eric Flamholtz are the most prominent pioneer of developing human
resource accounting through formulating of concepts and methods. One outcome of the research
(Brummet, Flamholtz & Pyle, 1968) the term “Human Resource Accounting” was used for the
first time. From the analysis of different literatures we see that the practice of HRA has been
developed with five phases, these are:

1st phase: (1961-65): Introduction of concepts
2nd phase: (1966-71): Development and formulation of models for HRA.
3rd phase: (1971-76): Growth of research for HRA.
4th phase: (1976-1980): Declining the interest for HRA.
5th phase: (1980 onwards): Improvement of practices.

Generally, it is the managerial technique which helps the management to identifying cost for HR
and considering its future economic value to the organization so that strategic business decisions
can be taken regarding human resources and providing information to the stakeholders. If such
accounting is not done, then the management runs the risk of taking decisions that may improve
profits in the short run but it will cause immense long term impairment by reducing their
productivity and by creating salary distortions across the organizational structure in future. So,
by the practicing of HRA an organization can be benefited in case of –
 cost effectiveness

 ensuring the best use of human resources
 Sound & effective basis for human asset control
 Providing information to the stakeholders about, how much value addition is created by
the organization to country’s human resource as part of the corporate social
responsibility.
 Enhancing the internal assets of the particular concern by considering the HR as assets.
 The productivity of human resources.

.
Success and failure of corporate undertakings purely depends upon the human resources. Now-
days human resource is a prime concern for all the institutions especially for financial institutions
as they have required investing a huge amount of capital. In this context, it is worthwhile to
examine human resource accounting practices in corporate sector i.e. banking sector in
Bangladesh. For the convenience of completing the research paper successfully it has been
prepared based on a sample of 25 commercial banks and practice of human resource accounting
has been measured on five broad indicators which incorporates several sub indicators. In the
survey it has found only few banks had mechanism to practice of human resource accounting in
2010 and now in 2011 almost the same number of banks has such mechanism and score
improved by .09 due to the some enhancement program in this regard and it has been found that
banking sectors in Bangladesh are often alleged as too vague in the issues of practicing human
resource accounting.

7.2 EXPLANATION, WEIGHT ALLOCATION AND SCORING OF
INDICATORS

 Explanations of Indicators

To measure the status of human resource accounting practice in banking sector five
indicators have been used. These are as follows-

 Nature of HRA- This indicator is used to get the idea about the priority concern of
banks towards practicing HRA.
 Valuation of HR- This indicators focus on about the valuation of HR with help of
cost approach, economic value addition approach or the other approach i.e. NPV
approach or standard cost approach.
 Financial statement and HRA- This indicator indicates the treatment of cost for
HR (i.e. the cost for recruitment, selection, hiring, training and development of
human assets). It also indicates whether the transparency and financial accounting
disclosure followed by the bank or not about HRA.
.
 Weight Allocation and Scoring of Indicators

All five indicators are equally weighted in case of scoring overall score and each sub
indicator is also equally weighted to score each indicator. For example to calculate the
score of the indicator titled as “Nature of HRA” there are three sub indicators: 1st is
“Having the priority concern of banks towards practicing of HRA”, the 2nd is “Having
any designated person assigned or any department in the bank” and the last one is
“Having any isolated segment of cost regarding HR” and these three sub indicators are
weighted equally. Here is to be noted that the third indicators have two sub indicators but
the first sub indicator “Application of cost for HR” have different dimensions and all the
dimensions of this sub indicator is weighted equally and then consider the second sub
indicator for allocation of weight. In this manner according to the nature of response
score has been allocated to each indicator as the score can be attributed a well balanced
reflection of reality.

Following weighted Factor Scoring Model is used to calculate the score of each indicator
and the overall score.

Si = ∑??????
??????
&#3627408471;=1
&#3627408470;&#3627408471;
??????
&#3627408471;
Here,

Si = Total score
Sij = Score of the jth indicator in case of overall score and score of the jth sub indicator in
case of each indicator.
Wj = Weight of the jth indicator in case of overall score and weight of the jth sub
indicator in case of each indicator.
Score is calculated on scale of 1.00

7.3 FINDINGS AND ANALYSIS
To get the idea of level of practicing HRA in banking sectors in Bangladesh five indicators have
been prepared in light of relevant issues of practicing HRA which has already been mentioned
earlier. However, to analyze the present state of practicing HRA the table-1 shows the responses
of practicing HRA on each indicator.

Indicator

2010 2011
1.0 Nature of HRA

1.1 Having the priority concern of banks towards
practicing of HRA

4 10
1.2 Having any designated person assigned or any
department in the
bank)

0 2
1.3 Having any isolated segment of cost regarding HR

2 5
2.0 Valuation of HR

2.1 Cost Approach

25 20
2.2 EVA Approach

0 2
2.3 Others 0 3

3.0 Financial statement and HRA

3.1 Application of cost for HR:

3.1.1 Income Statement Item

23 20
3.1.2 Balance Sheet Item as Assets (i.e. intangible or
other assets)

2 5
3.2 Transparency and financial accounting disclosure
about HRA (voluntary)

0 5
4.0 Auditing Practice

4.1 Regular practice of auditing

25 25
4.2 Is there any emphasis to assess the value of HR?

1 4
4.3 Is there any practice of auditing about HRA?

0 0

5.0 Enhancement program for practicing of HRA

0 4
Table 1 The number of responses of practicing HRA on each indicator.

The priority concern of banks towards practicing of HRA is increasing in 2011 than the year
2010. There is no assigned department to handle this technique to implement in recent past. In
case of valuation of HR only two banks apply the EVA approach where 20 banks follow the
historical cost approach or traditional approach of accounting. It is necessary to mention that 5
banks recently move the cost for HR to treat them as assets and shown in balance sheet where the
other shown in income statement as revenue expenditure under the head of human resource
development cost or other expenses. As the treatment of this in income statement, it doesn’t
show the actual financial position of the concern and it leads to decline the profit.

From the table-2 it is found that in 2010 among the five indicators “Enhancement program for
practicing of HRA” the fifth indicator scored the marginal but in 2011 it has scored to its highest
extent that means 0.16. This has happened because of increasing the importance at the top level

of management about the practice of HRA but this not enough to implement HRA it requires a
complete guidelines by IFRS and IAS.

Indicator
Score 2010 Score 2011 Improvement

Nature of HRA

0.08 0.23 0.15
Valuation of HR

0.33 0.33 0.00
Financial statement and HRA

0.25 0.35 0.10
Auditing Practice

0.35 0.39 0.04
Enhancement program for practicing of HRA

0.00 0.16 0.16
Grand Score

0.20 0.29 0.09
Table 2 This table provides the score on each indicator and overall practice of HRA in the bank.

However, this process is not all perfect as there are some deviations. Have a close look on the
indicators “Nature of HRA” and “Financial statement and HRA” it can be observed that level of
progress has taken in two years (from 2010 to 2011) by 0.15 and 0.10 and the indicators’ score
were 0.08 (2010), 0.23 (2011) and 0.25 (2010), 0.35 (2011) respectively. There is no
improvement of second indicator while the third indicator slightly moves positively.

Organizations success not only depends on efficiency of professional management body it is also
very important to have a mechanism to practice of HRA. In the survey it has found only few
banks had such mechanism in 2010 and now in 2011 almost the same number of banks has such
mechanism and score improved by .09 in this regard.

The overall practice of HRA in banking sector has not yet been at the satisfactory level because
most of the resource personnel don’t have the clear concept of HRA. In this point of view it is
limited within the circle of complexities in the issues of its implementation.

7.4 BARRIERS FOR IMPLEMENTING HRA PRACTI CE IN BANKING
SECTOR
The problems involved for implementing HRA practice are as follows:

 Quantification of human resource: There is no specific measurement tool. Since the
productive life of HR is uncertain, future benefit derived by him also is uncertain. As the
useful life of human resources is uncertain, amortization of human resource cost is not
possible.
 Lack of standard norms: There are no standard norms in case of practicing HRA as like
as finance or accounting with which actual performance can be compared.
 Supremacy of financial accounting: Where the existence of financial accounting the
interest of practicing HRA resulting the poor scope to implement.
 Additional cost: Most of the financial analyst think the practice of HRA require the
additional cost which lead the concern become expensive and non-profitable.
 Lack of international accounting standard regarding HRA: Accounting has been
developed day to day and it innovate new branches of accounting and issues new
standard but still there is no complete and reliable standard of practicing HRA.
 Lack of guidelines of BB towards practicing HRA: BB has not yet undertaken initiatives
to practice HRA mandatory at all financial institutions (i.e. commercial banks) and
disclose all about the information of HR for transparency.

7.5 SUGGESTIONS TO OVERCOME THE BARRIER
The probable suggestions to overcome the barriers for implementing HRA practice in banking
sectors are as follows:

 Quantification of human resources problem may be solved by applying economic value
approach or present value approach.
 HRA is a modern branch of accounting so it is required the standard norms like
accounting and finance with which actual performance can be compared. By giving the

emphasis to practice of HRA more in the various concern then the banks can assist to
formulate a standard for its own.
 Supremacy of financial accounting can alleviate by making the human resources more
conscious about the significance of practicing human resource accounting.
 The perception of the financial analysts should be changed towards to the practice of
HRA because the practice of HRA may lead the cost at bearable limit in the short-run but
it will lead the maximum benefit in the long-run.
 At least a designated person or a department should be assigned in practicing of HRA in
the bank.
 The period of amortization of human resource assets may be taken as the certain
percentage of effective useful life of the individual personnel of the organization.
 By enforcing law, legislative problem of practicing HRA may be solved. International
Accounting Standards Board should develop and issue standards immediately regarding
the practice of HRA.

Human Resource Accounting
Disclosure (HRAD) in Bangladesh

 General Discussion
 Review of the Study
 Model Specification
 Result and Analysis
 End Note

8. Human Resource Accounting Disclosure (HRAD) in Bangladesh

8

8.1 GENERAL DISCUSSION
Human Resources are the energies, skills, talents and knowledge of people which are, or which
potentially can be applied to the production of goods or rendering useful services (M.
Narayanankutty). The term “human resource” has been defined in various ways with one
commonalty, and that is, the value that different activities exercised within an organization along
with the environments in which it operates provide to that organization. Embodied in the
activities include behavior, knowledge, experience, attitude, morale, corporate culture, to
mention but a few, that when put together becomes of economic value to the organization.

According to Schultz (1961), human resource can be defined as the abilities and skills of a
certain group of people or an individual person that have economic value.

The economic environment has shifted from industry based with a focus on physical assets such
a factory, machines and equipment to a high technology, information, innovation based
environment with a focus on the expertise, talents, creativity, skills, and experience of people—
the company’s human resource. How to account for the “most important asset” as claimed by
most companies has become a big challenge for both accountants and human resource
professionals since the term human resource was introduced in the field of accounting. Many
organizations, big and small, acknowledge that “our biggest asset is our staff.” However, no
organization knows how to account for its employees on their financial statements. Among
accountants, opinion is divided with regard to the evaluation, costing, and reporting the value of
employees of an organization, and there have been various suggestions on these issues.

However, despite the human resource intensive economy, traditional accounting continues to
focus on traditional assets to the exclusion of the more important human assets. Current financial
accounting treats human resource-related costs as expenses which reduce profit on the income
statement, rather than as assets on the balance sheet which provide future benefits.

8.2 REVIEW OF THE STUDY

To measure human value as a part of the goodwill, HRA was introduced in the accounting
literature in the 1960s (Flamholtz, 1985). In 1968 Brummet, Flamholtz & Pyle used the term
“human resource accounting” for the first time. In 1973 the American Accounting Association’s
Committee on Human Resource Accounting defined HRA as “the process of identifying and
measuring data about human resources and communicating this information to interested parties.
It provides information about human resource costs and values, serves to facilitate to decision
making, and motivates decision makers to adopt a human resource perspective (Sackmann et al.,
1989,). Research to examine the way in which human resource variables affect the efficiency of
firms could be performed in a number of ways including analyzing the association between
different aspects of human resources and firm performance (Bassi & McMurrer, 1998; Boudreau
& Ramstad, 1997; Grojer, 1998). Looking at different proposals (Conner, 1991), the resource
theory considers human resources in a more explicit way. This 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 is its personnel. It takes advantage of
their interdependent knowledge. That would explain why some firms are more productive than
others. With the same technology, a solid human resource team makes all the difference (Archel,
1995). There are two reasons for including human resources in accounting. First, people are a
valuable resource to a firm so long as they perform services that can be quantified. Second, the
value of a person as a resource depends on how he is employed. So management style will also
influence the human resource value (Ripoll and Labatut, 1994).

Research into true human research accounting began in 1960s by Rensis Likert (Bowers, 1973).
Likert defends long-term planning by strong pressure on human resources’ qualitative variables,
resulting in greater benefits in the long run. Support for the idea of accounting for human
resource values can be found much earlier (Sacmann et. al., 1989). In 1965, Cronbach & Glaser
(1965) and Naylor & Shine (1965) developed models for estimating the financial utility of
personal selection. To embrace both HRA and UA (Utility Analysis), Grojer & Johanson (1996)
use the concept Human Resource Costing and Accounting (HRCA). Grojer & Johanson (1996)
express the management orientation of HRA even more clearly in the assertion that HRA
concerns the management of human resources. Roslender (1997) proposes a societal approach to

the subject. He uses the term human worth accounting. Assets from an accounting perspective
are normally well, but too narrowly, defined when compared with emerging knowledge-based
theories (Grant, 1996; Haanes & Lowendahl, 1997). Because of poor measurement and
inadequate reporting, human resources run in the risk of being undervalued internally by
managers and externally by capital markets (Hanson, 1997). There are many studies suggest a
business community with a much more reluctant standpoint (Johanson et al, 1998). One recent
survey on the attitudes of members of the European Accounting Association toward HRCA
showed that it is becoming more important for accounting research and business practice, at least
in East Europe and the Scandinavian countries. An interest in HRCA in Finland started several
years ago from a return on investment perspective. Guy Ahonen. Johanson (1999) propose that
decision making and learning by investors and managers are influenced when managers hold
positive attitudes towards HRCA. The American SEC has declared that there is no evidence of
an information interest from a capital market point of view, not even for non financial HRCA
information. In a recent literature survey (Johanson et al, 1998) on experience using HRCA and
the balance scorecard (BSC) some 2000 articles and books written in seven languages were
looked at. When it comes to the BSC, of which HRCA in some organizations is an explicit part,
there is no lack of company enthusiasm and good intentions on how to use the BSC in the future
- Johanson et al, 1998. Equity investors’ necessity for information on human resources has been
investigated extensively whereas studies of lenders are missing (Epstein & Freedman, 1994;
Eccles & Mavrinac, 1995; Mavrinac& Siesfeld, 1997). One of the techniques showing a greater
capacity to stimulate efficiency is based on the idea that an employee who is induced to get to
know his job better is more productive and quicker on the job (Asociacion Espandola de
Contabilidad y Administracion (AECA) 1994). No party that is referred to human resource is
considered in the different balance sheet models, and only in the profit and loss account are the
costs most directly related to them, such as salaries and staff welfare expenses( including
pensions) (fourth directive of Comunidad Economica European 1978). As the human resource
has been considered as strategic capital, its accounting and reporting aspects are becoming
crucial for the organizational success. But no significant analysis has been done yet on this topic.
This paper is an attempt to contribute that end.

8.3 MODEL SPECIFICATION

To provide primary evidence of the impact of corporate attitude on human resource
disclosures of different enlisted companies in Bangladesh this paper uses simple ordinary
least square regression technique. The following regression has been estimated.

Where,
Y = Human Resource Accounting Disclosure Index (HRADI)
ß = Co efficient of independent variables.
Size = Natural log of market capitalization is used as a proxy of size of the company.
PT = Dummy variable, Profitability is measured by the margin.
FIN = Dummy variable, Financial institution.
Age = Years of operation in the market as a listed public limited company.
MNC = Dummy variable, 1 if the company is an Multination Company.
SP = Dummy variable, 1 if the company has concentrated sponsor.
e = Standard sample error.

8.4 RESULT AND ANALYSIS
The lowest level of disclosure observed in this study appears to be 0.26 (Table – 3) which
suggests that the company disclosed only 26 of Human Resource Disclosures (HRD) applicable
to this study. The range of the human resource disclosure is form 52% to 6.45% with standard
deviations 10.85. The result indicates that none of the companies disclose all the human resource

accounting information items determined in this study. No company has a HRAI of 100%. Eight
companies possess HRAI 6.45 that reveals their very low level of HRAD.

The model class of Human Resource Disclosure (HRD) items 20- 25 percent indicates that
maximum 14 companies (Table – 2). HRD level is 20 to 25 percent while 11 companies disclose
15 to 20 percent of total disclosure items. About 80 percent of sample companies are less than
35% disclosure. Remaining 20 percent companies have a HRDI between .25 and .40. It implies
that the level of human resource reporting of listed companies of Bangladesh is very power.
Table 4 shows that 54% of the total disclosed HRAI is reported in through notes of annual report
and about 16% is reported through Directors’ report. Around 14% HRAD is reported in formal
way through profit and loss account. Table -5 shows that the non-financial companies are
negatively correlated with HRADI while natural log of market capitalization (size) is positively
correlated with HRADI.

In the regression analysis, HRAD score is found to be significantly influenced at 5% level by
several attributes of the company such as profitability, Multinational Corporation, age and
sponsors variable. Among these only sponsor variable is negatively associated with HRAD.
Other attributes of the company such as size has also been found to statistically insignificant at
the same level. The multiple correlation co-efficient (R) is 0.771 (R2 =0.595) indicates that 60%
of the variation in HRADI can be predicted (Table-8). The regression result shows that the size
of the company has a significant positive relationship. Same result is also absorbed in case of
profitability of the sample companies. The beta weight = 0.068; sig > 0.10 indicates no
association between the age of company and HRADI.

No. Variables
01 Separate HRA statement.

02 Total value of Human resource

03 Number of employees

04 Human resource policy

05 Training and development

06 Management succession plan

07 Employment report

08 Employees’ value addition

09 Human resource development fund

10 Employees/workers fund

11 Employees categories

12 Managerial remuneration

13 Retirement benefits

14 Performance Recognition

15 Superannuation fund

Table – 3: Human Resource Accounting Reporting (HRAR) variables:

Class No. of Company (N) Company % Cumulative %
0-5

3 5.16 5.16
05-10 5 8.61 13.77
10-15 6 1.34 24.11
15-20 11 18.96 43.07
20-25 14 24.14 67.21
25-30 0 0.00 67.21
30-35

9 15.52 82.73
35-40 7 12.08 94.81
40-45 2 3.46 98.27
45-50 1 1.73 100.00

Total 58 100
Table – 4: Human Resource Reporting Levels

Mean 26.00
Maximum 52.00
Minimum 6.45
Std. 10.85
Table – 5: Descriptive statistics of the HR disclosure indexes.

Medium of Reporting

No. of Information
Reported

Percentage

Profit & loss account

21 14
Notes

80 53.33
Directors’ Report

23 15.33
Managing directors’ report

6 4.00
Chairman’s report

15 10.00
Profile of business

5 3.34
Total

150 100
Table – 6: Medium of Human Resource Accounting Reporting

Table – 7: HRAI by industry-type

8.5 END NOTE
This paper examines quality of voluntary HRAD taking a sample of 58 firms from different
industry groups in Bangladesh as categorized by DSE and CSE. Conducting index items survey,
we found that in Bangladesh, market capitalization position, profitability, category of corporation
and multinational affiliation and concentrated ownership have significant influence on human
resource disclosure is that it can ensure major benefit to the society through ensuring greater
transparency and higher productivity. This study initiates to reveal the relationship between
corporate attitudes and HRAD of listed companies in Bangladesh. Its results show that company
size significantly associated with HRAD. The possible reason for the result could be that large
companies in DSE and CSE are motivated to disclose more HRA information in their annual
report to uphold their market value. In addition, the results also find the financial companies are
disclosing HRA information than non-financial companies and company’s profitability
positively influences companies to report the information in their annual report. It indicates
highly regulated financial companies are disclosing more HRADI than non-financial companies.
Hence, regulating structure in Bangladesh is enhancing the disclosure practice in the area of
HRA. The study also does not find any relationship between the age of the company and HRAD.

Nevertheless, the study is not free from limitations that future work may address. A one-year
sample study (2009) is considerably insufficient to make inference regarding quality of voluntary
HRAD. The mean disclosure value 25% shows that listed companies in Bangladesh disclose only
one fourth of the selected HRA disclosure items. So, further research can be done focusing on
the reasons of reluctant attitude of listed companies in Bangladesh to disclose the HRA
information. Moreover, the scope of the research may be extended by increasing the sample size
and cross industry examination.

Conclusion

 Impact of Human Resource Accounting
 Limitations of HRA
 Conclusion

9. CONCLUSION

9

9.1 IMPACT OF HUMAN RESOURCE ACCOUNTING

he concept of human resource accounting covers the people who constitute a valuable
resource of an enterprise and information on the investment and value of such
resources is useful for internal and external decision-making. Such accounting is of
permanent importance to the nation and also to individual organizations. The following are the
main benefits of Human Resource

1. Helpful in proper interpretation of Return on Capital Employed. The human resource
accounting will disclose the value of human resources. This will help in proper interpretation of
return on capital employed. Such information will give long-term perspective of the business
performance which could be more reliable than the return on capital employed based on net
profit only.

2. Improves managerial decision-making. The maintenance of detailed records relating to
internal human resources (i.e. employees), will improve managerial decision-making specially in
situations like direct recruitment versus promotion, transfer versus retention, retrenchment or
relieving versus retention, utility of cost reduction programmed in view of its possible impact on
human relations and impact of budgetary control on human relations and organizational behavior
and decision on relocating plants, closing down existing units, developing overseas subsidiaries
etc. Thus, the use of HRA will definitely improve the quality of management.

3. Serves social purpose. It will serve social purpose by identification of human resource as a
valuable asset which will help in prevention of misuse and under use due to thoughtless or rather
reckless transfers, demotions, layoffs and day to day maltreatment by supervisors and other
superiors in the administrative hierarchy; efficient allocation of resources in the economy;
effecting economy and efficiency in the use of human resources and proper understanding of the
evil effects of avoidable labor unrest/disputes on the quality of the internal human resources.

4. Increases productivity. It will have the way for increasing productivity of the human
resources because, the fact that a monetary value is attached to human resources, and that human
T

talent, devotion and skill are considered as valuable assets and allotted a place in the financial
statements of the organization, would boost the morale, loyalty and initiative of the employees,
creating in their mind a sense of belonging towards the organization and would act as a great
incentive, giving rise to increased productivity.

5. Invaluable contribution to humanity. HRA will be an invaluable contribution for accounting
to humanity and it will lead to improve human efficiency while preserving human dignity and
honor. For this, a basic change in individual behavior, attitude and thinking is required. HRA
will help in realizing the value of human resources and, thus, will influence the individual
behavior, attitude and thinking in the desired direction.
6. Essential where the human element is the prime factor. HRA is absolutely essential in such
organizations where human element is the prime factor, e.g., a professional accounting firm, a
drama company, a solicitor and attorney firm, an educational institution etc.

7. Helps in investment decisions. The value of a firm’s human resources is helpful to potential
investors and other users in making long-term investment decisions.

8. Completes MIS. Human resource data would create a more complete management
information system as it can provide information of vital importance for both short-term and
long-term decision-making as well as performance measurement. It will provide adequate basis
for decision on allocation of resources e.g. budgeting, capital expenditure decisions and better
measurement of resources of an organization. Performance measurement helps in assessing the
strengths and shortcomings of an organization and helps in making better promotion policies.

9. For successful operation of an organization. The success of an organization very much
depends on the buildup of quality work force at all levels. The success stories of BHEL, ITC,
Hindustan Lever, Larsen & Toubro and several other enterprises are largely due to the emphasis
on human resource development. IF this vital asset is not shown in the balance sheet, to that
extent the public and investors are handicapped
9.2 LIMITATIONS OF HRA

No doubt HRA can provide valuable information both for management and outsiders, yet its
development and application in different industries and organizations has not been very
encouraging. This accounting concept is not popular like social accounting because it may not
result in providing immediate and tangible benefits and on account of the fact of lack of
consensus among accountants and other concerned about the basis of measurement of the value
of human resources. The reluctance on the part of the organization to introduce the
HRA system can be attributed to the following:

1. There are no specific and clear-cut guidelines for finding cost and ‘value’ of human resources
of an organization. The existing valuation systems suffer from many drawbacks.

2. The life of human resources is uncertain and therefore, valuing them under uncertainty seems
unrealistic.

3. There is a possibility that HRA may lead to dehumanizing and manipulations in employees.
For example, a person having a low value may feel discouraged and thus, in itself, may affect his
competency in work.

4. The much needed empirical evidence is yet to be found to support the hypothesis that HRA, as
a managerial tool, facilitates better and effective management of human resources.

5. Human resources, unlike physical assets, are not capable of being owned, retained and utilized
at the pleasure of the organization. Hence, treating them as ‘asset’ in the strict sense of the term
could not be appropriate.

6. There is a constant fear of opposition from the trade union. Placing the value on employees
would prompt them to seek rewards and compensation based on such valuation.

7. In what form and manner, should their value be included in the financial statements? Is
another question on which there is no consensus in the accounting profession?

8. If a valuation has to be placed on human resources, how should it be amortized? Should the
rate of amortization be decreasing, constant or increasing?

9. Tax laws do not recognize human beings as assets. So human resource accounting has been
reduced to a merely theoretical concept.

9.3 CONCLUSION

nternational contributions made to the field of HRA have resulted in growth of both the
field HRA and the wider study of human capital, human resource metrics, intellectual
capital, and organizational management. Along with advances in HRA theory, it is
encouraging to note that some studies have been based on empirical research, case and field
studies. Both the process and inclusion of HRA measures in human resource decisions are
expected to have implications from the standpoint of providing measures that can compete with
other investment proposals for the firm’s resources, and demonstrate that the long-term benefits
from such investments can be positive. The movement toward fair value accounting seen in
recent years, for both U.S.GAAP as well as for international standards, indicates a more
sophisticated approach to the measurement of assets, tangible as well as intangible. This might
suggest a willingness to recognize the need for, and consider the measurement and use of HRA
in future external financial reporting.

There are several approaches to HRA and any organization can choose an approach which better
serve its purpose. Because it is relatively new thing in our country so it may be a little tough to
get the knowledge necessary to perform this job. But we should try to facilitate those people who
are eager to know about this subject and they will serve us in the future.
We all know there are three type of capital mostly needed in an organization which is known as
man, machine and money. We gave enough emphasis on that machine as well as money but most
of the cases we don’t give any emphasis on our human resources. That’s why we are not able to
I

use the full potential of the human resource we have. For increasing the effectiveness of the
organization we should be more careful about the human resource. And to use the full potential
of our human resource we can use this human resource accounting.
Finally we can say that the output of HRA system can be used to enhance performance of
employees as well as company and to take a variety of decisions in the area of human resource
management. But the number of organizations that have adopted HRA system in Bangladesh is
low as it is not compulsory for the Bangladeshi organizations to value human resources and
mostly used by public sector but private sectors companies are least interesting. Still all those
companies who are adopting this accounting system are enjoying their strong financial
performance and efficient management.
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TY_OF_FINANCIAL_REPORTING_OF_QUOTED_SERVICE_COMPANIES_IN_NIGERIA

APPENDIXES

APPENDIXES

Appendix 1: Name of the Companies Use in the Study of HRA Disclosure

Human Resource Accounting

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