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PROFILE

ABDUR RAHMAN

COLUMN FOR THE RECORD
SOCIETY THE NEED FOR HUMAN RESOURCE ACCOUNTING
POLITICS & POLICY SHAHEEN AIR INTERNATIONAL

 

THE NEED FOR HUMAN RESOURCE ACCOUNTING


 "Our main asset is our people!"

 

By QAISAR ALI MALIK
Sep 08 - 14, 2003 
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The "value" of an organization is so far determined through traditional balance sheet measures such as 'Return on Assets' and 'Return on Equity' and is viewed as a sufficient reflection of the organization's performance. However, the increasing importance of human resources has created a need of valuating 'Return on Human Capital' as well along with the traditional valuations in order to calculate the total value of an organization

Human resource accounting (HRA) is defined as the process of identifying, measuring and communicating information about human resources in order to facilitate effective management within an organization. It is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms.

HRA is a system that provides management with the changes that are occurring to the human capital of an organization. It involves accounting treatment for issues like investment in people and their current replacement value, whereas the traditional accounting system is incapable of providing such values.

Managerial decisions like recruitment planning, turnover analysis, personnel advancement analysis and capital budgeting, are facilitated through the information generated by HRA. It also helps in examining expenditure on personnel and in re-appraisal of expenditure on services and training. In case of mergers and takeover decisions of the organizations where the human capital is a relevant factor this information can serve as a key factor. Another significant role of HRA is creating goodwill for a company, as HRA practicing company may project itself as having best practices and superior policies of human resources. Further, the human resource information is utilized for measuring the return on capital employed on total organisational assets, including the human assets.

 

 

Many companies world-over are adopting HRA as an essential component of their financial statements due to its increasing importance. One of the best examples is of the Denmark Government. The Danish Ministry of Business and Industry has issued a directive that with effect from the trading year 2005, all companies registered in Denmark will be required to include in their annual reports, information related to human resources. These companies will be required to provide comparative figures of investment in intellectual capital for the previous two years, along with the narration. The information related to intellectual capital is required to be at least one third of the report.

The concept of HRA evolved a decade ago but recently it has been converted to application by some of the organizations. The reasons for its low acceptability may be lack of awareness, lack of initiatives by the company, lack of industry standards and most important reason is the need of extensive research required to figure out the methods of determining the value of human capital. A lot of investment is required for the development of HRA, which large organizations may afford, but it is not economically viable for SME's.

The major problematic aspect of HRA is to assess the real value of human assets. Organizations may provide detailed information about their tangible assets like plant and equipment, and intangibles like patents, goodwill and trademarks, but there is no formal record of investment in human resources. HRA, which stands for measuring and reporting the costs and benefits of humans as organisational resources, is still to become an accepted trend in the business & IT industry. Major issues of HRA which are yet to be resolved are:

 

 

* Reliable and comparable data collection on human resources
* Cost vs. benefit analysis of gathering and processing this information
* The valuation of human capital.
* The development of human capital.
* Standard format of HRA for comparability purposes.
* Establishment of a coherent terminology
* Disclosure in traditional financial statements.
* HRA mandatory or voluntary for enterprises.
* Securing the interests of the employees at enterprise level.

The main stakeholders of an organization like investors, employees, trade unions and Governments have realized the importance of HRA, irrespective of the problems and challenges, and so they are gradually becoming aware of the potential of HRA.