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
* Reliable and comparable data collection on human
* Cost vs. benefit analysis of gathering and processing this
* 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.