Tuesday, May 17, 2011

Explain the concept of Human Resource Accounting (HRA).

Explain the concept of Human Resource Accounting (HRA). Describe the process of Human Resource Accounting of your organization or any organization you are familiar with. Bring out the advantages and limitations of HRA. Briefly describe the organization you are referring to.

Human resource is an important asset in the organization whose value goes on increasing with its right placement, application and development in the organization. In spite of vast physical resources with latest technology, an organization may quite often find itself in financial crisis if it does not have the right persons to manage its affairs. Thus human resource is a very valuable asset for the organization which aims to progress in all directions amidst heavy competition. Though the concept of Human resource Accounting is very old, organizations have-not made any effort to assign ay monetary value to this in their accounting practice till the recent past. The real efforts for viewing the human resource as an asset was started by behavioral scientist from 1960 onwards who tried to develop appropriate methodology and procedure for finding out the cost and value of the people in the organization. They attached the failure of conventional accounting practice to value the human resource of an organization along with material resources. Hence, human resources were identified as the value of production capacity of an organization, and the value of customer goodwill. There are two major reasons why human resource accounting has been receiving so much attention in the recent years.
a) There is genuine need for reliable and complete management of human resources.

b) Traditional framework of accounting is in the process to include a much broader set of measurement than was possible in the past.

c) People are the most important assets of an organization and yet the value of this asset does not appear in financial statements.

This information does not get included in management information systems. Conventional accounting of human resources consists of taking note of all expenses of human capital formation which does not seem either to be correct or meeting the actual needs. Human resource accounting, in simple terms, means accounting for people as the organizational resources. Human resource accounting is the process of identifying and measuring data about human resources and communicating this information to the interested parties. It is the measurement of the cost and value of people to the organization. It involves measuring costs incurred by private firms and public sector units to recruit, select, train and develop employees and judge their economic value to the organization.

Objectives of HR Accounting
The objective of HRA is not merely the recognition of the value of all resources used by the organisation, but it also includes the management of human resource which will ultimately enhance the quantity and quality of goods and services. The main objectives of HR Accounting system are as follows:

a) To furnish cost value information for making proper and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost effective organisational objectives.

b) To monitor effectively the use of human resources by the management.

c) To have an analysis of the human assets i.e. whether such assets are conserved, depleted or appreciated.

d) To aid in the development of management principles. and proper decision making for the future by classifying financial consequences of various practices.

e) In all, it facilitates valuation of human resources recording the valuation in the books of account and disclosure of the information in the financial statement.

f) It helps the organisation in decision making in the following areas: Direct Recruitment vs. promotion, transfer vs. retention, retrenchment vs. retention, impact on budgetary controls of human relations and organisational behaviour, decision on reallocation of plants closing down existing units and developing overseas subsidiaries etc.

Advantages of HR Accounting
Human Resource Planning anticipates not only the required kind and number of employees but also determines the action plan. The major benefits of HR accounting are:

a) It checks the corporate plan of the organisation. The corporate plan aiming for expansion, diversification, changes in technological growth etc. has to be worked out with the availability of human resources for such placements or key positions. If such manpower is not likely to be available, HR accounting suggests modification of the entire corporate plan.

b) It offsets uncertainty and change, as it enables the organisation to have the right person for the right job at the right time and place.

c) It provides scope for advancement and development of employees by effective training and development.

d) It helps individual employee to aspire for promotion and better benefits.
e) It aims to see that the human involvement in the organisation is not wasted and brings high returns to the organisation.

f) It helps to take steps to improve employee contribution in the form of increased productivity.

g) It provides different methods of testing to be used, interview techniques to be adopted in the selection process based on the level of skill, qualifications and experience of future human resources.

h) It can foresee the change in value, aptitude and attitude of human resources and accordingly change the techniques of interpersonal management

Limitations of HR Accounting
Human Resource Accounting is the term used to describe the accounting methods, system and techniques, which coupled with special knowledge and ability assist HR management in the valuation of personnel in financial terms. It is based on the assumption that there is great difference among the employees in their knowledge, ability and motivation in the same organization as well as across organizations. There are some who produce more, understand faster and show efficiency in training programmes as compared to others. HR accounting facilitates decision making about the personnel, either to keep or dispense with their services or to provide training accounting development and application in different industries and organizations has not fully grown. There are many limitations which make the management reluctant to introduce HR accounting in their organizations. Some of these limitations are given below:

a) There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human resources of an organization
b) If the period of existence of human resource is uncertain, valuing them under uncertainty in future would be unrealistic
c) There is a fear that HR accounting may dehumanize and manipulate employees.

For example an employee with a comparatively low value may feel discouraged and develop a complex which will affect his competency to work.

d) The much needed empirical evidence is yet to be found to support the hypothesis that HR accounting as a tool of the management facilitates better and effective management of human resources.

e) 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.

f) There is a constant fear of the opposition from the trade unions that placing a value on employees would make them claim rewards and compensation based on such valuation.

g) As human resources are not capable of being owned, retained and utilized, unlike the physical assets, there is a problem for the management to treat them as assets in the strict sense.

h) Inspite of its significance and necessity, tax laws do not recognize human beings as assets.

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