Impact of Human Resources Accounting on Employees ...

IJEI, Vol. 5, No. 2 (July-December, 2012) : 199-229© International Science Press

IMPACT OF HUMAN RESOURCES ACCOUNTING ONEMPLOYEES’ PERFORMANCE IN ORGANIZATION

HAMID SAREMIDepartment of Accounting, Quchan Branch, Islamic Azad University, Quchan, Iran,

(Email: [email protected])

NADER NAGHSHBANDIResearch Scholar, Department of Accounting,

Janardan Rai Nagar Rajasthan Vidyapeeth University, Udaipur Rajastan

In an age of technology and economics, human capital has important and axial role inthe organization and human resource accounting has a wide perception to key resourcesof organization i.e. human resources. Human resources accounting is new branch ofaccounting that has Short-lived and generally deals to a range of policies and measuresthat are related to various aspects of human resources and It gives importance to anorganization’s most important asset is its human resources and human resourcemanagement is the key to success in an organization and to achieve this importantmatter must review and evaluation of human resources data be with knowledge ofaccounting based on empirical studies and methods of measurement and reporting ofhuman resources accounting information. Undoubtedly human resource managementwithout information cannot be done and take decision and human resources accountingis practical way to inform the decision makers who are committed to harnessing humanresources,, human resources accounting with applying accounting principles in theorganization and is with conducting basic research on the extent of the of humanresources accounting information” effect of employees’ personal performance. Inhuman resource accounting analysis and criteria and valuation of cost and manpowervaluating is as the main resource in each Institute. Protection of human resources is aprocess that according to human resources accounting is for organization profitability.In fact, this type of accounting can be called as a major source in measurement andtrends of costs and human resources valuation in each institution. What is the economicvalue of such assets? What is the amount of expenditures for education and training ofprofessional individuals to value in asset account? What amount of funds spent shouldbe considered as lost opportunity cost?In this paper, according to the literature of human resource accounting we have studiedthe human resources matter and its objectives and topic of the importance of humanresource valuation on employee performance review and method of reporting of humanresources according to different models.Keywords: Human resources, human resources, accounting, human capital, humanresource management, valuation and cost of human resources, employees, performance,organization.

200 / IJEI : (5)2, 2012

INTRODUCTION

It is true that worldwide, knowledge has become the key determinant for Economicand business success, but the companies focus on ‘Return on Investment’ (RoI), withvery few concrete steps being taken to track ‘Return On Knowledge’. What are neededare measurement of abilities and their performance of all employees in a company, atevery level, to produce value from their knowledge and capability. “Human ResourceAccounting (HRA) is basically an information system that tells Management whatchanges are occurring over time to the human resources of the business i.e. theiremployees. HRA also involves accounting for investment in employees and theirreplacement costs, and also the economic value of people in an organization.

Human capital also provides expert services such as consulting, financial planningand assurance Services, which are valuable, and very much in demand. Manyorganizations are now realizing the bottom-line effect on retaining quality employees.Retaining quality performers quite simply adds to increased productivity and morale,while reducing the associated costs of turnover. Employee retention is one of theprimary measures of the health of the organization. If the organizations are losingcritical staff members, they can safely bet that other people in their departments arelooking as well. So the organization aim is to understand expectation of employees,their need accordingly change the organizational culture to improve retention rates.Now the employee need to more flexible than before.

Here human resources accounting is as effective tool in management of organizationacts as evaluator of human resources management behavior regarding employees’performance.

Human resources accounting, is more considerable by managers who show theirindifference towards keeping human resources. The managers who are unresponsiveto create job satisfaction and positive incentives on employees and do not think for jobsecurity, hope and a sense of loyalty, allegiant and creating opportunities foradvancement and human resource problems removal and provide causes for thedismissal or resignation of staff.

According to the statement of the American Accounting Association (AAA) humanresources accounting includes the employees’ evaluation process of an organizationand its assessment during the time. Accounting, human resources, included humanresource identification and its measurement process and also transferring thisinformation to concerned and interested groups in the year of 1970. Flamholtz hasprovided a same definition to (AAA) in year 1971 he described the human resourceaccounting as measurement and cost report and individuals ‘ value in organizationresources. In fact human resources accounting is application of concepts and methodsof accounting in human resources management area.

This branch of accounting is assessment and selection criteria, cost and valuatingof human resources as the main resource of each organization, each source has twoaspects:

1. Sources value,2. determing sources costs.

IMPACT OF HUMAN RESOURCES ACCOUNTING ON EMPLOYEES’ PERFORMANCE IN… / 201

There is no doubt that human resources should also be priced and displayed onthe balance sheet as part of corporate assets and depreciation of these resources becalculate and considered in specific method as in many countries depreciation of humanresources will be placed at acceptable tax costs category This in its turn increases theprofit. In today’s knowledge-based economy, human resources is one of the mostimportant resources that could have a significant role in the productivity organizationscan continue their survival f each organization? Success or failure of any organizationlargely depends on its employees. Those organizations can continue their survivalthat due to constant changes in today’s world and knowledge-based economy whereknowledge and human capital are considered the main sources of wealth generation.In this debate there are two definitions:

First, be aware of the importance of human resources and the played role thatthese resources can be organized in flexibility to adapt to environmental conditions.

Second, is to operate appropriate and useful managerial policies will be effectiveand efficient use of resources (kulatitlaka, Markes, 1988, p. 377).

The that view has been suggested recently, is that accounting for human resourcesis an organization that can be considered as modern criteria in economy area. Manyexperts believe that human resources are valuable assets and these assets should bemeasured. It seems in order to achieve the following objectives of human resourceaccounting should find quantitative and practical aspects:

1. To record the human economic value in the financial reports.2. To compute an organization’s investment in its human resources.3. To increase the human resource management efficiency and create the facilities

for employees evaluation policies such as training programs.4. To assess of human resources of an organization in this view that It has been

maintained or depleted or has developed.5. To calculate the value extant that human resources create in other physical

and financial resources of an organization.6. To identify the created non-operating profit and productivity caused by the

investment in human resources.Due to need of management to information for decision making, human resource

accounting (HRA) provides information that managers work better and moreefficiently use their human resources under provided as much as possible could makeuse of their holding human resources bitterly and usefully. Since up till now manydefinitions of human resource accounting has been presented that some of them aregiven below:

1. Human resource accounting is” the process of diagnosis and provideinformation about human resources to facilitate the in an organization’management

2. Human Resources accounting with information providing needed by managerscan help them to make use of their human resources more effectively. (Verma& Dewe, 2004, p. 46).

202 / IJEI : (5)2, 2012

3. Human Resources Accounting is a theoretical perception on the nature andvalue of individuals in organizations and economic units that with developmentof valid and reliable methods for measuring cost and value of individuals inorganizations trying to design and develop operational systems to implementthese methods and obtained information report to the users. (Hadizadeh,Mohamad Reza, 2003).

As it can been considered various definitions of experts in this field is presented,but they all are common in three basic principles:

• The Individuals are valuable resource of every organization.• Usefulness of manpower as a source of organization can be determined through

management practices.• For decision making in organizations, information on investment and value of

human resources, is useful.

Human Resource Accounting History

The early stages in HRA development, particularly from 1971-1977 as noted byFlamholtz, Bullen and Hua (2002, p. 949), was a period of rapid growth of interestin the field and involved a significant amount of academic research throughoutthe Western world and in Australia and Japan, with increasing attempts to applyHRA in business organizations. During this time, the American AccountingAssociation (1973) established committees on Human Resource Accounting in 1971-1972 and 1972-1973. These committees published reports on the development ofHRA, and the AAA’s involvement proved a catalyst for a stream of research duringthis period.

DEVELOPMENT ON HRA MEASUREMENT MODELS

The Research during the early stages also involved the continued development ofconcepts and models for measuring and accounting for human resource cost and value.According to Flamholtz’s model for measurement of original human resource costs(1973, 1999, p. 59), human resource costs may be explained in terms of the two majorcategories of acquisition costs and learning costs. Acquisition costs include the directcosts of recruitment, selection, hiring and placement, and the indirect costs of promotionor hiring from within the firm. Learning costs include the direct costs of formal trainingand orientation and on-the-job training. In a human resource accounting system, thesecosts are reported in asset accounts with future economic benefits rather than asexpenses.

Another HRA model is the Stochastic Rewards Valuation Model (SRVM), originallydeveloped by Flamholtz (1971) and further explained in Flamholtz (1985, 1999), focusedon HRA value rather than HRA cost. Flamholtz utilized both nonmonetary andmonetary measures in drawing upon both behavioral and economic variables. TheFlamholtz model proposes that an individual’s value to an organization is based onthe future services that are expected to be rendered to the organization in future rolesor service states, and views the movement of people among organizational roles over


time as a Markovian stochastic or probabilistic process with service rewards. The SRVMis a multi-step process that begins with defining the various service states ororganizational positions that an individual may occupy in the organization, and thendetermines the value of each state to the organization, the service state values whichcan be calculated either by using a number of methods such as the price-quantitymethod or the income method. Next the person’s expected tenure or service life in theorganization is calculated and the person’s mobility probability or the probability thata person will occupy each possible state at specified future times is derived fromarchival data. The model follows with discounting the expected future cash flows thatthe person generates in order to determine his or her present value. As Flamholtz(1999, pp 160-161) indicates, there is a dual aspect to an individual’s value—”expectedconditional value” and “expected realizable value.” The first, a person’s expectedconditional value, is the amount the organization could potentially realize from aperson’s services if that person maintains organizational membership during the periodof his or her productive service. The second, a person’s expected realizable value, isthe amount actually expected to be derived, taking into account the person’s likelihoodof turnover.

Continuing Developments in HRA Research and Applications

The earlier HRA studies emphasized the need for future research in the field, and anumber of Researchers continued or began work in the area. As noted in Sackmann,Flamholtz and Bullen (1989), Flamholtz, Bullen and Hua (2002), and Flamholtz, Kannan-Narasimhan and Bullen (2004), throughout the ensuing years many studies wereconducted in the area of HRA. Some of the most interesting research recognizedsignificance to organizations of the process HRA measures, as well as the measurementsthemselves.

EFFECTS OF THE PROCESS OF HRA MEASUREMENT IN DECISION-MAKING

As much as the measures themselves are relevant in managerial decisions, it isalso useful to Recognize that when managers go through the process of HRAmeasurement treating human Resources as capital assets, they are more likely tomake decisions that treat the company’s Employees as long-term investments ofthe company. Flamholtz (1979) describes the HRA Paradigm in terms of the“psycho-technical systems” (PTS) approach to organizational Measurement.According to the PTS approach, the two functions of measurement are: (1) processfunctions in the process of measurement and (2) numerical information from thenumbers themselves. Whereas one role of HRA is to provide numerical measures,an even more important role is the measurement process itself. The HRAmeasurement process as a dual function attempts to increase recognition thathuman capital is paramount to the organization’s short and long-term productivityand growth. When managers go through the process of measuring human resources,they are more likely to focus on the human side of the organization and are morelikely to consider human resources as valuable organizational resources who shouldbe managed as such.

204 / IJEI : (5)2, 2012

HRA MEASUREMENT

As noted earlier in the discussion of HRA model development, according to Flamholtz(1999, p. 160), the concept of human resource value is derived from general economicvalue theory, and like all resources people possess value because they are capable ofrendering future service. Thus as Flamholtz notes, an individual’s value to an organizationcan be defined as the present value of the future services the individual is expected toprovide for the period of time the individual is expected to remain in the organization.

Using the Stochastic Rewards Valuation Model, originally developed by Flamholtz(1971) for human resource valuation, and further explained in Flamholtz (1985, 1999),Flamholtz, Bullen and Hua (2003) showed a practical method for calculating ROI onmanagement development, and reported the incremental cash flows that anorganization will receive due to investment in management development. The articleconcluded that use of HRA as a tool to measure the value of management developmentenhances not only the value of human capital but also the value of managementaccounting. The authors utilized the HRA measure of expected realizable value, andfound that employees’ participation in a management development program increasedthe value of the individuals to the firm. In addition the authors noted (p. 40) that theHRA measures provided upper level management with an alternative accountingsystem to measure the cost and value of people to an organization. Thus HRArepresented both a paradigm and way of viewing human resource decisions, and theset of measures for quantifying the effects of human resource management strategiesupon the cost and value of people as organizational resources.

Davidove and Schroeder (1992) indicate that too many business leaders have nogenerally accepted definition or accounting procedure for tracking training investments,and note that a lower training investment is not automatically better for an overallreturn on investment. The authors suggest that although many business leaders stillview training as an overhead expense, with thorough ROI evaluations, trainingdepartments can convince business to view them as partners in creating the assetscrucial to organizational success.

IMPORTANCE OF HUMAN RESOURCE ACCOUNTING

Human Resource Accounting provides useful information to the management, financialanalysts and employees as stated below:

1. Human Resource Accounting helps the management in the Employment,locating and utilization of human resources.

2. It helps in deciding the transfers, promotion, training and retrenchment ofhuman resources.

3. It provides a basis for planning of physical assets vis-à-vis human resources.4. It assists in evaluating the expenditure incurred for imparting further education

and training in employees in terms of the benefits derived by the firm.5. It helps to identify the causes of high labor turnover at various levels and

taking preventive measures to contain it.


6. It helps in locating the real cause for low return on investment, like improperor under-utilization of physical assets or human resource or both.

7. It helps in understanding and assessing the inner strength of an organizationand helps the management to steer the company well through most adverseand unfavorable circumstances.

8. It provides valuable information for persons interested in making long terminvestment in the firm.

9. It helps employees in improving their performance and bargaining power. Itmakes each of them to understand his contribution towards the betterment ofthe firm vis-à-vis the expenditure incurred by the firm on him.

OBJECTIVES OF HUNAN RESOURCES ACCOUNTING

The main objective of human resource accounting is to facilitate the management toget information on the cost and value of human resources. Human resources accountingbrings to light the quantum of human resources and indicates the right control ofconservation, depletion and appreciation of it .in the right perspective. It providesdata to the interested persons about the cost of human resources and correspondinglycomparing it with the benefit obtained out of its utilization.

The objective of HRA is not merely the recognition of the value of all resourcesused by the organization, but also includes the management of human resource whichwill enhance the quantity and quality of goods and services. The basic objective ofHRA is to facilitate the efficiency of human resource. It is basically adopted to treathuman resources as assets, to generate human data about human resources, to assignvalue to human resources and to present human assets in the balance sheet.

LIMITATIONS OF HUMAN RESOURCE ACCOUNTING

Human Resource Accounting is the term used to describe the accounting methods,system and techniques, which coupled with special knowledge and ability, assistpersonnel management in the valuation of personnel in financial terms. It presumesthat there is great difference among the personnel in their knowledge, ability andmotivation in the same organization as well as from organization to organization. Itmeans that some become liability too instead of being human assets. HRA facilitatesdecision making about the personnel i.e., either to keep or dispense with their servicesor to provide training. There are many limitations which make the managementreluctant to introduce HRA. Some of the attributes are:

(i) There is no proper clear-cut and specific procedure or guidelines for findingcost and value of human resources of an organization. The systems which arebeing adopted have certain drawbacks.

(ii) The period of existence of human resource is uncertain and hence valuing themunder uncertainty in future seems to be unrealistic.

(iii) There is a fear that HRA may dehumanize and manipulate employees.(iv) 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.

206 / IJEI : (5)2, 2012

(v) The much needed empirical evidence is yet to be found to support thehypothesis that HRA as a tool of the management facilitates better and effectivemanagement of human resources.

Though HRA has had its inception in the 1960s, it is an evolving concept, which isstill at nascent stage. Nonetheless, its relevance to organizations is immensely gainingground. Armed with various measures and figures, managers and firms can focus ondecisions regarding investments in areas of intellectual capital that will have the greatestpayoff for the firm.

Internally and externally, HRA would provide information to investors and otherstaff, of the value of human resources, the returns on investments in training anddevelopment and also the link between HR interventions and financial results.

As a way to assess human capital, HRA represents a new way of thinkingstrategically. Boudreau has noted that measures of HRA and benefits can serve avariety of purposes. It acts as a catalyst for change. It tends to enhance the credibilityof the HR functioning for it was not long back that this function was looked downdisdainfully as only a department to organize picnics for its staff. HRA also helpspersuade others to support investment in HR and also to improve the quality of HRdecisions.

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

BENEFITS OF HRA

The major advantage of the most researchers have pointed to it is the use of humanresource accounting information for management decision making. Stephenson andFranklin (1982) introduced the primary reasons for establishing a human resourcesaccounting system to provide relevant and more complete financial information toimprove and rectify of decision making of a company. They also counted t he followingbenefits and objectives accounting:

Human resources accounting indicates impact of human resources on firmperformance.

Human resources accounting should help to managers of company in evaluatingvarious strategies of company.

Human Resources accounting can develop capital budgeting system to improvethe quality of investment returns.

Human Accounting, resource can enable managers to make better use of scarceresources (Hussi & Ahonen, 2002).

1. The adoption of the system of HRA discloses the value of human resources.This helps in proper interpretation of Return on Capital Employed. Suchinformation would give a long term perspective of the business performancewhich would be more reliable than the Return on Capital Employed under theconventional system of accounting.


2. The maintenance of detailed record relating to internal human resources(i.e. employees) improves managerial decision-making specially institutionslike direct recruitment versus promotions; transfer versus retentionretrenchment or relieving versus retention; utility of cost reduction programsin view of its possible impact on human relations and impact of budgetarycontrol on human relations and organizational behavior. Thus, the use of HRAwill definitely improve the quality of management.

3. The adoption of the system of HRA serves social purposes by identification ofhuman resources as a valuable asset which will help prevention of misuse andunder use due to thoughtless or rather reckless transfers, demotions, layoffsand day-to-day maltreatment by supervisors and other superiors in theadministrative hierarchy; efficient allocation of resources in the economy;efficiency in the use of human resources; and proper understanding of theevil effects of avoidable labor unrest/disputes on the quality of internal humanresources.

4. The system of HRA would no doubt, pave the way for increasinglyproductivity of human resources, because, the fact that a monetary value isattached to human resources and that human talents devotion and skillconsidered as valuable assets and allotted a place in the financial statementsof the organization, would boost the morale, loyalty and initiative of theemployees, creating in their mind a sense of belonging towards theorganization and would act as a great incentive, giving rise to increasedproductivity.

HRA SCENARIO

It is true that worldwide, knowledge has become the key determinant for economicand business success, but Indian companies focus on ‘Return on Investment’ (RoI),with very few concrete steps being taken to track ‘Return on Knowledge’.

What is needed is measurement of abilities of all employees in a company, atevery level, to produce value from their knowledge and capability. “HumanResource Accounting (HRA) is basically an information system that tellsmanagement what changes are occurring over time to the human resources of thebusiness. HRA also involves accounting for investment in people and theirreplacement costs, and also the economic value of people in an organization,” saysP K Gupta, the director of strategic development-intercontinental operations, ofLegato Systems India. The current accounting system is not able to provide theactual value of employee capabilities and knowledge. This indirectly affects futureinvestments of a company, as each year the cost on human resource developmentand recruitment increases.

Experts point out that the information generated by HRA systems can be put touse for taking a variety of managerial decisions like recruitment planning, turnoveranalysis, personnel advancement analysis and capital budgeting, which can helpcompanies save a lot of trouble in the future.

208 / IJEI : (5)2, 2012

INFORMATION MANAGEMENT IN HRA

Like any accounting exercise, the HRA too depends heavily on the availability ofrelevant and accurate information. HRA is essentially a tool to facilitate better planningand decision making based on the information regarding actual HR costs andorganizational returns. The kind of data that needs to be managed systematicallydepends upon the purpose for which the HRA is being used by an organization.

For example, if the purpose is to control the personnel costs, a system of standardcosts for personnel recruitment, selection and training has to be developed. It helps inanalyzing projected and actual costs of manpower and thereby, in taking remedialaction, wherever necessary. Information on turnover costs generates awarenessregarding the actual cost of turnover and highlights the need for efforts by themanagement towards retention of manpower.

Accountability in the management process is often enhanced when informationinvolving an evaluation of managerial effectiveness is generated.

Finally, information on the intangibles like intellectual capital/human capitalbecomes necessary to measure the true worth of the organization. This information,though unaudited, needs to be communicated to the board and the stockholders(Gebaure, M., 2003).

MEASUREMENT IN HRA

The biggest challenge in HRA is that of assigning monetary values to differentdimensions of HR costs, investments and the worth of employees. The two mainapproaches usually employed for this are:

1. The cost approach which involves methods based on the costs incurred by thecompany, with regard to an employee.

2. The economic value approach which includes methods based on the economicvalue of the human resources and their contribution to the company’s gains.This approach looks at human resources as assets and tries to identify thestream of benefits flowing from the asset.

ECONOMIC VALUE APPROACH

The value of an object, in economic terms, is the present value of the services that it isexpected to render in future. Similarly, the economic value of human resources is thepresent worth of the services that they are likely to render in future. This may be thevalue of individuals, groups or the total human organization. The methods forcalculating the economic value of individuals may be classified into monetary andnon-monetary methods.

MONETARY MEASURES FOR ASSESSING INDIVIDUAL VALUE

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 servicesthat 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 servicesprovided by him is likely to change. The present cumulative value of all the possibleservices that may be rendered by him during his/her association with the organizationis the value of the individual.

Flamholtz’s Stochastic Rewards Valuation Model

The movement or progress of people through organizational ‘states’ or a role is calleda stochastic process. The Stochastic Rewards Model is a direct way of measuring aperson’s expected conditional value and expected realizable value. It is based on theassumption that an individual generates value as he occupies and moves alongorganizational roles, and renders service to the organization. It presupposes that aperson will move from one state in the organization, to another, during a specifiedperiod of time.

NON- MONETARY METHODS FOR DETERMINING VALUE

The non-monetary methods for assessing the economic value of human resources alsomeasure the Human Resource but not in dollar or money terms. Rather they rely onvarious indices or ratings and rankings. These methods may be used as surrogates ofmonetary methods and also have a predictive value. The non-monetary methods mayrefer to a simple inventory of skills and capabilities of people within an organizationor to the application of some behavioral measurement technique to assess the benefitsgained 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 arescores assigned to characteristics possessed by the individual. Thesecharacteristics include skills, judgment, knowledge, interpersonal skills,intelligence etc. Ranking is an ordinal form of rating in which the superiorsrank their subordinates on one or more dimensions, mentioned above.

3. Assessment of potential determines a person’s capacity for promotion anddevelopment. It usually employs a trait approach in which the traits essentialfor a position are identified. The extent to which the person possesses thesetraits is then assessed.

4. Attitude measurements are used to assess employees’ attitudes towards theirjob, pay, working conditions, etc., in order to determine their job satisfactionand dissatisfaction.

The Relationship between Human Capital and Employees Performance

The human capital focuses two main components which is individuals andorganizations. This concept have further been described by Garavan et al., (2001) thathuman capitals have four key attributes as follows: (1) flexibility and adaptability (2)enhancement of individual competencies (3) the development of organizational

210 / IJEI : (5)2, 2012

competencies and (4) individual employability. It shows that these attributes in turngenerate add values to individual and organizational outcomes. There are variousfindings that incorporate human capital with higher performance and sustainablecompetitive advantage (Noudhaug, 1998); higher organizational commitment(Iles et al., 1990); and enhanced organizational retention (Robertson et al., 1991).

Some recent literature shows the importance of training. In any case, it is fitting topoint out that the workforce’s lack of training is related to low competitiveness (Green,1993). In turn, a greater human capital stock is associated with greater productivityand higher salaries (Mincer, 1997). Likewise, training is linked to the longevity ofcompanies (Bates, 1990) and greater tendency to business and economic growth(Goetz & Hu, 1996). In addition, Doucouliagos (1997) has noted human capital as asource not only to motivate workers and boost up their commitment but also to createexpenditure in R&D and eventually pave a way for the generation of new knowledgefor the economy and society in general. Also, for small businesses it is a valuable asset,which is positively associated with business performance. Finally, investment intraining is desirable form both a personal and social perspective.

From the organizational level, human capital plays an important role in the strategicplanning on how to create competitive advantages. Following the work of Snell et al.,(1999) it stated that a firm’s human capital has two dimensions which are value anduniqueness. Firm indicates that resources are valuable when they allow improvingeffectiveness, capitalizing on opportunities and neutralizing threats. In the context ofeffective management, value focuses on increasing profits in comparison with theassociated costs. In this sense, firm’s human capital can add value if it contributes tolower costs, provide increased performances.

Another study by Seleim, Ashour, and Bontis (2007) analyzed on the relationshipbetween human capital and organizational performance of software companies. Theyfound that the human capital indicators had a positive association on organizationalperformances. These indicators such as training attended and team-work practices,tended to result in superstar performers where more productivity could be translatedto organizational performances. This was also supported by Dooley (2000) who founda significant positive correlation between the quality of developers and volume ofmarket shares. Based on the above arguments we can conclude that human capitalindicators enhanced the firm performance directly or indirectly.

A study by Bontis and Fitzenz (2002) found that the consequences of humancapital management and they established the relationship between human capitalmanagement and economic and business outcomes. In this study, a total of 25 firmsin the financial services companies were selected. The study measured human capitaleffectiveness with four metrics; revenue factor, expense factor, income factor andHC ROI. The fundamental aspects of any organization are to generate more revenueand income per employee. Human capital has a direct impact on the intellectualcapital assets that will yield higher financial results per employee. The developmentof human capital is positively influenced by the educational level of employees andtheir overall satisfaction. Therefore, development human capital has a direct impacton ROI of firms.


A causal model using a set of cross-sectional data developed by Selvarajan et al.(2007) indicates that human capital enhancement paves a way for greater innovativenessand this in turn offers positive implications on firm performance. In the meantime,firm performance and human capital could also be viewed in the context of highperformance work systems (Hsu et al., 2007). It is argued that the formation andemphasis on the human capital enhancement will result in high performance or ratherhigh performance work systems.

Admittedly, human capital development and enhancement in organizations tendto create a significant contribution on organizational competencies and this in turnbecomes a great boost for further enhancing innovativeness and the current literatureto a large extent supports the fact that firm performance is positively impacted by thepresence of human capital practices (Noe et al., 2003; Youndt et al., 2004). Some evenendorsed that human capital development is a prerequisite to good financialperformance (Delaney & Huselid, 1996) and in addition, the importance oforganizational human capital with regard to firm performance was further supportedby Hsu et al. (2007). In addition, evidence shows that the relevance of human capital tofirm performance has also become prevalent among the technology-based newventures, and it seems that the use of human capital tool (emphasizing quality ofemployees) per say in small technology based new ventures tends to have a greatimpact on the firms’ success (Shrader & Siegel, 2007).

In the meantime, human capital enhancement can also be viewed in the context oftop management team (TMT). Heterogeneity or sometimes is called diversity in TMTwill tend to lead to greater performance because the argument is heterogeneity promotesvarious characteristics to be absorbed into the workforce team; this includes people ofdifferent age groups, functional backgrounds, education backgrounds, tenure and gender.These characteristics have a positive impact on firm performance as argued under theupper echelon theory (Hambrick & Mason, 1984). Studies reveal that heterogeneitycultivates greater knowledge, creativity and innovation among the team members(Watson et al., 1993; Maimunah & Lawrence, 2008). Heterogeneity is positively linkedto better problem solving and offering creative solutions (Michel & Hambrick, 1992).

Hence, diversity is positively related to performance. Even in the context of anorganization, the implementation of certain management approaches or philosophiesalso deals with the infusion of human capital (e.g. quality circles, team of employee’sexperts) especially when faced with problems (Kanji, 1997).

HUMAN RESOURCES ACCOUNTING APPLICATIONSHuman Resources accounting can be useful in the evaluation process in an organizationbecause it makes possible to manage the monetary and nonmonetary criteriameasurement and assists to the management in appropriate and timely decisionsmaking process.

Make it possible the Implementation of accounting systems reward also humanresource accounting including salary and fringe benefits, and possible improvementsin the organizational level in order to appreciate of previous performance and motivateemployees and to strengthen employee performance improvement. (Organ, 1998).

212 / IJEI : (5)2, 2012

Human Resources accounting allows management to adopt appropriate decisionsabout rewards with regard to the employees’ value. On other hand human resourceaccounting can be used in performance and efficiency evaluation in standard costingof training, employment and other expenses relating to manpower. These standardcosts compares to real costs of employment and develop employees and existingdeviations be studied and analyzed ( Groejer & Johanson, 1997) .

Also Gebauer in 2003 defined the human resources applications as follows:Demonstrate critical thinking skills to manage that employees in organizations

are of value and Personnel decisions making should be taken with considering thevalue and cost of human resources and providing necessary information for effectiveand efficient administration of human resources by management. Benitez also in 1999divided human resources accounting applications into two Micro and macro levels, asfollows:

Macro Level

1. Changing patterns of production, work organization and employment patterns.2. Changes in regulations and rules of government, companies and individuals.

Micro Level

1. To improve human resources management.2. To overcome the problems resulting from the measurement of intangible assets3. To overcome the problems in providing sufficient information for investors in

conventional financial statements.4. Considering employees as assets for the separation of social responsibilities

between public and private sectors.5. For shaping the company and improve its image.6. For Preserve competent workforce.7 For employment of future employees.

Christine in 1998 said that: Human Resources Accounting, typically ismeasurement development and human capital management objective, and is andapproach to improve assessment of accounting procedures and human resourcesmanagement.

Verma Dewe. In 2004 added that human resource accounting specify the functionof human resources in achieving organizational goals ,their strategies and overallorganizational productivity with providing information regarding human resourcesevaluation criteria such as absenteeism rate learning, job satisfaction, rate of return onhuman capital, organizational commitment, effectiveness and costs of learning andtraining and value added of each employees. Thus it provides areas for improvementand his promotion.

To study of human resource accounting method on human resources performanceHuman Resources accounting in fact is, the application of accounting concepts and


methods is in the range of human resource management. This accounting ismeasurement and selection criteria of expense and manpower valuation as the mainresources of each Institute. These costs other expenses are consist of two parts currentand of capital expenses.

Another interpretation could include such costs as consumer expenses and thecosts of lost that include of two elements that are direct and indirect costs opportunities.

Human resource costs consist of both initial cost and replacement cost will thatare as follows:

Initial Costs

Initial cost of human resources is all funds that are used to supply manpower educationand training include the costs of manpower selection, recruitment, deployment,orientation to job training during service retraining and applicable and professionaltraining in order comprehend required skills.

This definition is almost used in other resources because the prime cost ofequipment and manufacturers are those amounts that are spent for this resourcedetermination.

Replacement Costs

Are expenses that bearded for replacement of personnel that are working in theinstitution or enterprise and are divided in two parts as follows?

1. Replacement and designation or occupational costs.2. Personal expenses.

Replacement and Designation or Occupational Costs

The cost that must be bear to replace the person who has occupied an organizationalpost with a person who can provides similar service in this organizational positionand such expenses itself consists of three parts (ensuring costs, education or trainingcosts, costs of resignation).

Costs of Resignation

They are amounts that are paid on resignation of each or any number of personsemployed by the organization. These costs include: Bonuses or pay the cost ofresignation, cost difference before resignation, cost of unoccupied organizational post.We should not forget that the bonus cost or resignation remuneration is in fact theredemption price of service duration and is difference costs of before the employeeresignation due to a decrease in productivity of employee before resignation, becauseefficiency of each employee before resignation usually is reduced. Cost of unoccupiedOrganizational post is indirect cost that is affected from reduced efficiency that is dueto the posts which remain vacant (Raisi, 1381). The human resources economical valuelike economical value of all resources depends to employer capacity to use the potentialof these forces. Specifically, the economic value of human resources is of service presentvalue that they are expected in future.

214 / IJEI : (5)2, 2012

HUMAN RESOURCE ACCOUNTING METHODS FOR HUMAN RESOURCESVALUE MEASUREMENT

Human Resource Accounting can be studied in two methods:1. Human Resources Costing: A Human Resources accounting system at first need

to identify the costs occurred associated with manpower that should beseparated from other costs of business. Methods and techniques used shoulddistinguish between capital and current costs. Human resources costing consistof the following two parts:1. Initial costs: is all funds that spend to meet the education and preserve for

manpower includes the work force selection , employment ,settlementdeployment and training during service, retraining and applicable trainingand specialty for skill determination.

2. Replacement costs: the costs of replacing employees who are currentlyengaged in the organization; they include:(i) Post Replacement or occupational costs: these are cost that are for

individual replacement in an organization or with the person whocan provide similar services that includes employment, education,training and resignation. The resignation costs are consists ofresignation remuneration costs, unoccupied post and difference beforeresignation.

(ii) Other personnel expenses include rewards (cash and non cash),Facilities (tools, furniture and equipment necessary for the welfare ofemployees), Health and cleanliness costs, cost related to consultationand conversation, wages and salaries and other payments such asinsurance payments.

HUMAN RESOURCES VALUATING

Human Resources Accounting needs to valuation, more than costing. The concept ofhuman resource based on theory of value in the general economy. Considering thatthe human being is capable of further potential benefits, Can define human valuessuch other sources as the present value of expected future service. Therefore individual’svalue is present value of a series of service that expected the employees creates duringhis service in an organization. A group rejected this theory and believes that human isbeyond evaluation and in fact is unevaluated.

According to the researchers to measure theory, human resources, there are twobasic steps, this means that at first we should specify the concept of human resourcesin term of non-monetary or qualitative so that can provide it in balance sheet oforganization in money expression.

HUMAN RESOURCES MEASUREMENT MODELS

In 1970' decade some researchers suggest some models about human resourceaccounting evaluation in order to promote human resources practical measurement.


In 1971, Flamholtz suggested model that was considered employees’ replacement indifferent positions of an employee organization. He calculated the resulting serviceby an employee in a given time period with help of this model. On bias of the occupyingprobability of each parts organization for an employee, the expected service levels isobtained as follows:

1

( ) ( )n

i ii

E S S P S�

��In this model Si represents the amount of can be expected to receive services from

an employee who is taking a certain position. Monetary value of these services can befound by multiplying the service part in expected service level or can consider itequivalent to a profit amount that is expected to be achieved from employee service(Flamholtz 1971). To determine changes in the participation rate of employees in theoffice of the enterprise uses the Markov process. In the same year sehwartz and levassigned the economic value to an employee in form of prsent value of employee’sincome during of its useful life and their models were adjusted for the probability ofan employee’s death.Thier model is as follows:

� �*

* ( 1)(1 )

T ti

r r t rt r i r

IE V D t

r ��

� ��

In this model:

E (Vr*) = Individual human capital with r years life

I (t) = Employee’s income before retirementr = Discount rate (special for employee)T = Retirement age.Dr (t) = Conditional probability for a person with r year life who will die in the

year of t.I* (t) = f [I0 (t)], t=r, t.

In 1973, Morse studied the two previous models and combines together.He has accepted that Flamholtz tried to determine organization’s human assetsvalue by using net present value of services provided by employees. But Lew,schwatrz had tried to measure else. In the second model Human capital theresidual income from employment of an individual is estimated by using thepresent value of organization. Therefore a resource obtained of any increase in humancapital is focused on person directly and indirectly in organization where an employeeworks.

Therefore Morse has developed a more compound model it is as follows:

1 1

( ) ( ) ( )(1 ) (1 ) (1 )

N NT T T

t r t r t rr r r

i i

Gi t X t Ei tA dt dt dt

r r r� � ��

� � ��

216 / IJEI : (5)2, 2012

That in above model:A = Human assets value for an organization.N = The number of indivduals who are currently employed by the

organization.t = present time.

T = the maximum period that takes time when an employed person, deserthis organizations

Gi (t) = Gross value of services provided by it employee to the organization atthe time of the t

Eli(t) = All direct and indirect compensation paid to ith employee at time of t.X(T) = Surplus-value services to all people on the value of each of individuals’

services when they work together in time of t.r = money time value.

Lau & Jaggi developed a Markov practical model in 1974 as follows:

1

[ ] [ ]. [ ] [ ]n n

n

TV N r T V�

�

� �I.e. In this model:

[TV] = Vector sum of the economical values in each job category.[N] = Vector number of employees in each occupational category at time zeron = Number of time periods.r = discount rate percentage for each period.[T]n = Transfer probality matrix of (possibly job promotion to higher levels)

during the time of n period[V] = vector of expected economic value in each job category.To use documents and evidences of personnel affairs in organization the promotion

possibility and compensation of organization n for each employee in a given year inthe following matrix is calculated and the tabloid.

End of service period

Beginning of service Job category 1 2 3 4period 1 0.4 0.4 0.1 0.1

2 0 0.5 0.4 0.13 0 0 0.8 0.24 0 0 0 0

According to this matrix, there are 0.4 probabilities for employees who working infirst job category to remain in the same job and there is 0.4 possibilities that they areprompted to second job category and there is 0.1 of probability they leave theorganization. (4th Job category is related to give up the organization service) the total


of probabilities in each level of this matrix is equal to 1,Jaggi& Lau, 1974 providednumerical examples in a case. The value of human resources in each Job category (perthousand Rails) is determined as follows:

[V1, V2, V3, V4] = [1000, 2000, 3000, 0]The number of employees in each job category is:[N1, N2, N3, N4] = [100, 100, 100]Probability matrix [T] is as follows:

0.4 0.1 0.1 0.10.0 0.5 0.4 0.10.0 0.0 0.8 0.20.0 0.0 0.0 1.0

T �

The expected economic value of the 100 employees in the occupational categoryin a time period (say first year) is consisting of:

100 x (0.4 x 1000 + 0.4 x 2000 +0.1 x 3000) = 150000 Rls.Using matrix operations, the expected values for each job category is calculated as

follows:

100 0.4 0.4 0.1 0.1 100 150000100 0 0.5 0.4 0.1 2000 220000100 0 0 0.8 0.2 3000 240000

0 0 0 0 1 0 0

� � �

If the probability matrix for the second year is as follows:

2

0.16 0.36 0.28 0.20 0.25 0.52 0.23

[ ]0 0 0.64 0.360 0 0 1

T

Therefore, the expected economic value to the employees of 1st job category in thesecond year includes:

10×(10000+0/36×0002 +0/28×3) And expected values for each of the levels in the second years:

100 0.16 0.36 0.28 0.2 1000 172000100 0 0.25 0.52 0.23 2000 206000100 0 0 0.64 0.36 3000 192000

0 0 0 0 1 0 0

� � �

218 / IJEI : (5)2, 2012

The total value of each job category for each two-year period (first and secondyear) is as follows:

150000 172000 322000220000 206000 426000240000 192000 432000

� �

The calculated value is not greatly distorted even assuming a period longer than40 years, the economic value of all employees has been calculated using computers atzero time (based on a 40-year period) is equal to 3.983 million rials.

A few years later, Ogan (1976) developed a generalized model into the form below.

1 1

1.

(1 )

n L t

kj qj K

K Vr K

��

� �

��

i.e.:

k = Total adjusted net present values of human resources in a professionalservices organization

VP = certain equivalent net Benefits

L = the estimated useful life of the employee to the organizationj = 1� 2 � 000 � n � It employee jr = risk-free discount rateIn this model has been tried to calculate total benefits produced by employees

after deducting the employment expenses also in this model the certainty factor l basedon continuity of employment and employee survival probability of employment isused. It seems that the application and subsequent development of such models islimited. Practical applicable models are still largely depends on the availability ofneeded basic information. Pioneered confess the use of such models for HRA using toemployee groups and not individually and acknowledge The user organizations thatsuch. (Which have invested heavily in human resources) are more valuable andapplicable.

Criteria for Measuring Human Capital• Financial criteria such as sales and financial performanceCriteria for production efficiency, services produced customer service, numbersof errors, customer satisfaction, and quality of service.• Criteria for delay, absence

According to research in the field of human resource valuation was carried out inEngland In 2004, the following criteria were considered as criteria in more than 50percent of organizations used for the valuation of human resources.


Possible measurements Human capital activities

Cost, time, quantity, quality, compliance with the strategic criteria Using the new forceReasons for turnover, turnover rate Dismissal

Payment levels, differences, justice evaluation, customer satisfaction, Reward/compensationemployee satisfaction for service

Measuring the level of competencies, skills, competencies and the Competencies/Traininginvestment in education

Age, promotion rates, participation in knowledge management Diagram of humanactivities, diversity, leadership, organizational commitment resources

Per capita income per person, per person operating expenses, Productivity criteriareal value added per person

THE ROLE OF HUMAN RESOURCE ACCOUNTING IN ORGANIZATIONS

With considering to increasing importance of human capital in the entire economy,there is deep understanding of the role of human resource accounting in organizations.The first and important role of human resources accountants in modern organizationsis to help to managers in role of human force counselors. In not long time personnelexpertise in the organizations were responsible for matters such as recruitment, training,promotion, salary and wages planning, management of employee relations. Thetraditional role in the evolutionary process was quickly transformed into a set ofconceptual and strategic responsibility became widespread. One of the apparent rolesof human resource accounting is to provide counsel to management on various issuesthat there is in human resources. It can advise and counsel on how to create a corporateculture for efficient use of human resources or to occur for answers to many questionsabout human resource management.

Questions Such as: 1. Whether the organization should have people in the low skill levels hire

from outside the organization and then gradually promote them up to highlevels?

2. Whether the organization should eliminate the employees during the time offacing financial crisis or keep them as protection of their human assets?

3. How much organizations need to invest in order to develop and improvehuman resources?

Successful companies such as Google and Microsoft’s are allowed tremendousvalue for accumulated, experienced and knowledge human resources accountants,executives and consultants.

The most of these successful companies, senior human resources accountants playan important role in the line management decisions and are responsible for humanresource assessment and determine a position of any one in the business macrostrategies of organizations. Human resource accounting can be a constructive changefor organizations that already have deal with traditional practices and are now haveprograms for their development.

220 / IJEI : (5)2, 2012

But how can human resource accounting be effective in management decisionsabout cost and people value as resources? With an example regarding employees’elimination can find an answer to this question.

Many companies that are faced with economic recession began to dismissal anddischarge of their employees that its immediate result is reduction in payroll costsand improve the company’s net profit. The strategy, of dismissal and discharge ofemployees though have benefits in the short term but also has hidden costs thatcannot be measured by common and traditional accounting, particularly, thence thatsome discharged employees may be employed in other and even competingcompanies and when the company expanded again, cannot again return them totheir previous work.

As a result, companies need to invest in training new people that require thehidden replacement cost is in this regard that may be incurred in the future. Inmeanwhile the removal and dismissal of employees has cognitive and motivationaleffects. Although some employees may work more seriously because of the fear ofunemployment and some others react to support their jobs and positions. However,the important result is that layoffs and dismissals may be causing that employeesfeel their company use them and so employers need to protect of themselves againstemployers.

One of others role of human resources accounting is to asset to top managementof organization for recognizing of their business decisions application. Humanresource accounting is the approach to analyze the results of decisions (Such asdismissal and dismissal) on human organization and explanation the results tomanagement and hidden costs due to various and important decisions commercialmatters. Another key aspect of human resource accounting is using it to measure thecost and value of human resources. HR professionals and accountants can measurethe cost of dismissal and discharge (Estimated replacement cost due to replace thelost work force).

The key issue is that the company should not adopt a policy of removal anddeportation rather, management must consider the costs and benefits of such decisions.Thus one of the roles of human resource accounting is to prepare and provide numericinformation as one of data for management decisions making.

Another impact of human resource accounting measurement is to control anddetermine the costs and value of people in views of human resources. In the traditionalmethod, people in organizations are considered as cost. In common accounting allinvestments that are essential for selection, choice, training and salaries and benefits isconsidered as cost to determine the net profit of enterprise. While most of theseexpenditures determine the investments in assets creation that generate future valueto the organization. Consciously or unconsciously management considers employeesexpenditures as cost in the organization.

Therefore one of the functions of human resource accounting is that to showmanagement the right method of dealing with such costs. (Brumment, 1969).


As you can see in Figure 1 for three human resources accounting determine threemain tasks of for human resources specialists, accountants, Provides framework tofacilitate decision making about human force, and compute Information required forcost people value as assets to the organization and cause for the motivation of linemanagement with considering the perspective of human resource management indecisions making about the organization’ people. Specific applications of humanresources accounting:

So far we discussed the article about the wide application of human resourceaccounting. In this section we will try to review some specific applications as a modelfor human resource management process pattern. This pattern which is depicted indiagram-2 is a framework for analyzing issues and problems of management from theperspective of human resources accounting, based on the general theory ofsystems. This pattern indicates human resource management tasks that can berespondent through human resources accountants by using the needed basicinformation. (Dawson, 1994).

Figure 2 shows that human resource management is a system is designed for dataconversion (HR) to output data (Human Services). Data are humans, individuals,groups and as total are human organization. To convert the t data to output in anysystem is needed to process that in this system process involves the capture, recoveryand growth, allocation, maintenance, operation, evaluation and reward of people undermanagement systems.

The efficiency of this system is the same service is provided by individuals andgroups and these are services that determine people value in an organization. Thispattern suggests that the ultimate goal of human resource management, Enhancecorporate value through the transfer of raw data into valuable output for human. Froma management perspective, the first role of human resources accounting is to provide

Figure 1: The Role of Human Resource Accounting

222 / IJEI : (5)2, 2012

necessary information to attract, develop and progress, allocation, maintenance,operation, troubleshooting, and reward the value of resources. This statement meanshuman resources accounting’ professionals, required different data for the transferprocess.

Figure 2: Input-Output Management System Model

METHODS OF VALUATION OF HUMAN ASSETS

There are a number of methods suggested for the valuation of human assets. Many ofthese methods are based on the valuation of physical and financial assets while otherstake into account human consideration. Major methods of valuation of human assertsare historical cost, replacement cost, standard cost present value of future earningsand expected realizable value.

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

(a) Cost Based Approaches

(i) Historical Cost(ii) Replacement Cost(iii) Opportunity Cost(iv) Standard Cost


(b) Monetary Value Based Approaches

(i) The Lev and Schwar(ii) The Eric Flamholtz Model(iii) Morse Model

(c) Non-monetary Value-based Approaches

(i) Likert Model(ii) The Flamholtz Model(iii) Ogan Model

Cost Based Approaches

(i) Historical Cost Approach

Brumnet, Flamholtz and Pyle have developed this method. It is on the basis of actualcost incurred on human resources. Such a cost may be of two types- acquisition costand learning cost.

Acquisition cost is the expense incurred on recruitment, selection; entire cost istaken into consideration including those who are not selected.

Learning cost involves expenses incurred on training and development. Thismethod is very simple in its application but it does not reflect the true value of humanassets. For example, an experienced employee may not require much training andtherefore, his value may appear to be low though his real value is much more thanwhat is suggested by historical cost method.

Under this approach actual cost incurred towards recruitment, hiring, trainingand developing human resources of the organization are capitalized and amortizedover the future expected useful life of the human resources. Certain part of costs willbe written off in proportion to the income of the future years which those humanresources will provide service.

When these human assets are prematurely liquidated, the amount not written offis charged to income of the year in which such liquidation takes place.

When the useful life of the human resource is considered to be longer than originallyexpected, revisions are to be effected in the amortization schedule. The historical costof human resource is almost similar to the book value of the other physical assets. Theadditional costs incurred in training and developing is capitalized and is amortizedover the remaining working life of the employee. The unexpired value is investmentin human assets.

(ii) Replacement Cost

Rensis Likert & Eric G.Flamholtz propounded it. This is a measure of cost to replace afirm s existing human resources. Human Resources are to be valued on the assumptionthat a new similar organization has to be created from scratch and the cost to the firmis calculated if the existing resources were required to be replaced with other persons

224 / IJEI : (5)2, 2012

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.

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

Replacement cost is much better indicator of value of human assets though it maypresent certain operational problems. For example, true replacement of a person maynot be found easily with whose cost the valuation is done.

This approach is more realistic as it incorporates the current value of theorganization’s human assets in its financial statements prepared at the end of the year.Costs incurred by an organization in replacing a terminated employee are defined asreplacement cost like the following:

(a) Communication of job ability(b) Pre-employment administrative functions(c) Interviews(d) Testing(e) Staff Meetings(f) Travel Cost(g) Employment Medical Examination.

Opportunity Cost Method

Heckiman and Jones first advocated this approach. This is also known as “MarketValue Method”. This method of measuring the value of human resources is based onthe economist’s concept of “opportunity cost”.

Opportunity cost is the value of an asset when there is an alternative opportunityof using it. In this method there is no opportunity cost for those employees who arenot 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 anindividual or group denies this kind of talent to another division. Thus the opportunitycost of an employee in one department is calculated on the basis of offer made byanother department for the employees working in this department in the sameorganization.

Standard Cost Method.

David Watson has suggested this approach. Instead of using historical or replacementcost, many companies use standard cost for the valuation of human assets just asit is used for physical and financial assets. For using standard cost, employees ofan organization are categorized into different groups based on their hierarchicalpositions.


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 inthe same group. In many cases, these differences may be quite vital.

According to this approach, standard costs of recruiting, hiring, training anddeveloping per grade of employees are determined year after year. The standard costso arrived at for all human beings employed in the organization are the value of humanresources for accounting purposes. The approach is easy to explain and can work as asuitable basis for control purposes through the technique of variance analysis. However,determination of the standard cost for each grade of employee is a ticklish issue.

Monetary Value Based ApproachesAccording to this approach, the value of human resources of an organization isdetermined according to their present value to the organization. For determination ofthe present value, a number of valuation models have been developed. Some of theimportant models are as follows:

In this method the future earnings of various groups of employees are estimated upto the age of their retirement and are discounted at a predetermined rate to obtain thepresent value of future earnings used in the case of financial assets. It is the presentvalue of future earnings. To determine this value, the organization establishes what anemployee’s future contribution is worth to it today. That contribution can be measuredby its cost or by the wages the organization will pay the employee. The organizationdoes not benefit by monitoring the efficiency of its investment in employee developmentbecause the investment has little or no impact on the present valuation of future earnings.

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.5. 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.6. 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 thereforenot realistic.

7. It ignores the variable of thee career movement of the employee within theorganization. An engineer will be an engineer throughout his career in theorganization.

8. It does not take into account the role changes of employees. A PersonnelManager may become Chief Legal Officer.

However, this method does not give correct value of human assets as it does notmeasure their contributions to achieving organizational effectiveness.

226 / IJEI : (5)2, 2012

Scarpello & Thekee (1989)

“At the theoretical level, HRA is an interesting concept. If human resource value couldbe measured, the knowledge of that value could be used for internal management andexternal investor decision-making. However, until HRA advocates demonstrate a validand generalisable means for measuring human resource value in monetary terms, weare compelled to recommend that researchers abandon future consideration of possiblebenefits from HRA.

Flamholtz Model (Reward Valuation Method)

This model has been suggested by Flamholtz (1971). This is an improvement on „presentvalue of future earnings model since it takes into consideration the possibility orprobability or an employee’s movement from one role to another in his career andalso of his leaving the firm earlier, that his death or retirement.

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

Flamholtz has given the variables affecting an individual’s expected value {IERV}:individual conditional values and his likelihood of remaining in the organization. Theformer is function of the individual’s abilities and activation level, while the later is afunction of such variables as job satisfaction, commitment, motivation and other factors.

Morse Model (Net Benefit Model)This approach has been suggested by Morse (1973). According to this approach, the valueof human resources is equivalent to the present value of net benefits derived by theorganization 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 theirindividual as well as their collective capacity is determined.

2. The value of future payments (both direct and indirect) to the employees isdetermined.

3. The excess of the value of future human resources (as per 1 above) over thevalue 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.

4. The present value of the net benefit is determined by applying a predetermineddiscount rate (generally the cost of capital). This amount represents the valueof human resources to the organization.

Non-monetary Value-based Approaches

Pekin Ogan (Certainty Equivalent Net Benefit Model)

This approach has been suggested by Pekin Ogan (1976). This, as a matter of fact, is anextension 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 intoaccount, while determining the value of human resources. The approach requiresdetermination of the following:

1. Net benefit from each employee as explained under „net benefit approach .2. Certainty factor at which the benefits will be available3. The net benefits from all employees multiplied by their certainty factor will

give certainty equivalent net benefits. This will be the value of human resourcesof the organization.

In case of permanent exit on account of death, retrenchment etc. then the balanceon the deferred revenue account of that year of that person should be written off againstthe income in the year of exit itself. For the purpose of finding the present value ofestimated payments the expected average after tax return on capital employed overthe average tenure period should be taken as the discount rate. As for disclosure ofaccounting information on human resources as an asset, he has suggested to includehuman assets under investments in the ‘financial statement’ of the organization. He isnot for taking it as ‘fixed assets’ as it will cause problems of depreciation, capital gainsor losses upon exit etc.; neither it could be taken as ‘current asset’ as it will not be inconformity with the general meaning of the term.

228 / IJEI : (5)2, 2012

CONCLUSION

Promoting allergenic human capital and organizational performance level on variousaspects of the broader economic and social development of society is not hidden byany one and what was said is the most important asset of any organization’s humanresources and performance of human resources in the organization can determine itsposition in the business world The necessity of accounting for human resources atpresent is irrefutable and the results of the organization’s goals and accountinginformation in investment decisions and managers is essential Human resourceaccounting system can be as tool under the control of managers of companies for solvingmany problems but if they believe that human resource is valuable asset and how tomake better use and do investment on human resources This paper explored the currentliterature on human capital and its impact on employees performance. Theconceptualization of human capitals is closely linked to some fundamentals ofeconomics and employees performance. The literature reviews show that there arereasonably strong evidences to show that the infusion of ‘human capital enhancement’in employees promotes innovativeness and greater employees’ performance.

Studies also clearly substantiate the fact that financial performance is positivelyimpacted through the consideration of human capitals.

In light of this, the understanding of employees performance in relation to humancapitals should not be regarded as a phenomenon that only adds ‘more zeros’ in afirm’s profits; it is rather transforming the entire workforce as the most ‘valuable assets’in order for the organization to pave ways for greater achievements via innovativenessand creativity. Hence, companies should therefore, come up with some effective plansespecially in investing the various aspects of human capital as not only does it directfirms to attain greater performance but also it ensures firms to remain competitive fortheir long term survival.

Promoting human capital and its effect on various aspects of organizationalperformance and in the broader level on social and economic development ofcommunity is not hidden from anyone.

In the end, it should not be forgotten that today one of the most importantdevelopment tools, is management and if success is achieved in the development isdue to manpower and social environment. There is no doubt that the management oforganizations should be serious about human resources and increasing theirperformance which will affect on productivity and efficiency. Then the role of humanresources accounting and the appropriate valuation techniques would be moresensitive.

References

Flamholtz Eric G. & Marial Bullen & Wei Hua (2002), Human Resource Accounting: A HistoricalPerspective and Future Implication, Management Decision.

Afiouni F. (2007), Human Resource Management: A Road Map Toward Improving OrganizationalPerformance, Journal of American Academy of Business, Vol. 11, No. 2, pp. 124-31.

Likert R. and W. C. Pyle. (1971), Human Resource Accounting, A Human OrganizationalMeasurement Approach, Financial Analysts Journal, January- February, pp. 75-84.


Ogan, P. (1998), Assessing the Impact of Human Resource Accounting Information on ManagerialDecisions: A Field Experiment, Personal Review, March, pp. 29-34.

Groejer, J. E, and Johanson, V. (1997), Commentary Current Development in Human Resource Costingand Accounting Reality Present, Researchers Absent? Accounting Auditing & AccountabilityJournal, Vol. 11, No. 4, 1998, pp. 495-505.

Gebaure, M. (2003), Information Systems on Human Capital in Service Sector Organizations, NewLibrary World, Volume 104, Issue 12.

Bonits, N. Dragonetti, N. C., Jacobsen, K. and Roos, G. (1999), The Knowledge Tool Box: A Reviewof the Tools Available to Measure and Manage Tangible Resources. European Management Journal,Vol. 17, pp. 391-402.

Bozz Dlan S., Po’Regan. And F. Ricceri. (2006), Intellectual Capital Disclosure (ICD); A Comparisonof Italy and the UK, Journal of HRCA: Human Resource Costing and Accounting, Vol. 10, No. 2, pp.22-113.

Theek Herman and John B. Mitchell (2008), Financial Implications of Accounting for HumanResources Using a Liability Model, Journal of Human Resource Costing & Accounting.

Josrotia punita (2000), “The Need for Human Resource Accounting”, Journal of Business Finance &Accounting, No. 62.

Johanson U., Eklov G., Holmgren M., Martensson M. (1998), “Human Resource Costing & Accountingversus the Balanced Scorecard: A Literature Survey of Experience with the Concepts”, School ofBusiness, Stockholm University.

Verma, Sh. & Dewe, Ph. (2004), Measuring the Value of Human Resources Accounting & Business,p. 46-48.

Christine, N. (1998), Human Resource Accounting-interests and Conflicts. Journal of AccountingLiterature, 30.

Human Resource Planning and Development. Lesson 35: Human Resource Accounting, (1999), RaiUniversity, p. 182-186.

Brumment, R.L and Others (August 1969), Human Recourse Accounting: A Tool to IncreaseManagerial Effectiveness, Management Accounting, pp. 12–15.

Dawson, C. (1994), Human Resource Accounting: From Prescription to Description, ManagerialDecision, Vol. 32, No.6, pp. 35-40.

Websitehttp://www.articlesbase.com/human-resources-articles/human-resource-accounting’http://www.articlesbase.com/human-resources-articles/human-resource-accounting-1133288.htmlhttp://www.scribd.com/doc/8358363/Human-Resource-Accountinghttp://www.icai.org/resource_file/10501jan05p867-874.pdfhttp://dspace.vidyanidhi.org.in:8080/dspace/bitstream/2009/3625/1/DLU-1990-060-Prelim.pdfhttp://www.itpeopleindia.com/20021216/cover.shtmlhttp://www.pondiuni.edu.in/dde/downloads/hrmiv_hra.pdf 8.http://books.google.co.in/books?id=d

NwPVJ1cp2kC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=falsehttp://www.infibeam.com/Books/info/anmol-publications/human-resource-accounting/8170410975.htmlhttp://www.emeraldinsight.com/products/journals/journals.htm?id=JHRCAhttp://humanresourcemanagement.flashh.in/2009/06/22/human-resource-accounting/http://hubpages.com/hub/Human-Resource-Accountinghttp://www.icwai.org/icwai/knowledgebank/oh20.pdf

http://www.docstoc.com/docs/7938779/Human-Resource-accounting.

��

Impact of Human Resources Accounting on Employees ...

Documents