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Impact of Human Resource Accounting on organizational performance

Published 23, March 2015

According to the American Accounting Association’s Committee on Human Resource Accounting (1973), Human Resource Accounting is nothing but “the process of identifying and measuring data related to human resource and communicating this information to interested parties”. From this definition, we could recognize that HRA is not only involved in the measurement of data related to placement, training and development of employees but also involved in the evaluation of financial condition of people in an organization. This has been supported by Flamholtz (1971) who defined HRA as “the measurement and reporting of the economic value of people in organizational resource.”Overall, the HRA can be defined as the process of identifying and measuring data related to human resource for the development and enhancement of economic value of interested parties associated with corresponding organization.

Human Resource is one of the biggest assets of an organization. Unfortunately, there’s no legal regulation in any of the organization annual report. Sometimes, the HR value might increase beyond the tangible assets value of organization but conventional accounting method does not facilitate recording and recognizing the HR vlaues. For example, the announcement of Bill Gates retirement from the Microsoft Corporation drastically reduced the share price of the company. But, firm’s conventional accounting method suggests no such impact on the financial aspect of the company while in reality the situation is completely different from what is claimed. Human Resource Accounting (HRA) deals with accounting for organizational expenditures which provides future benefits for the development of organization. Here the expenditure related to human resource are recorded as assets on the balance sheet contrary to traditional accounting which treats these costs as expense that reduce net profit of an organization. In addition, HRA process of measurement has a role to play in any decision making process related of the organization. Though the history of HRA can be traced back to USA, its contribution for the growth of HRA has come from various other countries.

According to scholars and HRA experts, the HR valuation is unsuccessful. This is because, they consider that treating people as assets is incorrect (Mayo, 2004). To execute proper HRA practice, the proponents must aware of two important aspects. First of all, they have to be clear about how their explanation works and also demonstrate how it fix’s with other works and accepted theories. For example, their demonstration should answer this simple query “How would a human asset concept fit and work with the other current business concepts?”Subsequently, the proponents should explain how to measure the concept of their theory. These aspects are very basic and important scholarly requirement as for instance, if the asset value could not be measured properly then it is unfeasible to exhibit the value affects of assets. In general, finance and accounting managers do not agree with the HR measurement proposals. As a result, HRA asset supporters have failed in terms of implementing HR practices. The main reason for their objection is that the proposed HR accounting practice is extremely different from other HR assets techniques and thus it is difficult to demonstrate that human assets meet two tests of an asset (Kieso et al., 2003). For accountants, assets should produce a future income and can be controlled by organization. But, in the case of HR, the actual or marginal flow of income has attributed to an imprecisely measured HR values which could not be accepted by accountants and other finance managers. Moreover, the HR assets could not be owned or sold by organization and thus it would differ from other class of assets.

Similarly, the widespread perception on knowledge economy has developed the concept of intellectual property to incorporate intellectual capital as one of the important assets for the reporting purpose of firms (Guthrie, 2001; Mouritsen et al., 2004; Roslender 2009a, b). This has been supported by Flamholtz et al. (2003) who noted the increased emphasis on intellectual capital in the enrolment of investment capital statement. To incorporate managerial decision making, accounting users should have more accurate information with respect to financial and managerial accounting. Such information can offer additional value to both financial and managerial accounting. Despite of all such facts, still there is some area that remains elusive in HRA, which is defined by Roslender (2009a) as “accounting for people” (AFP) and by Guthrie and Murthy (2009) as human competency accounting (HCA) which intimates the complexity in determining the competency of employees (Roslender & Dyson, 1992; Mayo, 2005; Verma & Dewe, 2008). In spite of the mutual efforts, there has been a continuous aloof among the accounting and financial professionals on the subject of “human resources”. A general argument among financial and accounting experts is that the human assets measurement often deals with more subjectivity than physical assets measurement and this issue makes them to be excluded from financial statement.

As intellectual property capitals are considered as the major reporting elements, there may be chances for moving beyond such debates. For instance, the concept of intellectual capital is considered as crucial to report the value of corporation’s intellectual assets (Mouritsen et al., 2001). In spite of all these factors, this context is highly focused on the general measurement issues such as whether to capitalise or expense investment in human resource and whether human resources meet the criteria of assets with respect to accounting sense. Based on the survey of business professionals, Khan et al. (2010) revealed that most HR directors consider healthy workforce as an important asset.. But the accounting and financial experts who worked in private sectors were found to have least concern about the well-being of the employees.

Considering human as assets has become morally repulsive following the abolition of slavery. As a result, it is expected that it would take more time to apply this concept in accounting agenda. With the liberation of debates in the eighteenth century, the humans have been excluded from financial statements. But the absence of the human contribution to the firm's production as reported in the financial statements may have made the acknowledgement and rewarding of workers' contributions all the more difficult. The modern debate post-Second World War initially centred on whether humans could be classified as assets; this, no doubt, was influenced by earlier eighteenth- and nineteenth- century ideals. The fact that the cost of labour is expensed rather than recognized as an asset could be seen to coincide with the consumer model of modern capitalist economies.

Similar to the field of accounting, HRM is also found to be influenced by economics and scientific management thinking, as it is a scientific field of inquiry. As a result, the resource based review (RBV) of the firm has become popular in recent years. . The main objective of the RBV is to provide accurate information on how certain rare, peerless and unique source could provide competitive advantage (Verma & Dewe, 2008). In HRM literature, , various studies are available on the contribution of HR for improving productivity and firm performance (Boxall & Purcell, 2000). However, , there is no adequate information on the role of HR measurement on firm’s growth (Bowen & Ostroff, 2004). Thus HR and accounting could share a common theoretical base but there is a lot of confusion and assumption in terms of people. For example, in accounting literature, the term “human resource” has traditionally denoted as “human assets”. But the term “human resource” was chosen to replace “personnel” to indicate employees within the firms. At last, these issues have come to an end in 1980 and both HR and accounting are being mentioned in the name of “human capital”.

In spite of all such different perspectives, HRA/AFP/HCA suggests how to combine the separate professional concerns in the search for a solution. Basically, accounting has involved with reporting and managing non-human resources by means of developing accurate rules and regulations. Likewise, Human resource has involved with the development of financial benefits by means of improved training and other HR related system and practices. In fact, HRA/AFP/HCA has also involved in the progress of managerial decision making and at the same time, it provides supporting data to HR managers for the development of human resources. Though the adoption of HRA/AFP/HCA practices has been accepted only to a small extent, most of them are arguing that metrics such as ROI may lead to the failure of the HR professions (Pfeffer, 1997). As a result, the adoption of more economic and less welfare-oriented perspective has become questionable (Rynes, 2004).

Accordingly, the emerging fields including HRA/AFP/HCA has demonstrated the migration of knowledge across the artificial edifices those have been erected by scientific disciplines (Daft & Lewin, 2008). Moreover, HRA assists the proponents to seek an accurate way to determine the competency of employees as well (Roslender & Dyson, 1992). In order to implement effective HRA practices, it is essential to focus three main settings: (1) profound knowledge on human resource cost, values, outcome and how to calculate these (2) high management demands (3) high target settings. Finally, it is essential to execute HRA from strategic-management perspective.

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