Human Resource Accounting-Emerging Trend

Need for valuation of human resource in accounting terms is the emerging and debated phenomenon in various industries nowadays. Traditionally, financial accounting attempts to record all the assets and valuables of the organizations which help in generating the revenues and value. Success and failure of the organizations largely relies upon the human resource employed to run the strategic and operational affairs. Thus, the valuation and quantification of human resource intervention cannot be ignored in order to present the true and fair picture of the firm’s affairs. Application of human resource accounting is confronted by many debates among the accounting practitioners as it is a matter of pure social sciences or accounting standards.

Financial accounting over the years has introduced many valuation tools that aims to measure the activities and their results in form of costs, revenues, profits, production etc. Such tools also gauge the valuation of tangible assets as well as intangible assets. However, there has been no consensus on the development of the accounting tool to evaluate the human resource which can account for 4 to 20 times of value of all other assets of the entity. Ever changing human behavior towards firm’s contribution has made it a matter of subjectivity and behavioral sciences. Accordingly, behavioral sciences have attempted to measure the value of human resource by studying the behavioral implications of human resource on the performance of the organizations. Generally speaking, human resource value is determined by their energy level, skills, knowledge set and intelligence levels which are applied to the decision making, production and rendering services for the benefit of the employer. In today’s economic concerns, quality human resource is also regarded as competitive advantage by many entities. Productivity and profitability are the functions of the human capital contribution, for instance two firms having same level of assets and operations in the same market can yield variable returns due to different human interventions to their respective organizations. Hence, the exclusion of human assets valuation can make the valuation of the organization incomplete and untrue. 

Among the four factors of production, land, labor, capital and entrepreneur, the labor element of production has not been subject to the conventional accounting due to many complexities. In the last two decades, the proposal for human resource valuation is gaining active consideration and much attention is being paid to the development of human resource concepts which may be widely acceptable among the stakeholders.

Human resource accounting involves measurement of costs incurred by organizations to recruit, train, retain and develop the human capital and in return its matching or valuation by the stream of economic value earned or expected to be earned through human resource. Human resource accounting basically attempts to assign a financial figure on the quality variables of the employees. Human resource applied in the sales, marketing, planning and development functions are usually unable to understand the concept of human resource accounting and thus cannot apply the concept of their performance in relation to the valuation in accounting terms. However, the employees working in the accounting and finance areas of the organization have a better understanding of the concept and are in better position to evaluate themselves for the accounting reasons

Simplification of human resource contribution and significance to the organizational performance cannot be inferred as the easy accounting process as there are numerous factors that shape up the value of the employee who are operating at the free will. This free will make them distinguished to the other well accepted assets of the organization as they cannot be controlled, owned and operated like a plant, building or patent. Human behavior and its value proposition towards organizational performance can be influenced through certain measures and tools but it cannot be controlled as per the measured expectations. Apart from the lack of agreed human resource accounting standards and tools, the whole process of human resource accounting is cumbersome and complex as there is need of complete and symmetrical information about the employees and ensuring the impartiality and judgmental skills and tools of the valuation system and appraiser.

Human resource accounting aims at the enhanced and improved managerial awareness of the value of human resources which in return can help in make better and informed decisions about the cost and benefits to be applied on them. It also helps the management to create the sense of responsibility and accountability for the management. Through this way, the utilization of human resource can be applied more precisely and effectively. Future plans, budgeting and human resource related decisions can be developed in line with the quality of human resource available.

Additionally, the valuation of the human resource efforts can create the sense of high morale and motivation among the employees as it show that organization cares and value the employee contribution. In return, it will make them more dedicated towards the meeting of organizational objectives. Idea of being valued and recognized through human resource valuation makes the organization more attractive for the best human resources available in the market. Precise or close to precise measurement of the quality of the human resource also provides the valuable information to the existing or potential investors to select the company for investment motives.