UNIT 10 HUMAN RESOURCE ACCOUNTING

Structure

10.0 Objectives
10.1 Introduction
10.2 The Concept of Human Resource Accounting
10.3 Human Resource Accounting :
Objectives in Relation to the Process of Human Resource Management
10.4 Information as a Key Factor in HRA
10.5 Human Resource Costs : Concepts and Methods of Measurement
10.6 Human Resource Valuation : Concept and Determinants of Value
10.7 Human Resource Value : Monetary Measurements
10.8 Human Resource Value : Non-Monetary Measurements
10.9 Developing a Human Resource Accounting System : Some Design Considerations
10.10 Phases in the Design and Implementation of a Human Resource Accounting System
10.11 Human Resource Accounting : Need for Further Validation and Research
10.12 Let Us Sum Up
10.13 Key Words
10.14 Clues to Answers

10.0 OBJECTIVES

After going through this Unit, you should be able to:

• understand and define the concept of human resource accounting,
• describe the main objective and the managerial role of human resource accounting,
• appreciate the role of information as a key factor in human resource accounting system,
• understand the basic concept and the measurement aspects of human resource costs,
• follow the concept and various methods of monetary and non-monetary valuation of human
resources, and
• understand the process and problems of designing and implementing a human resource
accounting system.

10.1 INTRODUCTION

Effectiveness is best measured by comparing inputs with the desired output. This gives a direct
and positive measure of effectiveness as well as providing comparative information to show how
effectiveness has altered over a period of time. It requires a common base for measuring inputs
and outputs. Measurement is the process of representing the properties or qualities of objects in
numerical terms. In our control systems, measurement has a dual function. It provides
information that can be used for evaluating performance, and to make corrections is goal directed
behaviour. This is the informational function of measurement. The accounting system, with its
measures of financial and managerial performance, is a part of overall measurement system that
contributes to the informational function. The informational function also draws on non-financial

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measures of performance such as product quality and organisational climate. It may be noted that
the very act of measuring something has an effect on people’s behaviour because people tend to
pay more attention to the aspects of jobs or performance that are measured.

In human resource planning, unlike other functions, there is still the problem of measuring itself;
how can personnel inputs be measured using some common standards inevitably financial? This
presents serious difficulty for the personnel function itself if it has to measure that output in
financial terms. One attempt to apply financial denominators to human resources is the human
asset or human resource accounting which endeavours to measure both the cost and the value of
people to organisations.

The subject of approach to measurement of human resources through human resource accounting
has tempted personnel specialists and academics alike. The early development of human resource
accounting was carried out by a team of researchers from the University of Michigan’s Institute
for Social Research under the guidance of Rensis Likert. Likert felt that the failure to show the
human resources of the firm as an asset on the firm’s books caused management to undervalue
these resources in its decision making. Early development work by the research team at the R.G.
Barry Corporation at Columbus, Ohio emphasised the capitalising of expenditure on employee
recruitment and development, using the historical-cost approach. The money spent on
recruiting and training of employees was treated as a capital investment to be amortized
over several years, since the benefits were presumed to continue over that period. R.G.
Barry Corporation presented the human resource accounting information as an addendum to its
regular financial statements in its report to stockholders. However, the primary use of information
is for managerial control and decision making.

This Unit discusses the various aspects related to Human Resources Accounting.

10.2 THE CONCEPT OF HUMAN RESOURCE ACCOUNTING

The subject of offering measures of the values of people to the organisation through human
resource accounting has tempted human resource professionals and academics alike. Flamholtz
and Lace (1981) have defined this approach in the following way:

“Human Resource Accounting may be defined as the measurement and reporting of

the cost and value of people as organisational resources. It involves accounting for
investment in people and their replacement costs, as well as accounting for the
economic values of people to an organisation.”

They go on to describe the value of an employee to the firm as “the present value of the
difference between wage and marginal revenue product”. An employee’s value drives from
the ability of the firm to pay less than the marginal revenue product.

According to the American Association of Accountants (AAA), human resource accounting is

“a process of identifying and measuring data about human resources and communicating
this data to information to interested parties”. This definition considers human resource
accounting to be an extension of basic functions of accounting namely, identification,
measurement and communication of data related to human resources.

In an earlier definition, Flamholtz refers to human resource accounting as “accounting for

people as an organisational resource”. According to him, it involves measuring the costs
incurred by business firms and other organisations to recruit, select, hire, train and develop

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human resources. It also involves measuring economic value of people to organisations. Eric
Flamholtz’s definition makes it clear that the term ‘human resource’ recognises people who form
organisational resource.

To quote Davidson, “Human resource accounting in the measurement of the cost and value
is a term used to describe a variety of proposals that seek to report and emphasise the
importance of human resources knowledgeable, trained and loyal employees in a company’s
earning process and total assets”.

In the words of R.L. Woddruff Jr., Vice President, R.G. Barry Corporation, the company
which undertook pioneering work (1960s) in developing human resource accounting – “human
resource accounting is an attempt to identify and report investment made in resources of
the organisation that are not presently accounted for under conventional accounting
practice”. Woodruff further considers it to be an information system that tells management what
changes over time are occurring to the human resources of the business.

In the foregoing definitions one may not find unanimity on what human resource accounting is
but one point should not escape notice : the significance of information. Human resource
accounting system requires and produces a great deal of information.

10.3 HUMAN RESOURCE ACCOUNTING :

OBJECTIVES IN RELATION TO THE PROCESS OF
HUMAN RESOURCE MANAGEMENT

The point has been made that human resource accounting is a tool designed to assist in the
effective and efficient use of management of human resources. Let us now consider the
managerial role of human resource accounting more fully. The model shown in Figure I indicates
that human resource management is a system designed to convert human resource inputs into
outputs in terms of human services.

TRANSFORMATION
PROCESS

INPUTS MANAGERIAL OUTPUTS

SUBSYSTEMS

PEOPLE for SERVICES

Acquiring,
(Individuals, Developing, provided
Groups Allocating, by
and the Conserving individuals
Total Utilizing, and
Human Evaluating, groups
Organisation) and
Rewarding
People

Evaluation/Feedback
Figure I : “Raw” Human transformed into Valuable Human Output

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The inputs are people : individuals, groups and the total human organisation. The transformation
process refers to the managerial sub-systems for acquiring, developing, allocating, conserving,
utilising, evaluating and rewarding people. The outputs are the services provided by individuals
and groups. In other words, the model “transforms” “raw” human resources into valuable human
services. Now let us briefly examine each sub-system : what it covers and its enabling features.

Sl. Sub-system in the What it Includes Enabling Features

No. transformation process

1) Acquisition of Human Recruiting Forecasting manpower requirements,

Resources Selecting Selection Procedure, Cost estimation
Hiring and Manpower budgets.

Provides non-monetary surrogate

measures in order to test
management potential while
choosing the person possessing the
greatest future value to the
organisation.

2) Development of Human Training to enhance technical, Facilitates decisions involving the

Resources administrative and intellectual allocation of resources by measuring
skills the expected rate of return in
proposed investments in training.

(Human resource accounting information can greatly influence the acquisition and development of policy
for human resources in more than one way, such as:

− review of budget proposals,

− employment decisions with regard to
• level of entry
• outside experience
• extent of training
− provide estimates of historical and current
costs in order to help management
• assess trade offs between the costs of recruitment
from outside or development from within.)

3) Allocation of Human Assigning people to various Helps management to allocate people

Resources organisational tasks and roles to jobs in a way that will optimize
job productivity, human resource
development and individual
satisfaction.

4) Conservation of Human Maintaining Mechanical Provides early warning signals to

Resources capabilities of individuals and suggest the need for special attention
functional effectiveness of to conservation and prevent their
management teams. depletion.

5) Utilisation of Human Process of using human Provides a unifying framework to

Resources services to achieve help managers utilise human
organisational objectives resource effectively and efficiently.

It makes managers think of startegies

designed to influence the value of

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 people.
6) Evaluation and Reward Assessing the value of people Helps human resource evaluation
of Human Resource to an organisation with respect process by developing valid and
to performance and their reliable methods of measuring the
promotability value of people to the organisation.

Rewards include compensation,

promotion and symbolic ‘rewards’.
The sub-system enables
administration of organisational
rewards in relation to a person’s
value to the organisation.

To conclude, human resource accounting from a managerial perspective offers a way of thinking
about the management of an organisation’s human resources. It is based on the notion that people
are valuable organisational resources. Another aim of human resource accounting is to help
investors obtain information about an organisation’s human assets. It may be noted that current
financial accounting practice treats all expenditures for investment in human resource as
‘expenses’ rather than as ‘assets’. This convention results in a distorted measure of an
organisation’s return on investment. Therefore, it does not offer a clear picture to the investor
who attempts to value an organisation’s human resource on this basis alone. Nevertheless, the
point is established that human resource accounting does have a potential role for management
and investors. Figure II presents a model which contemplates the aims and objectives of human
resource accounting.

New Measures of Effective Greater Accountability

Manpower Utilisation for Human Resources

Longer Time Better Decisions

Horizon about People

Better Human Increased Managerial Awareness

Resource Planning of Human Resource Value

Human Resource Accounting : Objectives

Figure II: Objectives of Human Resource Accounting

To conclude, we can say that human resource accounting aims at (1) increased managerial
awareness of the values of human resources, (2) better decisions about people, based on improved
information systems, (3) greater accountability on the part of management for its human
resources, (4) developing new measures of effective manpower utilisation, (5) enabling a longer
time horizon for planning and budgeting, and (6) better human resource planning.

10.4 INFORMATION AS A KEY FACTOR IN HUMAN RESOURCE

ACCOUNTING

Let us consider an example. One Travel Agency operating through its several regional offices,
numerous branches and employing a sizeable field work force, during the review of its operations

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is confronted with the following ‘reported’ problems concerning the planning and effective
utilisation of its manpower:
Nature of the problem Basis of report
1) High turnover among its field operatives General impression
(over the counter personnel) (no data available)

2) Rising administrative cost : the personnel Based on opinion

costs accounting for a very high component.

3) Lack of attention on the part of managers Viewed as apparent

towards developing their people. Only one or two branches monopolised in offering
promotable manpower causing heartburning
amongst the remaining branches.

A close look at these problems through an outside consultant brings out three basic lacunae in the
organisation system:
a) absence of a measure of planning of manpower beyond a short-term (one year),
b) obvious lack of information about the firm’s manpower, and
c) absence of a position of senior executive in the corporate office for overseeing and
coordinating various human resource activities and effective utilisation of the company’s
manpower.

The criticality of (b) can be easily understood because without reliable system of information,
effective planning and control is just not possible.

The primary purpose of human resource accounting is to help management plan and control the
use of human resources effectively, and efficiently. In that process, it must require a great deal of
information that can serve the management, the investors and other outside agencies. Basically,
the information it involves is for measuring the costs incurred by business firms and other
organisations to recruit, select, hire, train and develop human assets, besides measuring the
economic value of people to the organisation.

In the example given above, the travel agency identified the following kinds of information and
their use:

Information needs in human resource accounting

Kind of information Purpose of information
1) Information for Human Resource Planning To facilitate manpower planning
To gather data on actual costs of recruitment and
selection, training, etc.
Collection of figures over the past period provide
reasonable basis for projecting future expenses.

2) Information for control of personnel costs To provide reasonable means of evaluating the
performance of management in controlling costs,
The information helps develop a system of
standard costs for personnel recruitment, selection
and training. That would help further in analysing
costs.

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 3) Information for control of turnover costs To increase management’s awareness of the costs
of turnover and to devise steps to control it.

4) Information for evaluation of management To increase the accountability of management in

effectiveness providing measurements that were effective in
developing and utilising people over a longer
period of time.

5) Information for the Board and Stockholders To keep the top management abreast of changes in
the organisation’s investment in people and
human resource value.
To help the top management in deciding on
information on the firm’s investment in human
resource to investors even though the data remains
unaudited.

The above illustration provides a synoptic view of the elements of information required to
consider various problems related to the effective and efficient utilisation of human resources in
the organisation. It also illuminates the point that the need for human resource accounting
information arises from the specific felt needs of an organisation.

10.5 HUMAN RESOURCE COSTS : CONCEPTS AND METHODS

OF MEASUREMENT

Before we consider cost measurements through human resource accounting, let us take a look at
some of the terms used in the accounting concept of ‘cost’.

Some Definitions
1) Cost : A sacrifice incurred to obtain some anticipated benefit or
service. Conceptually, all costs have “expense” and
“asset” components.
2) Original Cost : The sacrifice that was actually incurred to acquire or
obtain a resource. Original cost is also termed “historical
cost”.
3) Replacement Cost : The sacrifice that must be incurred to replace a resource
presently owned or employed.
4) Outlay Cost : The actual cash expenditure that must be incurred to
acquire or replace a resource.
5) Direct Costs : Costs which can be directly traced to an activity, product
or resource.
6) Indirect Costs : Costs that cannot be traced directly to a specific activity,
product or activity process, but which are incurred for
general use in more than one activity, etc.
7) Actual Costs : Costs actually incurred to attain some specified end.
8) Standard Costs : Costs that ought to be incurred to attain some specified
end under certain pre-defined conditions.

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9) Opportunity Costs : The income or revenue foregone or sacrificed in order to
acquire or replace a resource.
The several accounting concepts of costs just defined have significant applications in human
resource accounting. The concept of human resource cost has its roots in the general concept of
cost. Human resource costs are costs incurred to acquire or replace people. Like other costs, they
have expense and asset components. Similarly, other descriptions of costs, viz., outlay and
opportunity costs, direct and indirect costs, actual and standard costs – all fit into the costs
framework of human resource accounting.
There are two ways to measure costs through human resource accounting : (1) the original or
historical cost of human resources, and (2) the replacement costs of human resources.

I) The concept of original cost

The original cost of human resources may be defined as the sacrifice that was actually incurred to
acquire and develop or replace people. It includes costs of
• recruitment,
• selection,
• hiring,
• placement,
• orientation, and
• on-the-job training.
It has elements of direct costs as well as indirect costs. For example, a trainee’s salary is a direct
cost, while the time spent by the supervisor or other employees during training contributes to the
indirect cost. For managerial uses of the cost data, it is desirable to include the opportunity costs
incurred in the original costs of human resources. However, since the reliability of the
opportunity costs can always be questioned, it should not form part of reporting to investors and
external users.

Measurement of original cost of human resources

The definition of original cost of human resources refers to the sacrifice that would have to be
incurred to acquire and develop people. This means that any attempt for measurement of
original human resource costs essentially requires measurement of acquisition costs and
training costs. These costs will include both direct costs and indirect costs of acquiring and
developing human resources. Figure III presents a model for the measurement of original human
resource costs:
ORIGINAL HUMAN RESOURCE COSTS

Acquisition costs Learning costs

Direct costs Indirect costs Direct costs Indirect costs

Recruitment Promotion on Formal Training Trainer’s Time

hiring from and Orientation
Selection within firm
Lost productivity
Hiring Placement On-the-job Training during training

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 Figure III: Measurement for Original Human Resource Costs : A Model

ii) Replacement cost of human resources

The Replacement Cost of Human Resources may be defined as the sacrifice that would have to be
incurred today to replace human resources presently employed. It included the costs attributable
to the turnover of a present employee as well as the cost of acquiring and developing the
replacement. From individuals, the scope can be extended to include the groups of individuals
and the human organisation as a whole. Replacement refers to acquiring a substitute capable of
rendering an equivalent set of services for a single specified position, meaning thereby that the
context is the positional replacement.
There is another notion of replacement cost : personal replacement cost. It refers to the sacrifice
that would have to be incurred today to replace a person presently employed with a substitute
capable of rendering an equivalent set of services in all the position the former might occupy.
Here the context is the person, and the replacement cost is the cost of replacing a set of services
provided by one person with an equivalent set of services to be provided by another.
Measurement of replacement
The concept of replacement cost of human resources is defined as the sacrifice that would have to
be incurred today to replace human resources presently employed. The context of replacement
cost measurement can be positional as well as personal.
There are three basic components of positional replacement cost : (1) acquisition costs,
(2) learning costs, and (3) separation costs. While the first two components have been reflected
in the earlier model, the separation costs refer to the costs incurred as a result of a position holder
leaving an organisation. It may have both direct and indirect components and may include such
costs as (i) cost of a vacant position while search for replacement is on, (ii) opportunity cost
because of loss of services, and (iii) cost of lost productivity prior to the separation of an
individual from the organisation if such tendencies were apparent.
Figure IV presents a model for measurement of human resources replacement costs (positional
replacement cost).

POSITIONAL REPLACEMENT COSTS

Acquisition costs Learning costs

Direct costs Indirect costs Direct costs Indirect costs

Recruitment Cost of Promotion or Formal Training Cost of

transfer from within and Orientation Trainer’s Time
Selection
Lost productivity
Hiring Placement On-the-job Training during training

Separation costs
Direct costs Indirect costs

Loss of Efficiency Cost of Vacant position

Separation Pay prior to Separation during search

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 Figure IV: Measurement for Original Human Resource Costs : A Model
(Adaptation from Eric G. Flamholtz, “Human Resource Accounting :
Measuring Positional Replacement Costs”, Human Resource Management, Spring 1973, Pp.11)
Personal replacement cost

The concept of personal replacement cost refers to the sacrifice that would have to be incurred
today to replace a person with a substitute capable of providing a set of services equivalent to the
individual being replaced. The notion refers to the cost of replacing a person with a functionally
equivalent substitute rather than the cost of replacing him with the best available substitute. The
notion of personal replacement cost is quite similar to the concept of economic value.

Check Your Progress–1

1) What is human resource accounting? Discuss with reference to a few definitions of human
resource accounting.
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..

2) What is cost? Define the following concepts of cost:

a) Original cost b) Replacement cost
c) Outlay cost d) Opportunity cost
e) Standard cost
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..

3) What is the original cost of Human Resources and its major components?
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..

10.6 HUMAN RESOURCE VALUATION :

CONCEPT AND DETERMINANTS OF VALUE

One of the major objectives of human resource accounting is to develop reliable measures of
effective manpower utilisation. Both monetary and non-monetary measures are needed for use in
(1) decision making involving the acquisition, development and allocation of human resources,
and (2) monitoring and evaluating the degree to which the management has effectively and

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efficiently utilised the human resources. For the sake of conceptual clarity, let us first take a look
at some of the terms used in the context of human resource value with their simple definitions:

Some Definitions:

1) Value : The present worth of the services of an

employee is anticipated to render in the future.

2) Value of human organisation : The present worth of its expected future services
to an enterprise.

3) Individual’s value to an organisation : The present worth of the set of future services a
person is expected to provide during the period
he or she is anticipated to remain in the
organisation.

4) Group’s value to an organisation : The present value of its expected future services.

5) Individual’s expected conditional value : The amount the organisation could potentially
realise from his or her services if he or she
maintains organisational membership during the
period of his or her productive service life.

6) Individual’s expected realisable value : The amount actually expected to be derived,

taking into account the person’s likelihood of
turnover.

7) Productivity : The set of services an individual is expected to

provide while occupying his or her present
position.

8) Promotability : The set of services the individual is expected to

provide if and when he or she occupies higher-
level positions in his or her present or different
promotion channels.

9) Individual skills : The currently developed potential of an

individual to provide services to the
organisation.

10) Rewards : The benefits derived by the system.

11) Instrumental individual rewards : Rewards which are administered in relation to

individual effort.

12) Instrumental system rewards : Rewards which accrue by virtue of membership

in the system.

13) Activation level : The neuropsychological counterpart of the

notion of motivation.

14) Human resource valuation : The process of assessing the value of people to
an organisation. It involves measuring the
productivity and promotability of people.

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15) Casual variables : Independent variables that can be directly or
purposely altered by the organisation and its
management.
16) Goal emphasis : Behaviour that stimulates an enthusiasm for
meeting the group’s goal or achieving excellent
performance.
17) Intervening variables : Variables that reflect the internal state, health
and performance capabilities of an organisation.
18) Managerial behaviour : The dimensions of supervisory behaviour
effecting influencing group effectiveness.
19) Organisation structure : The structural relationship among organisation
roles.
20) Peer group behaviour : The support, interaction, facilitation, work
facilitation, and goal emphasis provided by the
subordinate peer group.
21) Support : Behaviour that enhances someone else’s feeling
of personal worth and importance.
22) Team Building : Behaviour that encourages members of the
group to develop close, mutually satisfying
relationship.
23) Work facilitation : Behaviour that help achieve goal attainment.
24) End-result variables : Dependent variables that reflect the results
achieved by an organisation.

What is human resource value?

The concept of human resource value is derived form the economic concept of value. The
economic concept of value has two dimensions:
1) Utility, i.e., value in use, and
2) Purchasing power, i.e., exchange value.

Value is the present worth of the services an object is anticipated to render in the future. Thus, if
an object has no future use, it has no value.

Similarly, human resource value is the present worth of people’s expected future services. The
concept can be applied to individuals, groups, and the total human organisation.

In the preceeding definitions we have noted that an individual’s value to an organisation is the
present worth of the set of future services he or she is expected to provide during the period he or
she is anticipated to remain in the organisation.

What determines the individual’s value?

Unlike other resources, human beings cannot be ‘purchased’ or owned by organisations, and
hence relatively free to either serve or turnover. From the organisation’s viewpoint, this suggests
a dual aspect to an individual’s value: one aspect is the amount that organisation could potentially
realise from his or her services if he or she stays with the organisaton (maintaining organisational

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membership) during the period of his or her productive service life, and the other aspect refers to
the amount actually expected to be derived, taking into account the person’s likelihood of
turnover.
Two models of the determinants of human resource value are relevant here: one by Flamholtz
that identifies the determinants of individual value and the other by Likert, that explains the
determinants of group value.

In Flamholtz’s model – Figure V, the ultimate measure of a person’s value is expected realisable
value. This is comprised of two variables : conditional value (potential value) and the
probability that the person will remain with the firm during his or her expected service life.
The conditional value of a person depends upon both the skills and the activation level that
ultimately leads to his or her promotability, transferability and productivity. The organisational
determinants of a person’s conditional value include the degree to which the role assignment
corresponds with the employee’s skills and personal goals, and the reward system used by the
firm. Then, the probability of a person staying in an organisation (maintaining organisational
membership) is directly related to the degree of job satisfaction that the employee feels.

Determinants of Elements of
conditional value conditional value

Skills Promotability

Activation Productivity Individual’s conditional value

level
Individual’s expected
Transferability realisable value to a
formal organisation

Probability of maintaining
Satisfaction organisational membership

Role Symbols:
Hypothesised determinant
Organisational Hypothesised interaction
A subset
Rewards Possible determinant

Figure V: Flamholtz’s Model of Determinants of an Individual’s Value to Formal Organisation

The Likert and Bowers Model; Causal, intervening and end-result variables

Likert and Bowers propose causal, intervening, and end-result variables which affect the group’s
value to an organisation. Causal variables are those which are controllable by the organisation,
while intervening variables reflect organisational capabilities. Both these variables determine
the end-result variables of the organisation. Figure VI presents the lists of elements used to
measure human organisational causal and intervening variables.

The causal variables include managerial behaviour and organisational structure. The intervening
variables include group processes, peer leadership, organisational climate, and the subordinates’
satisfaction. The end-result, dependent variables reflect the achievements of the organisation or
the total productive efficiency in terms of sales, costs, earnings, market performance, etc. Each of
these models identifies variables that determine the value of people to organisations. These

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variables must be taken into account in measuring the value of people as organisational resources,
as we move on further, to consider human resource valuation methods.
MANAGERIAL LEADERSHIP
• Support Friendly; pays attention to what you are saying; listens to subordinates’ problems.
• Team building Encourages subordinates to work as a team; encourages exchange of opinions and
ideas.
• Goal emphasis Encourages best efforts; maintains high standards.
• Help with work Shows ways to do a better job; helps subordinates plan, organise and schedule;
offers new ideas, solutions and problems.

ORGANISATIONAL CLIMATE
• Communication flow Subordinates know what is going on; superiors are receptive; subordinates are
given information to do job well.
• Decision making practices Subordinates are involved in setting goals; decisions are made at levels of accurate
information; persons affected by decisions are asked for their ideas; know-how of
people of all levels is used.
• Concern for persons The organisation is interested in individual’s welfare; tries to improve working
conditions; organises work activities sensibly.
• Influence on department From lower-level supervisors, employees who have no subordinates.
• Technological adequacy Improved methods are quickly adopted; equipment and resources are well
managed.
• Motivation Differences and disagreements are accepted and worked through; people in
organisation work hard for money, promotions, job satisfaction and to meet high
expectations from others and are encouraged to do so by policies, working
conditions, and people.

PEER LEADERSHIP
• Support Friendly; pays attention to what others are saying; listens to others’ problems.
• Goal emphasis Encourages best efforts; maintains high standards.
• Help with work Shows way to do a better job; helps others plan, organise, and schedule; group
shares with each other new ideas, solutions to problems.
• Team building Encouragement to each other to work as a team; emphasis on team goal; exchange
of opinions and ideas.

GROUP PROCESS
• Planning together, coordinating efforts.
• Making good decisions, solving problems.
• Knowing jobs and how to do them well.
• Sharing information.
• Wanting to meet objectives.
• Having confidence and trust in other members.
• Ability to meet unusual work demands.

SATISFACTION
• With fellow workers; superiors; jobs; this organisation compared with others; pay; progress in the organisation
upto now; chances for getting ahead in the future.

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 Figure VI: Elements used to measure human resource organisational causal and intervening variables
Ref.: Rensis Likert and David G. Bowers, “Improving the accuracy of P/L Reports by Estimating the Change in
Dollar Value of the Human Organisation”, Michigan Business Review, March 1973.

10.7 HUMAN RESOURCE VALUE: MONETARY MEASUREMENTS

Monetary measures of human resource value are needed in order to translate manpower resources
into a common denominator on which many organisational decisions are based. These decisions
pertain to individuals, groups, and the total human organisation. For this purpose, different
methods of valuation are needed because each of these aggregations of human resources is a
distinct unit of organisational decision making, and as yet there is no single valuation measure
presently developed that can be validly used for all the three. We have seen earlier that the main
aspects of a person’s value to an organisation are:
1) Expected conditional value, and
2) Expected realisable value.

There are two related approaches to measuring the expected conditional value, and expected
realisable value : direct and indirect. In the direct approach, there is an attempt to derive a direct
or principal measure of a person’s value. The indirect approach involves application of various
possible surrogates or proxy measures of economic value in order to obtain measures of expected
conditional and expected realisable value.

Flamholtz’s Stochastic Rewards Valuation Model

One method proposed for measuring a person’s expected conditional value and expected
realisable value directly, is Flamholtz’s Stochastic Rewards Valuation Model. The process of
movements of people through organisational ‘states’ or roles is known as stochastic process. The
Stochastic Rewards Valuation model is based on the assumption that an individual generates
value as he or she occupies and moves along organisation roles and renders service to the
enterprise. The model presupposes that a person will move from one state (role) of the system
(organisation) to any other state during a specified time period. Exit also is considered a state.

In order to follow the model, the following steps are necessary:

Step 1 Define the mutually exclusive set of “states” and individual may occupy in the system.

Step 2 Determine the value of each state to the organisaton.

Step 3 Estimate a person’s expected tenure in the organisation.

Step 4 Find the probability that the person will occupy each possible state at specified future times.

In principle, a person’s expected conditional value and expected realisable value can be equal,
provided the person is certain to remain in the organisation in the predefined set of states
throughout his or her expected service life. However, the basic problem in applying this model in
actual organisation is the difficulty of obtaining valid and reliable data inputs of (1) the value of a
service state, (2) the individual’s expected tenure, and (3) the probabilities of occupying each
defined state at specified times – although Flamholtz continues to explore the various
possibilities of measuring these dimensions.

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There are a number of other valuation models which have been developed over the past two
decades and more. We will consider some of these here. The methods suggested throw
considerable light on the possible approaches to the problems of human resource valuation.
Lev and Schwartz’s Present Value of Future Earnings Model

Lev and Schwartz model is based on the economic concept of recognising humans as wealth-
providing sources of income, and relies on measurement of such wealth as a present value of
future income streams. The exercise involves (1) classification of employees into homogenous
group profiles, (2) estimation of earnings for each such group, and (3) calculation of the present
value of earnings of each group, using an appropriate discounting rate. Thus, the discounted
future expected income stream represents the present value of services.

The model has some limitations: Firstly, it ignores the possibility of the individual making exit
from the organisation for reasons other than death, and secondly, it ignores the likelihood of role
changes beyond one’s normal career channel. Further, by simply aggregating individuals into
groups on the basis of age, qualification, etc. is no guarantee of aggregate measures in value
because of synergism.

Hermanson’s Adjusted Discounted Future Wages Model

In this method the approach is to adjust the discounted future salary wage payments to people by
performance efficiency factor (which is a ratio based on the return on investment derived by the
specified firm relative to all other firms in the economy for a specified period). Apparently,
compensation measures, such as, salary are considered potentially useful to develop a surrogate
valuation model. However, in reality they may not necessarily bear a significant relation either to
an individual’s value or to his or her current productivity. There are several other limitations,
such as, organisational compensation policy, wage and salary structure, influence of unions which
may not accurately reflect the individual value.

Hekimian and Jones Competitive Bidding Model

In this model Hekimian and Jones propose a method whereby the concept of opportunity cost is
applied by establishing an internal labour market within the organisation through the process of
competitive bidding. Under this approach, all managers will be encouraged to bid for any scarce
employee they want and the one who is able to acquire his or her services put the bid price as his
or her investment base in respect of that employee. However, this method also has problem of
valuation, such as, to the adoption of a procedure by a manager to decide the amount of bid.

Validation of Surrogate Valuation

In a review of the several methods discussed above, Flamholtz observes that it is not sufficient to
assert that the various methods bear an identity or close correspondence between the true
unknown economic value of individuals or surrogate measures. Nevertheless, according to
Flamholtz “at best these assertions should be reviewed as testable hypotheses” pointing to the
need of validation through further research.

Monetary Measurements: Valuation of Groups

Earlier, the point has been mentioned that the value of a group may not be equal to the values of
the individuals comprising the group. Mainly, the differential is attributed to synergism. It is not

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valid merely to apply methods for individual valuation to group valuation, and vice versa. Hence,
the need to develop methods for the valuation of groups per se.

In organisations, there are several types of groups. For example, one classification is departments,
plants, divisions, levels, or just work groups. Another way of grouping is based on the
consideration whether the group comprises an expense centre or a profit centre. The methods for
valuing groups constituting profit centres include:

1) The Economic Value Method,

2) The unpurchased Goodwill Method, and

3) The Human Organisational Dimensions Method.

Methods for valuation of expense centres include:

1) Capitalisation of Compensation,
2) Replacement Cost Evaluation, and
3) Original Cost Evaluation.

Brummet, Flamholtz and Pyle’s Economic Value Model

The Brummet, Flamholtz, and Pyle model follows the principle that a resource’s value is equal
to the present worth of the future services it can be expected to provide, and therefore, it can
provide a basis of measuring the value of a group of people. According to this method, groups of
human resources should be valued by estimating their contribution to the total economic value of
the firm. Thus, a firm’s forecasted future earnings are discounted to determine the firm’s present
value, and a portion of these earnings is allocated to human resources according to their
contribution.

Hermanson’s Unpurchased Goodwill Model

According to Hermanson, the unpurchased goodwill notion is based on the premise that “the best
available evidence of the present existence of unowned resources is the fact that a given firm
earned a higher than normal rate of income for the most recent year”. To rephrase the statement,
Hermanson is proposing that supranormal earnings are an indication of resources not shown on
the balance sheet, such as, human assets. Even though his or her method of valuing human
resources is explicitly intended for use in a company’s published financial statements rather than
for internal consumption, this would necessarily involve forecasting future earnings and
allocating any excess above normal expected earnings to human resources of the organisation.
However, the assumptions would be subject to the uncertainties involved in any forecast of future
events.

This method suffers from several limitations: Firstly, since the methods limits recognition of
human resources to the amount of earnings in excess of normal, the human resource base that is
required to carry out normal operations is totally ignored, leading to with the result that human
assets will be understated so to say. Secondly, the method only uses the actual earnings of the
most recent year as basis for calculating human assets which limits the scope of making very
much discounts the reliability of forecasts of future earnings that could be more relevant for
managerial purposes.

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Human Organisational Dimensions Method

Based on the Likert-Bowers model of group’s value to an organisation discussed earlier, the
method follows the assumptions on relationship among causal, intervening and end-result
variables. The assumptions are that the causal variables influence the intervening variables, which
in turn determine the organisation’s end-result variables. According to Likert, changes in the key
dimensions if the human organisation are considered to be dependable indicators for forecasting
changes in the productivity and financial performance of an organisational unit that the human
organisation will be able to sustain over substantial periods of time. Moreover, when changes in
the human organisational dimensions occur, predictions can be made of the magnitude of changes
that will occur subsequently in the output performance of that human organisation.

How changes in value of human organisation are estimated in monetary terms?

For computing a monetary estimate of the expected change in the value of human organisation,
the following steps are suggested:

1) Using Likert’s ‘survey of organisation questionnaire’, the key dimensions of human

organisation are measured on a Likert scale at specified time periods in non-monetary terms.

2) The scaled responses to questionnaire items called ‘scores’ are then standardised by statistical
methods to take into account the degree of variability of the set of responses. This is done in
respect of responses for each time period.

3) The difference between two standardised scores from one period to the next is then
calculated. This difference (called delta) represents the change in an index of specified
dimensions of the human organisation.

4) From present changes in dimensions of the human organisation, the expected future change in
end-result variables is estimated. Specifically, for a given variable the delta is multiplied by
coefficient or correlation between that variable and end-result variable. This provides an
estimate in standard scores of the anticipated change in the end-result variable attributable to
a change in the human organisational dimension believed to cause that change.

5) Lastly, convert the standard scores into the measuring units of the end-result variables.

Likert points out further that changes in the productive capability of a firm’s human organisation
cannot be assessed correctly unless periodic measurements of causal and intervening dimensions
of that organisation are taken regularly. Otherwise, current profit and loss reports often encourage
them to believe that changes are occurring that are the exact opposite of the shifts that actually are
taking place. When profits go up, it is often assumed that the human organisation has become
more productive, but steps taken to maintain earnings or prevent losses may actually result in a
decrease in the productive capability of the human organisation, even though a short-range
increase in reported profits is attained. That has happened in many firms.

There is some controversy about the validity and reliability of this method. According to
Flamholtz, this method is worthy of future research because at present its validity and feasibility
have not yet been established. Likert, however, maintains that the method is feasible where
reliable and valid measurements of the coefficients are available.

Methods for Valuation of Expense Centre Groups

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Flamholtz proposes three methods for valuation of expense centre groups using surrogate
measures for their valuation:
1) Capitalisation of Compensation,
2) Replacement Cost Valuation, and

3) Original Cost Valuation.

Capitalisation

This method refers to capitalising a person’s salary and using it as a surrogate measure of human
value that can be applied to the valuation of groups as well as individuals. By this method the
value of the group would be estimated as the aggregate of the value of the individuals comprising
the group.

Capitalisation of compensation method is not considered an ideal method of group valuation

because of the possible effects of synergy – a point that has been noted more than once. Still the
method at best may provide a valid first approximation of a group’s value to the firm.

Replacement Cost Valuation

The replacement cost of a group is defined as the sacrifice that would have to be incurred today to
recruit, select, hire, train and develop a substitute group capable of providing a set of services
equivalent to that of a group presently employed.

Valuation on replacement cost basis would essentially involve considerable subjective estimates
which at once brings in the question of validity. Nevertheless, replacement cost can be used as
one possible surrogate measure provided the synergism factor must not be ignored.

Original Cost Valuation

The method involves estimation of the original cost of recruiting, selecting, hiring, training and
developing a firm’s existing human organisation. The need for using original costs to value
groups arises out of the necessity of estimating the cost of developing an effectively functioning
team. The teamwork is a process associated with effective communication, decision making,
coordination and other usual organisational processes. However, the point must be noted that
while estimation of costs of certain activities namely, recruiting, selecting, … etc., is possible,
there are no methods of measuring the costs of developing organisational processes.

Valuation of the Total Human Organisation

The valuation of the total human organisation employs virtually the same methods as appropriate
measures for valuation of groups, subject to specific method being used for valuing groups
constituting profit centres or expense centres as the case may be.

10.8 HUMAN RESOURCE VALUE : NON-MONETARY

MEASUREMENTS

Although accounting has conventionally used money as its basic unit of measurement, the
American Accounting Association’s Committee to Prepare a Statement of Basic Accounting

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Theory recently suggested that there is no reason why money alone should be the unit of
measurement used in accounting. (The committee stated that “there is also no reason why the
only measure applied should be ‘value’ in terms of dollars.) It is entirely conceivable that
accounting should deal with various measures and do so in a systematic form, say, a sector or
number of measures”. The committee concluded that the future scope of accounting was likely to
include non-monetary as well as monetary measures.
Use of Non-Monetary Measurements

In human resource accounting, non-monetary measures of human resource value have significant
uses. Firstly, they may be used for decisions that do not require monetary measurements – such
as, layoff decisions. Secondly non-monetary measures may also be used as surrogates for
monetary measures. For example, a ranking of people according to their conditional value may be
used as a surrogate for the monetary measurement of conditional value. Thirdly, non-monetary
measures may be used to predict monetary measures. Hence, the importance to develop valid
and reliable non-monetary methods of measuring human resource value.

In this context, let us revert to Flamholtz’s model to consider the methods of measuring each
determinant of an individual’s value to human organisations. We referred to the terms expected
realisable value and conditional realisable value. Expected realisable value and conditional
value can be measured by ranking methods. The probability of maintaining membership can be
measured by acturial and subjective probabilities. The elements of conditional value
(productivity, transferability and profitability) can be measured by personnel research and
appraisal methods as well as by certain objective measures. Productivity corresponds to
measures of performance and it can be measured by performance objective indices and by
management appraisal. Promotability and transferability can be measured in terms of the
measures of potential, such as, psychometric tests and subjective assessments. Satisfaction can be
measured by attitude surveys. Skills can be measured by a capability inventory and motivation
can be measured by an attitude questionnaire. A person’s role can be measured by job analysis,
while rewards can be measured through attitude surveys.

All of the variables contained in the Likert-Bowers model of the determinants of a group’s value
can be measured by the “survey of organisations”, an attitude questionnaire. Taylor and Bowers
have conducted tests of the predictive validity and the internal consistency reliability of this
measurement instrument. Their findings led to reconceptualisation of an earlier version of the
Likert-Bowers model and provide a foundation for the development of non-monetary
measurements of a group’s value to an organisation.

10.9 DEVELOPING A HUMAN RESOURCE ACCOUNTING

SYSTEM : SOME DESIGN CONSIDERATIONS

The design and implementation of human resource accounting system is a matter of individual
organisational capability and its perception of accounting and objectives of developing a
framework for the accounting of the human resources. While one firm may draw satisfaction with
the most rudimentary system, the other organisation may feel the need for much more advanced
capability. Similarly, the appropriateness and validity of a certain human resource accounting
capability may render itself less appropriate and not valid with the changed conditions both inside
and outside the organisation.

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Flamholtz suggests five human resource accounting systems by type of capability represented by
systems I, II, III, IV and V. Similarly, five functions of human resources management, viz.,
human resource planning, human resource decision making, conservation, evaluation and
management efficiency control are listed. These are arranged in a matrix form (Figure VII) to
indicate the human resource accounting capabilities provided by each system level:

System I System II System III System IV System V

Human Prerequisite Basic HRA Intermediate Advanced HRA Total HRA

Resource Personnel system HRA system system system
Management system
Functions
I
Human Manpower skills Estimated costs Replacement Standard and Stochastic
Resource inventory of selection, costs actual personnel rewards
Planning Replacement recruitment, costs Stochastic valuation model
tables training, etc. manpower HR value
mobility models simulation
Manpower

Simulations
II
Human
Resource
Decision
making:
A. Budgetary Personnel costs Personnel costs Budgetary Budget Standard Human Capital
included in budgeted system for and actual costs budgeting
“General & separately recruitment, Original and Budget ROI on
Admn.” training, etc. replacement human capital
expenses Budget costs investment.
replacement
costs
B. Policy Traditional Value-oriented Recruitment vs. Manpower Value-based
selection, selection training trade off assignment compensation
training and decisions analysis optimization
placement models
methods
III
Human
Resource
conservation:
A. After- Turnover rates Turnover cost Replacement Opportunity cost HR Value
the-fact cost depletion
B. Before- n.a. Attitudinal data Expected Expected Expected
The-fact Turnover cost Opportunity conditional and
costs HR realisable value
accountability depletion
IV
Human Performance Perceived value Performance Measurements Measurement of
Resource and potential rankings predictions of of economic economic value
Evaluation ratings potential value value of groups of individuals
interval scaling
of value

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 V
Human n.a. Comparison of Comparison of Comparison of Inter-unit
Resource actual costs with budgeted and actual costs comparison of
Management historical costs actual costs against standard costs
Efficiency Variance Variance
control analysis analysis

Figure VII: Capability provided by HRA system I to V.

From the above matrix it would be seen that at the two extremes, there is System I which consists
of nominal but very elementary human resource accounting capability. At the other end, there is
System V which constitutes the total HRA system, representing the maximal human resource
accounting capability.

These five systems can be taken as five levels and five stages of developing human resource
accounting capabilities. A firm may presently be in the first stage of human resource accounting
capability and desire to reach the fifth stage. Now depending upon its own circumstances, it may
be quite rational to move from stage to stage to incrementally increase the firm’s capability or
alternately, to choose a higher system IV or V.

Factors influencing the choice of a system

There are four major factors influencing the choice of a human resource accounting system:
1) type of organisation,
2) existing human resource accounting capability,
3) size and structure of organisation, and
4) availability of data for developing human resource accounting.

Let us briefly examine each factor.

i) Type of organisation: There are three main criteria which influence the type of organisation:
1) The degree of human capital intensiveness. For example, most service organisations are
highly people intensive (the postal department is a case in point) and, therefore, likely to lead
to account for human resources.
2) The number of highly educated or skilled personnel, such as, airlines pilots and crew –
individually as well as in groups.
3) The number of people occupying similar positions, i.e., each performing virtually similar
functions. For example, field officers in banks and insurance companies. Large numbers
provide a basis for comparability and of performance and potential as well as data for
purposes of analysis.

ii) Size and structure of organisation: A small organisation may not need at all a formalised
human resource accounting system because the management’s personal knowledge of
operations. However, the larger the organisation, the more likely it’s need for human resource
accounting. Here, the human resource accounting system must be designed as a subsystem to
the overall management information system.

iii) Existing Human Resource Accounting capability: We have already noted from the matrix
(Figure VII) that an organisations PERSONNEL SYSTEMS and human resource capability
will also influence the choice of a human resource accounting system. For example, an

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 organisation with a computerised human resource information system can be expected to
develop System V capability with much ease than an organisation with inadequate personnel
system.

iv) Potential for Developing HR Accounting: Much of the potential for developing human
resource accounting capability will be judged from the fact of availability of and accessibility
to the required data. In some organisations, particularly in service organisations, such as,
tourism, being labour intensive, most of the data is available as a routine aspect of business
operations, even though it might lack the advanced capabilities. In other organisations, where
some or all the required data is not available, the potential for developing human resource
accounting is to intermediate (System III) capability. Exceptionally, an organisation may
wish to move directly from minimal to advanced human resource accounting capability.

10.10 PHASES IN THE DESIGN AND IMPLEMENTATION OF A

HUMAN RESOURCE ACCOUNTING SYSTEM

We have noted earlier that different organisations require different degrees of human resource
accounting capability. Flamholtz’s Systems I to V are not all embracing or standards to match a
specific organisation’s human resource accounting needs. Instead, in each case, an appropriate
system will have to be tailor made to a firm’s particular needs. There are five phases in the design
and implementation of human resource accounting system:
1) Identifying human resource accounting objectives,
2) Developing human resource accounting measurements,
3) Developing a data base for the system,
4) Pilot testing the system for validity, and
5) Implementing the system.

1) HR Accounting Objectives: The objectives of the human resource accounting system should
basically stem from the management’s requirements from human resource information. These
requirements must be defined explicitly. As a part of the detailed study and analysis of the
organisation’s human resource management process, each organisational unit responsible for
human resource management should define its functions, indicate the kinds of decisions
made, their relative frequency and information needed to make those decisions. These
information needs must be analysed in relation to the present information flow and the new
information to be developed must be made specific. Once this analysis is done, the basis of
the human resource accounting system in terms of its scope and objectives can be defined.
The objective may be a total HRA system, a problem oriented system, a partial system, such
as, a budgeting system for human resource costs, or setting of standard costs.

2) Developing Human Resource Accounting Measurements: The first step is to select the
types of HRA measurements desired. The choice needs to be exercised between : (a) single
measurement or a set of measurements, (b) monetary or non-monetary measurements, and (c)
measurements of costs or value, or both. In the next step, before these measurements selected
can be translated into useable forms, their validity and reliability must be tested.

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3) Developing Human Resource Accounting Database: The inputs required for human
resource accounting constitute the database. These include cost data, time sheets,
psychological measurements, etc. In typical cases, it will become necessary to restructure the
organisation’s accounting classification with a view to ensuring that all personnel related
costs are classified separately. Otherwise these cost elements are ‘buried’ covered in one
single classification “administration and general expenses”. The accounting classification
should be organised in relation to responsibility centres, such as, recruitment, training,
management development, etc. In addition to restructuring the accounting classification, the
database must also include non-financial information, such as, employee attitude survey
feedback as a standard ongoing basis. Similarly, the probabilistic estimates of employee
mobility compiled in the human resource planning process must be taken into account for
measuring human resource value.

4) Pilot Testing the System: After the objectives have been defined, measurements developed,
and necessary database is made available, the next step is to pilot test the system. Care should
be taken that the test is not influenced by extraneous problems and that the management’s
support and cooperation is available throughout the processes of design and development of
the system. In the light of the feedback from pilot testing, the system should be reviewed for
its utility, efficiency, cost, etc. aspects and suitability modified, if considered necessary.

5) Implementing the Human Resource Accounting System: The final phase is the
implementation process. It involves essentially, standardising the input output documents,
forms, etc., and familiarising the personnel with the new system. Staff orientation as to the
uses, purposes, uses and methods is a key activity in order to operationalise the human
resource accounting system without much hassles.

Any system, over a period of time, may become out of step either because of inherent constraints
or changes in the management needs. A continuing review would make the system more
responsive to the changing needs, and modifications required would be easy to carry out either by
simple adjustments in the existing system or by following the design and implementation process,
if need be.

10.11 HUMAN RESOURCE ACCOUNTING :

NEED FOR FURTHER VALIDATION AND RESEARCH

The theory and practice of human resource accounting has developed so far on the basis of
research and case studies of individual organisations taken up by academics and professional
managers. But it has not fully developed yet. Flamholtz raises several issues which have
remained unresolved:
1) the utility of human resource accounting to management,
2) the scope of measurement methods,
3) the development of operational systems (delivery systems),
4) the impact of human resource accounting on organisations, and
5) the suitability and methodology of reporting on human assets for external users.
1) Utility to Management: The basic question is: what impact does human resource accounting
makes on the human resource planning and decision making? In the absence of human
resource accounting information, would the management’s actions be the same? Or maybe,

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 regardless of the availability of measurement of human resource cost and value, decisions
taken on the basis of “intuitions” give better results? The questions of this type have not yet
been answered. In particular, the effects of output human resource accounting information on
decision making, the effects of output from actual human resource accounting decisions
systems on management decisions and investor decisions, and the process and product of
using human resource accounting in organisations – all need to be researched in depth.
Further, the question of utility must be examined form the perspective of the individual, the
group, and the organisation as a whole.
2) Method of Measurement: In human resource cost measurement, the reliability of data
derived from any existing accounting system for human resource costs remains much in
doubt. According to Flamholtz, the researchers do not know the degree to which the data
derived from the system of accounting for investment in people (R.G. Barry Corporation),
measuring replacement costs are reliable. As for human resource value measurement, the
method proposed by Likert and Bowers to value the human organisation needs to be
validated before it can be used in the proposed way. On the validity of the Stochastic
Rewards Valuation Model proposed by Flamholtz, the author himself in another research
study has commented that “the model has divergent convergent and discriminate validity
when measures of economic value and a surrogate (compensation) are used for service
state values”.
3) Development of Operational System: Regardless of the fact that some companies have
attempted to develop and implement operational systems of human resource accounting, there
is need to develop systems that can serve more generally the organisations in different
industries of varying sizes and mizes of people. There is also scant information on several
basic issues, such as:
• how significant are human resource costs?
• what are the most significant components of human resource costs?
• what is the relationship between investment in human resources and other resources of
the organisation? and
• what is the ratio of investment in human assets and other assets using different
benchmarks for different industries, functions, etc.?
Hence, the need for basic empirical research to provide answers to these and other pertinent
questions.
4) Organisational Impact of HRA: In the pioneering work at R.G. Barry Corporation, it is
claimed that the very fact of attempting to account for firms, human resources focuses the
attention of all managers towards people. In the absence of further validation through
research, doubts are often raised if this vary act (accounting for firm’s human resources)
going to change the behaviour and attitude of all managers towards people. Questions are
asked:
• does the availability of measurements of human resource cost and value increase
management’s awareness of the importance of human resources?
• how does a person react to knowledge of his/her value as a human resource?
• how does a person react to this knowledge in relation to his or her peers?
• what are the complications that can arise through misuse of human resource accounting
measurements?
• under what types of managerial style is HRA most appropriate?
• Will there be resistance to HRA measures by managers and the working personnel?

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These are crucial questions which can be answered only through future research.
5) Reporting for External Users: Another important issue is the unresolved problem of
reporting on human assets. More research is required to develop valid and reliable methods
for measuring and reporting investment in human resources in financial statements. Then
there is the potential problem of manipulation of earning in the process of capitalising and
amortising human assets.
And lastly, while economists agree that there does exist a relationship between investments in
human resources (human capital) and growth on the macro economic level, there is not much of
evidence that the same relation holds for the individual firm. Hence, future research is needed to
study the effect of investment in human capital on corporate rate of return.

Check Your Progress–2

1) What is value? Define the following terms used in the context of human resource value:
i) Individual’s value to an organisation.
ii) Groups value to an organisation.
iii) Individual’s expected realisable value.
iv) Peer Group Behaviour.
v) End Result Variables.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

2) What are the methods for valuation of expense centre groups?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

3) Describe the phases in the design and implementation of a Human Resource Accounting
System.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

10.12 LET US SUM UP

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Human Resource Accounting provides another type of information that holds promise for the
evaluation of human resource management and in turn, human resource planning policies and
practices which invest in effective utilisation of these resources. Human resource accounting
places value on the human assets of the firm, means accounting for an organisation’s employees
among its other resources, measuring both the cost and the value of the personnel. In other words,
it involves accounting for investment in people and their replacement costs, as well as accounting
for the economic values of people to an organisation. Several models and methods for developing
measures in monetary and non-monetary terms are proposed.

However, there seems to be a diversity in suggested ways of measuring the investments. HRA
concept is well theorised, but still there are many questions remaining unanswered, and the
practical problems of gathering data and reliable measures of costs and values have been
overwhelming. Further, human assets are outside the concept of “ownership” and thus, far there
being no clear cut method to measuring the “changing characteristic” of human resources, in a
wholly convincing way. Nevertheless, much of the value of human resource accounting lies in
encouraging managers to consider investments in manpower planning in more positive way. As
management the HRA concept itself, represents a new way of thinking about people as assets. It
has a great potential for future research.

10.13 KEY WORDS

Investment Approach : denotes policy of treating certain human resource costs

as an investment to be depreciated during an
employee’s expected employment.

Humanistic Values : refers to positive beliefs about the potential and desire
for growth among employees.

Incremental Values : indicates almost limitless values that are created by a

positive organisational climate.

Organisational Climate : refers to human environment within which an

organisation’s employees work.

Organisational Climate Approach : necessitates use of periodic surveys to determine ways

in which the organisational climate has improved or
deteriorated.

10.14 CLUES TO ANSWERS

Check Your Progress–1

1) Human Resource Accounting may be defined as the measurement and reporting of the cost
and value of people as organisational resources. It involves accounting for investment in
people and their replacement costs as well as accounting for the economic values of people to
an organisation. Read Sec.10.2 and answer in detail.

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2) Cost is a sacrifice incurred to obtain some anticipated benefit or service. Conceptually, all
costs have “expense” and “asset” component. See Sec.10.5 to find the definition of the
various concepts of costs.
3) The original cost of human resources refers to the sacrifice that would have to be incurred to
acquire and develop people. This means that any attempt for measurement of original human
costs essentially requires measurement of acquisition costs and training costs. These costs
will include both direct costs and indirect costs of acquiring and developing human resources.
See Sec.10.5 to check out the figure of the model of Measurement for Original Human
Resource Costs.

Check Your Progress–2

1) Value is the present worth of the services an employee is anticipated to render in the future.
Read Sec.10.6 to find the definition of the related terms.

2) Flamholtz proposes three methods for valuation of expense centre groups using surrogate
measures for their valuation:
i) Capitalisation of Compensation,
ii) Replacement Cost Valuation, and
iii) Original Cost Valuation.
See Sec.10.7 to learn about them in detail.

3) There are five phases in the design and implementation of human resource accounting
system. They are:
i) Identifying human resource accounting objectives,
ii) Developing human resource accounting measurements,
iii) Developing a data base for the system,
iv) Pilot testing the system for validity, and
v) Implementing the system.
See Sec.10.10 and expand the above answer.

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