A company is effectively constituted and run by its personnel. They may be divided into various categories, such as upper management, sales and marketing departments, finance or legal teams, technical staff, and operations. Together, they constitute the human resources of the company.
From a managerial point of view, it is important to ensure the proper cohesion of the various personnel with each other. Only when all the different people in the company co-ordinate with each other, can there be effective execution of the company’s strategy.
This is practically doable only when there is a certain monetary value that is placed upon all human activities. Until recent centuries, the focus was upon the quantification of goods produced and distributed by a company. However, this has been challenged by behavioural economists, accountants, as well as various practitioners of the management profession.
In this article, we shall discuss some of the main types of human resource accounting, and briefly some of their advantages and disadvantages.
What is Human Resource Accounting?
One conventional definition of human resource accounting is that it is an organised effort to report and quantify the investments that have been made in the human resources of an organisation that may technically not be included as per under traditional human accounting systems. In other words, it seeks to quantify some of the subjective variables such as recruitment, training, experience and so on.
A human resource accounting system helps the management plan and regulate the use of all personnel in the company in an efficient as well as effective manner. It is useful in constructing a company culture where there is optimum use of human resources. These help in the taking of critical decisions, such as whether a company should lay off employees during a recession, or retain them in order to protect the human assets. HRA also provides a blueprint for how much to invest in the human resources of the company.
Types of Human Resource Accounting
Cost based Models
Cost has been defined as a sacrifice which is undertaken in order to avail of a service or some benefit. The benefit may either be tangible or intangible in nature.
- Historical Cost Model
Historical cost refers to the original cost, or the original expense that was incurred in order to obtain a particular asset. It is useful in human resource planning because it gives a clear picture to the management about the costs involved in onboarding as well as training a particular resource. This cost is usually of two types: acquisition cost and learning cost.
The main utility is that historical costs can be used for estimating as well as budgeting personnel costs. For instance, in case the company plans to acquire new resources along various departments, it can make assumptions about the numbers of employees it can recruit.
- Replacement Cost Model
In this model, the premise is that the whole organisation has to be created from scratch. Moreover, it is assumed that the existing personnel would be replaced by people of similar talent as well as training.
What is the entire cost that would be involved in bringing up the firm to its present level of efficiency. The condition is that the existing workforce would be replaced man for man by executives who are no more and no less competent than the present employees.
It may be noted that replacement cost model is conceptually different from the historical cost model. The replacement cost is a notional cost, in that it is based on an abstract, or imagined, replacement.
While replacement model is a better indicator of the financial worth of existing employees, it suffers from an obvious limitation. It would be practically difficult to fulfil the core premise: that is, finding employees who have the exact same skill set as the ones that they are replacing, and thus making a financial evaluation on them. Moreover, this model goes against traditional accounting methods.
- Opportunity Cost Model
This model is based on the traditional economic definition of an opportunity cost. It implies that there is a certain cost to using an asset or a resource in a certain operation. This is because the resource could have been gainfully deployed in some other activity. Thus, the use of the resource is effectively preventing an alternative use, and based on this, the opportunity cost is calculated.
In this model, scarce employees constitute the value of the human resources. In other words, an employee can be classified as scarce if his employment in a particular department (say, the labour administration wing) prevents his engagement in another department (the accounts department).
Again, the obvious problem with such an approach is that employees who are not considered to be scarce will not be considered in the larger practices of human resource accounting. In fact, the very premise is flawed, for it might be actually the utility employees - who are functional across multiple departments, who might be the real force driving the company. Such an accounting practice might serve to demoralize them.
Value Based Models
- Future Earnings Value Model
It has been observed that it becomes difficult to ascertain the value of human capital under conditions of uncertainty. Consequently, it has been argued that it makes more sense to account for an employee, or human resource, based on the future earnings that they will be entitled to, from the company. This is also known as the compensation method.
In this method, the value that a human resource represents to a company shall be a function of - the person’s annual earnings until the age of his or her retirement, the retirement age, and the discount rate specific to the person.
A major fallacy with this model is that it ignores the possibility that the employee may choose to leave the company other than reasons such as death or retirement. In today’s day and age, where professionals switch companies quite frequently with the hope of fetching raises quickly, this model might not be quite practical.
- Reward valuation model
As per this model, there is no connection between the cost incurred on an individual and the value that the employee provides to an organization over a period of time. Rather, it is the expected realizable value of the services that the individual that should be accounted for. In other words, it is the present value of all the gainful services that the employee can render over the remaining course of his career that determines the value of the human resource.
It is comprised by two variables which are interdependent: the conditional value of the individual, and the probability that they will continue to serve in the company. This model also proposes that the potential service states of the employee may be identified - this means that all the various positions that they might come to occupy should be accounted for.
Conclusion
Thus, in conclusion, we may repeat that the practice of human resource accounting has three main functions for the HR professional. It provides a framework for thinking about how to handle the various human resources who are employed by the company. It assigns a clear numerical value to all the professionals working in the company, and this would serve as the basis for an objective judgement when it comes to making evaluations. Finally, it motivates the line management of the company to adopt a perspective considering the welfare of human resources while making decisions.
Author Bio
