What is Human Resource Accounting (HRA) and HRA Objectives?

Human resource Accounting (HRA) is the process of identifying, measuring and communicating data about human resources. In other words Human resource Accounting (HRA) can be defined as: Accounting for people as an organizational resource. It involves measuring the costs incurred by business firms and other organisations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organization.

The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as the process of identifying and measuring data about human resources and communicating this information to interested parties. Human resource Accounting (HRA), thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organization

Objectives of HR accounting.

Human resource Accounting (HRA) has the following objectives in an organization to fulfill:

• To furnish cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness.
• To allow management personnel to monitor effectively the use of human resources.
• To provide a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved.
• To help in the development of management principles by classifying the financial consequences of various practices.

Basically, HRA is a management tool which is designed to assist senior management in understanding the long-term cost and benefit implications of their HR decisions so that better business decisions can betaken.

If such accounting is not done, then the management runs the risk of taking decisions that may improve profits in the short run but may also have severe repercussions in future. For example, very often organizations hire young people from outside on very high salaries because of an immediate business requirement. Later on, however, they find that the de-motivating impact of this move on the existing experienced staff has caused immense long-term harm by reducing their productivity and by creating salary distortions across the organizational structure.

HRA also provides the HR professionals and management with information for managing the human resources efficiently and effectively. Such information is essential for performing the critical HR functions of acquiring, developing, allocating, conserving, evaluating and rewarding in a proper way. These functions are the key informational processes that convert human resources from ‘raw’ inputs (in the form of individuals, groups and the total human organization) to outputs in the form of goods and services.

Human resource Accounting (HRA) indicates whether these processes are adding value or enhancing unnecessary costs. In addition to facilitating internal decision-making processes, HRA also enables critical external decision makers, especially the investors in making realistic investment decisions. Investors make investment decisions based on the total worth of the organization.

Human resource Accounting (HRA) provides the investors with a more complete and accurate account of the organizations total worth, and therefore, enables better investment decisions. For example, conventional financial statements treat HR investments as “expenditures”. Consequently, their income statement projects expenditures to acquire, place and train human resources as expenses during the current year rather than capitalizing and amortizing them over their expected service life.

The balance sheet, thus, becomes distorted as it inaccurately presents the “total Assets” as well as the “net income” and, thereby, the “rate of return” which is the ratio of net income to the total assets. HRA helps in removing this distortion. Furthermore, in a business environment where corporate social responsibility is rapidly gaining ground, HRA reflects the extent to which organization contributes to society’s human capital by investing in its development.

Finally, in an era where performance is closely linked to rewards and, therefore, the performance of all groups/departments/functions needs to be quantified to the extent possible, HRA helps in measuring the performance of the HR function as such.