Quest International Multidisciplinary Research Journal

Volume I , Issue II
December 2012
ISSN : 2278 4497

Available online at www.mahidachintan.com

ORIGINAL ARTICLE

Human Resource Accounting : Brief History and Popular Models

Bhavin M. Badiyani
Assistant Lecturer
Government Arts and Commerce College
Gadhada- 364 750
Gujarat (India)
Abstract
With the overall transition from manufacturing
to service sector, most of economies in the
world have felt the need of assessing the
economic value of human assets. The growth of
International Financial Reporting Standards
(IFRS) has triggered the wider acceptance of
the concept of Human Resource Accounting.
The academic application of HRA finds its
roots in sixties. Later in eighties, a number of
organisations started applying various models
of HRA like Flamholtz's model of determinents
of individual value to formal organisation,
Flamholtz's model of stochastic rewards
valuation, the Lev and schwartz model etc. in
their regular accounting practices. The paper
focuses on the brief history and the popular
models of assessing the value of human
resources in the organisation.
Keywords : Human Resource Accounting,
Human Capital, Human Assets, Intellectual
Capita
Introduction
The past few decades have witnessed an overall
transition from manufacturing to service-based
economies. The importance of service sector
and its contribution in a country's economic
development is increasing day by day in this

era of globalisation. The most vital part of any

organisation in this era is, 'Human resource'.
Nowadays human resources are the most
considerable part of any organisation to achieve
the desired goals successfully.
Human resource accounting is the concept of
recent origin and is struggling for wide
acceptance. It involves accounting for
expenditures related to human resources as
assets as opposed to traditional accounting
which treats these type of costs as operating
expences that reduces firm's operating profit.
The growth and wide acceptance of
International Financial Reporting Standards
(IFRS) has triggered the necessity of
considering human resources as an asset of the
firm.This paper provides a brief overview of
the history and concept of human resource
accouunting and its popular models.

Concept of HRA
According to the american Accounting
Association's Committee on Human Resource
Accounting (1973), "It is the process of
identifying and measuring data about human
resources and communicating this information
to interested parties."

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Compulsive Use of Internet and Some Personality Characteristics of College Students

Thus, HRA involves measurement of all the

costs related with the employees such as
expences incurred for recruitment, placement,
training, development etc. Moreover, it
includes the quantification of the economic
value of the employees. Ransis LIkert, who is
famous for his contribution in the vfield of
leadership and management, says that the role
of HRA in any organisation can be described as
follows:
(1) It provides the information regarding cost of
recruitment, selection, placement, training etc.
which helps management in decision-making .
(2) The analysis of the information provided by
HRA can help in attaining cost-effectiveness.
(3) It provides the strong basis for controlling
the human-assets.
(4) It helps in the development of management
principles by classifying the financial
consequences of various practices.
Thus, HRA can be said a technique that assists
management for the effective human resource
management as well as in achieving the desired
goals of the organisation.
The current environment having wide
acceptance of International Financial Reporting
Standards (IFRS) have encouraged the
consideration of non-traditional approach
towards the human resources. There is a
possibility that future financial reports may
include more and more non-traditional
measurements such as value calculated of
human resources using various HRA models.
History of HRA
According to Falmholtz (1999),
the
development of HRA as a systematic academic
activity began in sixties. He divides the
development process of HRA in five stages.
Stage-1: (1960-1966)
In this period, the HRA concepts were
primarily derived from other management
studies such as psychological theories of
leadership, economic theory of capital, the
concepts of human resources etc. This was the
beginning of the academic interest in HRA.

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Stage-2: (1966-1971)
During this era, the main concentration was on
devveloping the various models of HRA. There
was a need of HRA models, which could help
the management bodies in assessing and
managing the human resources of their
respective firms. Especially, a number of
research projects were undertaken to develop
the methods and models of HRA, by the
researchers being inspired by Roger
Hermanson.
Stage-3: (1971-1976)
There was a rapid growth of research in the
field of HRA during these yearrs. The prime
focus was on the problems of application of
HRA in various organisations.
Stage-4: (1976-1980)
The issues related to application of HRA were
being more and more critical and needed much
wider and deeper researches in this field.
Though the organisations were impressed with
HRA, they didn't found it needful to invest big
amounts in this type of researches. So, the
progress of this concept was slow during these
years.
Stage-5: (1980 onwards)
After 1980, more and more economies were
shifting from manufacturing to service
economies. They felt the need for having
consideration towards human assets. This
change was obvious because the growth and
profits of most of organisations was being more
and more dependent on the intellectual assets
than on the physical assets. So there was a
sudden zoom in attention towards the HRA
after 1980.
This resulted in the shift of focus from the
academic application to the greater application
of HRA to management. Today, the intellectual
capital are believed to be the strategic resources
and therefore, the clear estimation of their
value is now very important. The increased
pressure of ethical issues and codes of conduct
demanding for transparency in accounting have
helped the need to develop the methods of
measuring value of human asseets.
In India, many public and private firms have
adopted HRA. Below is given the list of such
firms:

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Compulsive Use of Internet and Some Personality Characteristics of College Students

o
o
o
o
o
o

Bharat Heavy Chemicals Ltd. (BHEL)

Oil India Ltd. (OIL)
Steel Authority of India Ltd. (SAIL)
Hindustan Lever Ltd. (HLL)
TELCO Ltd.
Infosys

Approaches to HRA
There are a number of approaches have been
developed and suggested for the measurement
and valuation of human resources. These
approaches may broadly be classified into two
types:
(A) The cost approach
(B) The economic value approach
(A) The cost approach
There are two types of costs that are of special
importance in HRA: (1) Original or Historical
cost and (2) Replacement cost.
The original cost of human resources is the
sacrifice that was made to acquire and develop
the resource. We can include the costs of
recruitment, selection, placement, orientation
and training in the original cost.
Sometimes, Opportunity cost is also used.
Opportunity cost means a calculation of what
would have been the returns if the money spent
on human resources was spent on something
else. However, this method is restricted only to
internal reporting.
The replacement cost means the cost that
would have to be incurred if present employees
are to be replaced. If an employee leaves the
organisation, various costs of recruitment,
selection, placement, orientation and training
would have to be incurred in order to replace
him.
There are some other cost methods like
standard cost method, the competitive bidding
method etc.
(B) The economic value approach
The economic value of human resource is the
present worth of the services that they are
likely to render in future.. The methods for
calculating the economic value of individual
employee may be classified into two partts:

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(i) Monetary measures

There are severals models given by experts to
assess the value of an individual.
(a) Flamholtz's model of determinants of
individual value to formal organisations:
Flamholtz says that the value of an individual is
the present worth of the services that he is
likely to render to the organisation in future.
The present cumulative value of all the possible
services that he may be render during his
association with the organisation is the value of
that individual. This value has two dimentions.
The first is the expected conditional value of
the individual. It means the amount that the
organisation could potentially realize from the
sevices of the individual during his productive
service life with the organisation.
The second one is the expected realizable
value. It means the expected conditional value
of the probability that the individual will
remain in the organisation during his
productive service life.
(b) Flamholtz's stochastic rewards valuation
model
Stochastic process means the progress of an
individual through organisational roles during
his service life. This model directly measures
an individual's conditional value and expected
realizable value. This model assumes that an
individual generates value as he takes different
roles in the organisation. An individual's
expected conditional value and expected
realizable value will be equal, if he is certain to
remain in the organisation in the predetermined
roles throughout his expected service life.
(c) The Lev and Schwartz model
According to this model, the value of an
individual who is 'r' year old, is the present
value of his future earnings from employment.
It can be calculated by using the formula
below:
E(Vr)=I(t) / (1+R)t-r
where, E(Vr)=expected value of an 'r' year old
individual's human capital
t = the individual's retirement age
R = discount rate
I = expected earnings of the individual in
period I

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This method basically depends on measuring

changes in the individual's value rather than
employer's gain from that individual.
(ii) Non-monetary measures
There are several non-monetary measures that
assesses the economic value of human
resources, but not in terms of money. They
depends on various ratings and rankings. Below
are given the non-monetary measures:
(a) The skills inventory: It is a listing of the
education, skills and experience of human
resources.
(b) Performance evaluation: It includes
ratings and rankings which reflects an
individual's performance.

given by the experts in this field like

Flamholtz's model of determinents of
individual value for formal organisation,
Flamholtz's model of stochastic rewards
valuation, the Lev and schwartz model etc.
Different organisations are using various
models according to their need and the nature
of their human resources. In short, nowadays
no economic growth can be made without
giving importance to the human resources and
without considering them as an asset.
References

(c) Assessment of potential: It measures an

individual's capacity of promotion and
development. 'Trait approach' is used here to
assess the potential of the individual.

(d) Attitude measurement: It assesses the

individual's attitude towards the job, work and
organisation and determines the job-satisfaction
or dissatisfaction.
The field of Human Resource Accounting is
still developing and the new models are being
created to fulfil the need of having a better
approach of assessing the value of human
resources.

Conclusion
In this era of modernisation and globalization,
it is essensial for an organisation to consider its
human resources as an asst. The gradual
development have been witnessed in this field
and still the new approaches and models are
being given. There are several methods and
models currently in use to determine the value
of an individual such as cost approach and the
economic value approach. Several models are

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Lev B, Schwartz B A (1971): On the

Economic Concept of Human Capital in
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Review.
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Accounting
Association
Committee of Accounting for Human
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XLVIII
Mukesh Chauhan & Shivani Gupta,
"Human Resource Accounting-Concepts &
Practices in India". The management
accountant. January 2009. Vol.44
Eric G. Flamholtz (1999: 3rd Edition)
"Human Resource Accounting: Advances
in concepts, methods & applications".
Kulver Academic Publishers
Eric G. Flamholtz (1971): A Model for
Human Resource Valuation: A Stochastic
Process with Service Rewards. The
Accounting Review
Likert R. (1971): Human Organisational
Measurements: Key to Financial Success.
Michigan Business Review, May 1971, 15.
D. Prabhakar Rao (1993), Human Asset
Accounting: An Evolution of the Indian
Practices, ASCI Journal of Management,
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Please Cite this Article as :

Badiyani, Bhavin M. Human Resource Accounting : Brief History and Popular Models
Quest International Multidisciplinary Research Journal 1.2 (2012) : 155 158.
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