Importance of Human Resource Accounting

Topics: Balance sheet, Financial statements, Human resources Pages: 5 (1695 words) Published: September 25, 2012
Importance of Human Resource Accounting:
Human Resource Accounting provides useful information to the management, financial analysts and employees as stated below: a) Human Resource Accounting helps the management in the Employment, locating and utilization of human resources. b) It helps in deciding the transfers, promotion, training and retrenchment of human resources. c) It provides a basis for planning of physical assets via-à-vis human resources. d) It assists in evaluating the expenditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm. e) It helps to identify the causes of high labor turnover at various levels and taking preventive measures to contain it. f) It helps in locating the real cause for low return on investment, like improper or under-utilization of physical assets or human resource or both. g) It helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavorable circumstances. h) It provides valuable information for persons interested in making long-term investment in the firm. i) It helps employees in improving their performance and bargaining power. It makes each of them to understand his contribution towards the betterment of the firm via-à-vis the expenditure incurred by the firm on him. j) A financial analyst is interested in understanding and assessing the inner strength of firm. Such inner strength does not merely depend on the physical assets owned and possessed by the firm. IT also depends upon the type of human resources available to the firm. The vigilant, dynamic and responsible management can steer the company well through most adverse and unfavorable circumstances. In case the human resources, specially the managerial resources at the disposal of the firm are impartially and systematically valued and disclosed in the financial statements, it will be a valuable information for persons interested in making long-term investment in the firm.

Limitations in HRA
Human Resource Accounting is the term used to describe the accounting methods, system and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in financial terms. It presumes that there is great difference among the personnel in their knowledge, ability and motivation in the same organization as well as from organization to organization. It means that some become liability too instead of being human assets. HRA facilitates decision making about the personnel i.e. either to keep or dispense with their services or to provide training. HRA has implications for both external financial reporting and internal managerial reporting. External financial reporting is utilized in financial statements to distribute among stockholders, bankers, and potential investors and lenders. External reports for public companies, and often for private companies must follow “generally accepted accounting principles” (GAAP). It encourages objective, reliable and verifiable measurement to facilitate assessment of the company’s financial standing and comparability among organizations. Some people objects HRA because for them it implies ownership of human beings. With it a main problem raises that is subjectivity in measuring human assets. The same is true for reporting intangible assets such as goodwill and patents. GAAP does not allow reporting of human resources as assets, accounting rules do not allow for these intangible assets to be reported as assets. There are many limitations which make the management reluctant to introduce HRA. Some of the attributes are: a) There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human resources of an organization. The systems which are being adopted have certain drawbacks. b) The period of existence of human resource is...
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