The American Accounting Association’s Committee on Human Resource Accounting has defined Human Resource Accounting (HRA)as “the process of identifying and measuring data about human resources and communicating this information to interested parties”. 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 organisation.

Purpose of Human Resource Accounting [ HRA]

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

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 be taken. 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. HRA also provides the HR professionals and management with information for managing the human resources efficiently and effectively. 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 organisation. Further, in a business environment where corporate social responsibility is rapidly gaining importance, HRA reflects the extent to which organisation 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.

Human Resource valuation Models

For valuing human resources, different models have been developed. Some of them are opportunity cost approach; Standard cost Approach, Current purchasing power Approach, Lev and Schwartz present value of future earnings Model, Flamholtz's stochastic rewards valuation Model etc. Of these, the model suggested by Lev and Schwartz have become popular. Under this method, the future earnings of the human resources of the organisation until their retirement is aggregated and discounted at the cost of capital to arrive at the present value.

Human Resource Accounting for Human Resource Management

HRA system consists of two aspects namely:
(a) The investment made in human resources
(b) The value of human resource.
Measurement of the investments in human resources will help to evaluate the charges in human resource investment over a period of time. The information generated by the analysis of investment in human resources has many applications for managerial purposes. The organizational and human performance can be evaluated with the help of such an analysis. It also helps in guiding the management to frame policies for human resource management. The present performance results will act as input for future planning and the present planning will have its impact on future results. The same relationship is also applicable to the areas of managerial applications in relation to the human resource planning and control. Investment in human resources can be studied under two heads.
(1) Investment pattern
(2) Investment in current costs.

Investment pattern in human resources:

The human resource investment usually consists of the following items:-
(1) Expenditure on advertisement for recruitment.
(2) Cost of selection
(3) Training cost
(4) On the job training cost
(5) Subsistence allowance
(6) Contribution to provident Fund
(7) Educational tour expenses
(8) Medical expenses
(9) Ex-gratia payments
(10) Employee's Welfare Fund.

All these items influence directly or indirectly the human resources and the productivity of the organisation.

Investment in current costs:

After analysing the investment pattern in the human resources of an organisation the current cost of human resources can be ascertained. For this purpose, current cost is defined as the cost incurred with which the organisation derives benefit of current nature. These are the costs which have little bearing on future costs. Thus the expenses incurred for the maintenance of human resources are termed as current costs. Current costs consist of salary and wages, dearness allowance, overtime wages, bonus, house rent allowance, special pay and personal pay.

International Standard for accounting employee benefits

International Accounting Standard (IAS) 19 prescribes the accounting and disclosure procedure by employers for employee benefits.

The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits (that is, all forms of consideration given by an enterprise in exchange for service rendered by employees). The principle underlying the detailed requirements of the Standard is that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable.

IAS 19 applies to:

• Wages and salaries
• Compensated absences like paid vacation and sick leave
• Profit sharing plans
• Bonus
• Medical and life insurance benefits during employment
• Housing benefits
• Free or subsidized goods / services given to employees
• Pension benefits
• Post-employment medical and life insurance benefits
• Long service or sabbatical leave
• Jubilee benefits
• Deferred compensation programmes
• Termination benefits

For short-term employee benefits (those payable within 12 months after service is rendered, such as wages, paid vacation and sick leave, bonuses, and nonmonetary benefits such as medical care and housing), the undiscounted amount of the benefits expected to be paid in respect of service rendered by employees in a period should be recognised in that period.

The enterprise should recognise the expected cost of profit-sharing and bonus payments when, and only when, it has a legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the expected cost can be made.

The accounting treatment for a post-employment benefit plan will be determined according to whether the plan is a defined contribution or a defined benefit plan:

• Under a defined contribution plan, the enterprise pays fixed contributions into a fund but has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits.
• A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These would include both formal plans and those informal practices that create a constructive obligation to the enterprise's employees.

For termination benefits, IAS 19 specifies that amounts payable should be recognised when, and only when, the enterprise is demonstrably committed to either:

• terminate the employment of an employee or group of employees before the normal retirement date; or
• provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

Professional opportunities in Human Resource Accounting

The HRA system tries to evaluate the worth of Human Resources of an organisation in a systematic manner as a whole to the organisation and the society and record them for presenting the information in a significant manner in the financial statement to communicate their worth with changes over the period and results obtained from their utilization to the uses of financial statements. This type of accounting can be done only by Chartered Accountants as they are the personnel who draft the financial statements of an organisation. As lot of information with regard to investment made in the Human Resources and its value can be calculated appropriately by Chartered Accountants, this type of accounting should be done by them rather than HR professionals who might not have accounting background.