Human resource accounting

Historical cost approach

This was the first attempt towards employee valuation made by R. G. Barry Corporation of Columbus, Ohio in the year 1967. This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition; formal training and familiarization; informal training, Informal familiarization; experience; and development. The costs were amortized over the expected working lives of individuals and unamortized costs (for example, when an individual left the firm) were written off.

Limitations

• The valuation method is based on false assumption that the dollar is stable.
• Since the assets cannot be sold there is no independent check of valuation.
• This method measures only the costs to the organization but ignores completely any measure of the value of the employee to the organization (Cascio 3).

Replacement Cost approach

This approach measures the cost of replacing an employee. According to Flamholtz (1985) replacement cost include recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.

Limitations

• Substitution of replacement cost method for historical cost method does little more than update the valuation, at the expense of importing considerably more subjectivity into the measure. This method may also lead to an upwardly biased estimate because an inefficient firm may incur greater cost to replace an employee (Cascio 3-4).

Present Value of Future Earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees’ death. This method helps in determining what an employee’s future contribution is worth today.

Limitations

• The measure is an objective one because it uses widely based statistics such as census income return and mortality tables.
• The measure assigns more weight to averages than to the value of any specific group or individual (Cascio 4-5).

Value to the organization

Hekimian and Jones (1967) proposed that where an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that division’s investment base. For example a value of a professional athlete’s service is often determined by how much money a particular team, acting in an open competitive market is willing to pay him or her.

Limitations

• The soundness of the valuation depends wholly on the information, judgment, and impartiality of the bidder (Cascio 5).

Expense model

According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job performance are measured using traditional organizational tools, and then costs are estimated for each criterion. For example, in costing labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs.

References

1. Blau, Gary E. Human Resource Accounting, 1st ed. Scarsdale, N.Y.: Work in America Institute, 1978.

2. Caplan, Edwin H. and Landekich, Stephen. Human Resource Accounting: Past, Present and Future. New York: National Association of Accountants, 1974.

3. Cascio, Wayne F. Costing Human Resources: The Financial Impact of Behavior in Organizations, 3rd ed. Boston: PWS-Kent Pub. Co., 1991.

4. Flamholtz, Eric. Human resource accounting : [advances in concepts, methods, and applications]. 2nd edition San Francisco : Jossey-Bass, 1985.

5. Monti – Belkaoui Janice and Riahi – Belkaoui Ahmed. Human Resource Valuation: A Guide to Strategies and Techniques. Quorum Books: Westport, Connecticut – London, 1995.

6. Ulf Johanson, Gunilla Eklöv, Mikael Holmgren, Maria Mårtensson School of Business Stockholm University, Human Resource Costing and Accounting versus The Balanced Scorecard: A literature survey of experience with the concepts 1998 (PDF)