Human Resource Accounting

Last Updated: 20 Jun 2022
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Topic : Human Resource Accounting as a Measurement Tool: Asian Perspective

Attempts to account the Human Resource are not new it was Rensis Likert (1963), who initiated research into HR accounting in the 60’s. He stressed the importance of long term planning of Human Resource qualitative variables that results in greater benefits in the long run.

The resource theory considered that the competitive position of an organization depends on its specific asset, which is the HR. This explains why some firms are more productive and successful than others under almost similar conditions and similar industry. It is the HR that makes all the difference. Following a less fruitful research period (Grojer and Johanson, 1998: 495) one could have expected interest in the area to wane but on the contrary, it has experienced something of a revival.

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When anyone wants to know the history of HR accounting, most reviewers such as Grojer and Johanson (1998) agreed that during the first half of the 1970s it was one of the most researched subject within accounting, consuming a vast amount of academic Endeavour. Human Resource is not just the number of pairs of hands engaged in any organization. HR is above the simple number game. HR may be though of as the total knowledge, skills, creative abilities, talents and aptitudes of an organization’s work force. It is the sum total of inherent abilities, acquired knowledge and skills of the employees.

Why HR accounting is considered as important and who is the focus of this research? HR accounting is a term that has both a narrow and more generic focus in the literature with respect to the understanding of the value of people in the contemporary workplace and the contribution of the HR function. Defined narrowly “It is the process of identifying and measuring data about HR and communicating this information to interested parties”(American Accounting Association, 1973, as cited in Flamholtz, 1999: xii).

This definition suggests that HR accounting is a tool that can be used for reporting people as organizational resources in both financial and managerial accounting terms (Flamholtz, 1999) The objective is to quantify the economic value of people (Sackman et al, 1989:235). According to Sveiby (1997) attempts to convert people or competencies into financial figures, although theoretically interesting, have not proved entirely useful to managers. The use of both financial and non-financial approaches is now a more common theme when discussion focuses on the nature of HR accounting.

The reason for this is that HR accounting should be thought of as a set of techniques that provide a more balanced perspective, encouraging as much concern about the long-term drivers of financial success as about current performance and value. Consequently, the literature has adopted a wider brief when describing its nature. Some writers (Lester, 1996; Sheedy-Gohil, 1996; Skittle, 1995) claim that the level of knowledge-based assets of an organisation gives a clearer indication of the potential for future profitability than do traditional historical accounting measures.

Therefore, the rate of change in knowledge-based and other intangible assets must be included in any meaningful measure of profits. However, a review by Scarbrough and Elias (2002) suggests that, as an asset, human capital is precarious in terms of its potential mobility and difficult in terms of its measurement. So narrowly defining HR accounting has distinct limitations because the measurement of HR in whatever guise then becomes reliant on a purely financial metric that invariably involves debate about asset models and cost-benefit analysis. Here, we adopt this broader notion, embracing both a range of financial and non-financial measurements associated with Human Resource Management.

Measuring human resources has been viewed as proceeding rather slowly because its advocates always seem to be in the minority (Turner, 1996). Despite this, research has, over the past decade, been substantially measurement-oriented (Johanson and Larsen, 2000).

Numerous studies report advances in measurement approaches, case studies of developing practice and the growing support for techniques such as the balanced score-card (eg Boudreau, 1998; Fitz-enz, 2000; Flamholtz, 1999; Flamholtz and Main, 1999). These achievements may have been somewhat overshadowed by research that has, quite necessarily, been preoccupied with debating a range of measurement concerns including the old arguments that will continue to be debated long into the future.

The first of these arguments concerns the capitalization of HR and the debate surrounding whether human resources qualify or can appropriately be labeled as assets notwithstanding the competing view that there may be little substantial difference between intangible and tangible assets with no reason to treat one differently from the other (Boudreau, 1998; Johanson and Larsen, 2000; Mirvis and Macy, 1976; Turner, 1996).

There has also been the need to discuss what Human Resource measurement system should be designed to achieve, bearing in mind that measurement is not neutral and the choice of metrics conveys values, priorities and a strategic framework (Boudreau, 1998: 24). The dangerous liaison between human resources and accounting and the pitfalls of measurement requires a delicate balancing act juggling the multiplicity of often unlinked measures with the need to provide information that is oing to be effective in guiding and managing behavior (Pfeffer, 1997). Similarly there has also been a need to debate whether the accounting paradigm has been re-conceptualized (Mayo, 2000) to account for the new economic transformation (Flamholtz and Main, 1999: 11). This involves accounting requirements that move beyond the accepted role of custodial and financial accountability into the realms of fiscal, social and environmental accountability. (Turner, 1996: 71).

This involves a shift in thinking from human asset to human worth (Roslender, 1997) emphasizing a more holistic approach which embraces a broader range of social scientists thinking (Roslender and Dyson, 1992: 312) and allows for exploration in the realms of soft accounting numbers (Roslender, 1997: 22). Complying with orthodox management accounting conventions runs the risk, argues Armstrong (1989, 1995), of not only challenging the role but having to justify all HR activity in cost-effectiveness terms, thereby handing to others outside the function the decision as to what initiatives be given priority.

This strategy cedes too much to the dominant accounting culture and may also, in the end, achieve little security for the personnel function (Armstrong, 1989: 160). What is needed, suggests Armstrong (1989: 160), is for HR practitioners to master the accounting approach to the point where they can clearly identify its shortcomings, thereby putting themselves in a position to focus on the inadequacies of accounting projections as an exclusive basis for managerial decision-making, especially where HR are concerned.

By exploiting such shortcomings, HR practitioners can, suggests Armstrong (1989), further their cause by offering alternative strategies that emphasis that traditional accounting valuations are only one of a number of ways of establishing the value of HR. It is the politics of measurement and its likely impact on the HR function that dwarfs all others argues Pfeffer (1997).

Shrewd HR leaders are already training their people in a range of measurement strategies in order to prepare them to do battle on more favorable terms with the number of people in the firm. All of these debates, including the ethics of even attempting to measure the worth of HR have one goal in mind: to develop a means of valuing that captures the very nature of the worth of people and reports it in a way that not only allows for the development of the people themselves but the added value (worth) that they contribute to the organisation.

Consequently, understanding why HR accounting is important, to whom it is important and its links with organizational and HR strategies will provide a context for benchmarking the level of support for measuring HR and how far that support has been integrated into the thinking of different managerial groups and organizational strategies. This is what we set out to achieve. Methodology & Data Collection The sample will be drawn from the organizations in Pakistan from the top industries working in local economy.

Questionnaires will sent to a random sample of 20 members from each organization. For the purpose of gathering data survey-questionnaire approach will be used. The research will carried out in three phases. Phase 1 involved item generation, for that section of the questionnaire concerned with the importance and measurement of HR. A focus group of 50 people from different organizations will ask to discuss a number of questions. The content analysis of this information is use in developing the important measure of the questionnaire.

In the second phase the draft questionnaire will sent to a group of 20 HR managers organized through a network of one of the senior managers who was part of the original focus group. Each participant will asked to go through the questionnaire and write any comments relating to any particular question or questions in the right-hand margin available in the copy of the questionnaire. The emphasis in this phase will, as explained to participants, to find out whether they thought any of the questions are ambiguous or whether parts of the questionnaire could be improved.

All the comments received related to the background information of the questions and a number of modifications will made to this section. In third phase the questionnaire will distributed to the sample groups described above.

Research Questions

  1. Why it is important to evaluate HR?
  2. Why organizations are not measuring HR?
  3. How HR can be measured?
  4. How often are measures taken and reviewed?
  5. Who develops and collects HR information?
  6. Whether human resources qualify or can appropriately be labeled as assets?
  7. Does the level of Knowledge-based assets of an organization give a clearer indication of the potential for future profitability than do traditional accounting measures?
  8. Does it is possible to develop a means of valuing that captures the very nature of the worth of people?
  9. Does it can be used for the development of the peoples in the organization?
  10. Does HR accounting add value (worth) that HR contributes to the organization?

Potential Outcomes

If the firm can effectively calculate the value of HR and add their value to firm’s assets, it will increase the book value of the firm’s shares. An index can be prepared for different industries and firms can compare their HR value to the industry standard and with the other firms present in the same industry.

  1. The budget for the Training and Development can be justified.
  2. Firms can evaluate the results of Training and Development by comparing the value of HR before and after training and development session.


  1. Armstrong, P. (1989). Limits and possibilities for HRM in an age of management accounting’ in New perspectives on Human Resource Management. J. Storey (ed). London: Routledge. Dasgupta. N. "Human Resources Accounting" Sultan Chand & Sons New Delhi 1980.
  2. Flamholtz, E. G. and Main, E. D. (1999). `Current issues, recent advancements and future directions in human resource accounting’. Journal of Human Resource Costing and Accounting, 4: 1, 11-20.
  3. Johanson, U. (1999). `Why the concept of human resource costing and accounting does not work’. Personnel Review, 28: 1/2, 91-107. Lester, T. (1996). `Measuring human capital’. Human Resources, 24, 54 .
  4. Mayo, A. (2000). The Human Value of the Enterprise, London: Nicholas Brealey Publishing.
  5. Mirvis, P. H. and Macy, B. A. (1976). `Human resource accounting: a measurement perspective’. Academy of Management Review, 1, 74-83.
  6. Pfeffer, J. (1997). `Pitfalls on the road to measurement: the dangerous liaison of human resources with the ideas of accounting and finance’. Human Resource Management, 36: 3, 357-365.
  7. Prabhakara Rao D, "Human Resources Accounting" Inter-India. Publications New Delhi. 1986
  8. Sveiby, K. E. (1997). The New Organizational Wealth: Managing and Measuring Knowledge-based Assets, San Francisco: Berrett-Koehler Publishers Inc. Turner, G. (1996). `Human resource accounting wisdom? ’ Journal of Human Resource Costing and Accounting, 1, 63-73.

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Human Resource Accounting. (2018, Sep 22). Retrieved from

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