Post on 19-Jan-2023
PROJEK PELAMI /THE.Qf§
BENEFITS AND LIMITATIONS
OF
HUMAN RESOURCE ACCOUNTING
pQTQSTA
A PAPER SUBMITTED TO
MARA INSTITUTE OF TECHNOLOGY
IN PARTIAL FULFILLMENT OF
THE REQUIREMENT FOR
ADVANCED DIPLOMA IN ACCOUNTANCY
BY :
NAME : CHE KARTINA BT. IDRUS
ITM NO : 90002168
DATE : 1 St. AUGUST 1992 ,
« ' •
Page
ACKNOWLEDGEMENT . . . . : . . ". .'. . . . . iv
ABSTRACT . . ... . v
CHAPTER ONE
INTRODUCTION . .' i
l.i TERMINOLOGY ...•..•. ... 2
1.2 OBJECTIVES 8F HRA . . . ": 3 •
1.3 OBJECTIVES OF STUDY 4
1.4 ^HISTORY OF KRA '....,.:. 5
- 1.5 METHODOLOGY .. .... 7
l.'e SCOPE AND LIMITATIONS 8
CHAPTER TWO
LITERATURE REVIEW 10
2.1 DETERMINANTS OF AN INDIVIDUAL VALUE 13
A. Individual Conditional Value .. 15
B. Probability of Maintaining Organizational Membership 23
CHAPTER THREE
DATA COLLECTION 28
COPYRIGHT © UiTM
• page
CHAPTER FOUR
ANALYSIS OF DATA
4.1 ACCOUNTING FOR HUMAN RESOURCES
I. Measurement and Recording of HRA 30
A. Cost-based Measurement
a. Historical Cost /ipriT;^ Qs^i^^h 30
' b. Replacement Cost Approach 32
c. Opportunity Cost
Approach 32
B. Value-based Measurement
a. Capitalization of Salary Approach 36
b. Unpurchased Goodwill
Method 37
c. Economic Value Approach .. 39
C. Non-monetory Measurement .... 40 4.2 AN APPLICATION OF STOCHASTIC
REWARDS VALUATION MODEL AT LESTER WITTE & CO ( a CPA FIRM ) 41
4.3 BENEFITS AND LIMITATIONS OF HRA
I . Benefits of HRA 48
II .Limitations of HRA 51
11
COPYRIGHT © UiTM
page
CHAPTER FIVE
CONCLUSION .. . 54
BIBLIOGRAPHY 56
APPENDICES • -
APPENDIX A -
APPENDIX B ,
APPENDIX C .
..APPENDIX D
•APPENDIX E
APPENDIX F
APPENDIX G
111
COPYRIGHT © UiTM
The author would like to express her gratitude to
Mrs. Jagjit Kaur, the advisor of this project paper for
all the beneficial time and effort that has been
contributed to read and offered many suggestion which
made this a stronger project paper.
In addition, the author appreciate the kindnest of
the librarians of Mara Institute of Technology,
International Islamic University and University of
M'alaya for their help in searching the related articles
and reference books. ^
The special contributions of idea and opinions
from En. Salleh and En. Khairuddin who are currently
working in Islamic Bank and Petronas are gratefully
acknowledged.
Last, but not least, this project paper could not
have been put together without the support,
encouragemen*t and advice from beloved mother . and
supportive friends.
iV
COPYRIGHT © UiTM
Human Resource Accounting ( HRA ) is. a new
approach in evaluating human resources that represents
the current status of human resources valuation concept;
which currently is being developed mostly in the
Western countries. By helping management'identify and
evaluate the human resources attributes that can make
the firm more profitable, human resources planning can
also make a significant contribution to a business.
There is a difficulty of measuring Human
Resources, therefore an audit firm has been chosen as a
field of study since it keep tracks of amount of hours
spent on each of the audit staff.
I
A very sophisticated approach to HRA with the
Stochastic rewards valuation model • which has been
applied in Lester Witte & Co, ( a firm in USA ) has been
put forward in this project paper. The model identifies
5 elements that must be defined in determining an
individual's value to the employer . Before that, the
various methods of HRA that have been recommended will
be further elaborated. Benefits and limitations of HRA
is another area to be taken into consideration , before
implementing HRA in the accounting system .
COPYRIGHT © UiTM
Finally, It's hoped that this project paper will
contribute to a better understanding of . !. Human
Resource Accounting .
VI
COPYRIGHT © UiTM
In recent yearS;, more -and more organisations are
beginning to extend their information resources by
moving towards systematic research which in essence,
seeks new information about the functioning of the whole
system in relation to its changing environment. One
example is the information gathered about the value of
its :human resources as an organisation moves through a
period of technological and personnel changes.
From an accounting point of view, all assets are
economic values that should be charged to the operations
of • the periods they benefit. This principle applied to
the entire economic life of the assets involved. For
that reason., advocates of human resource accounting
believe that, the often significant costs incurred in
recruiting, hiring, training and developing human
resources for the benefit of more than one period
should, like any other asset of material value be
indentified and charged to the periods in which their
benefit is felt.
The upshot of all this is that such information
can be of vital importance to management for decision
making and measuring the return on their present and
future investment in human resources. More effective
planning and controlling efforts are then assured,
particularly in labour intensive industries, in the
provision of professional services and in the
COPYRIGHT © UiTM
relatively new. but- expensive ' specialties, suj h as
systems analysis,and programming.
Of course this holds true only if operating
budgets include all the costs incurred in each
accounting period ' and the amortization of . human
resources over the period benefited. '~
Edwin H. Caplan and Stephen Lendekich in their
-book entitled HRA : Past, present and futuroe, said that:
"There appears to be two major reasons why HRA.has been receiving so much attention in recent years. Firstly, developments in modern organisation theory have made it apparent that there is a genuine need for reliable and complete information which can be used in improving and evaluating the management of human resource. Secondly, the traditional framework of accounting is in the process of being expanded to include a much broader set of measurement than was thought possible or desirable in the past."
1.1 TERMINOLOGY
Human resource Accounting ( HRA ) has been defined
as a method of identifying, measuring and communicating
information about human resources in order to facilitate
effective management within an organisation ( formally
incorporate the value of human contributions into the
.valuation of the firm ).
( Lee Khee Joo, "Human Resource Accounting", Akauntan Wasional, June 1989, p.16 ).
COPYRIGHT © UiTM
Stuart Armstrong and Mitchel, James 0 defined HRA
as whatever anybody wants to do to measure the, cost
benefits of managing.human resources and it involves
techniques for estimating the economic impact of the
behavioral outcomes of human resources or marketing
programs. ..
In general, HRA is not only a system of accounting
for an individual's organisation cost and value but also
involves a new way of thihking about managing people who
are the most valuable . and- important asset of^ the
company.
1.2 OBJECTIVES OF HRA
a. To provide cost-value information for making
management decision about acquiring,
allocating, developing and maintaining human
resources in order to attain organizational
objectives.
b. To identify the respective contributions of
capital and labour to overall organizational
performance and to provide a basis for managing
the organization with greater economic
rationality ( through the provision of improved
information for the personnel function).
( Parker L.,D, Terris K.R and Otley P.T, p.150 )
COPYRIGHT © UiTM
r;^^;^^^'^^^'^!^^^
c. To provide quantitative information on an
organizations of human resources that
management and investors can , use in their
decision making process.
d. To effectively monitor the use of human
resources in the management's planning and
control function.
e. To aid in the development of other management
objectives' by quantifying the human values to
arrive at better decision making process.
f. ' To provide methods of evaluating management's
utilization of human resources for example
monetary resources for turnover costs.
( Mc.Rae, Thomas W, "Human Resource Accounting As A
Management Tool," The Journal Of Accountancy, August
1974.p.32 )
1.3 OBJECTIVE OF STUDY
a. To be knowledgeable with the concept of Human
Resource Accounting •( HRA ), both theoretically
and practically. This include :
i. the objectives for adopting HRA
ii. the issues and problems concerning the
acceptance of HRA.
iii. the benefits of implementing HRA..
* •
COPYRIGHT © UiTM
b. To be exposed to the measurement method and
recording of HRA in the accounting system. HRA'
is still a new approach and with this study it
is hoped that it will give a better
understanding of the subject itself.
c. To establish the determinants of an Individual
Value and the application- of HRA in an
organization. This study would also like to
probe into the extent of how to determine an
individual value since 'individual should also
be considered as an asset to the organization.
The author would study the application of HRA
in an overseas organisation.
1.4 HISTORY OF HRA
Since the 1960's, research, in this subject has
primarily developed based on the human resources school
of personnel management. Flamholtz has specified five
stages in the development of HRA, which are :
a. From 1960 - 1966, this was marked by the
derivation of HRA concepts from the economic
theory of human capital, then the new human
resources school and organizational
psychologists' focus on leadership
effectiveness.
COPYRIGHT © UiTM
b. Between 1966-1971, this was identified as a
period of basic academic research, measurement
of models and identification of potential user
as well as some experimental applications in
actual organizations.
c. From 1971-1976, this was a period of growing
interest in HRA, exhibited by. both researchers
and organizations. The applications of HRA were
mostly attempted by small entrepreneural
organizations. Assessments were also made on
the potential impact of HRA information to line
manager and investor decisions.
d. Between 1976-1980, this was identified as a
period of declining interest among accounting
researchers and business organizations.
Flamholtz has attributed that interest in HRA
has waned, possibly because the public
accounting standards- were too stringent to
allow the direct reporting of human asset value
in financial statements, the preoccupation of
business with other concerns and the lack of
organizations preparation to sponsor HRA
applications research and expenditure.
COPYRIGHT © UiTM
e. Since 1980 and up to present, there has been
a period of growing interest in HRA. This has
been shown by demonstration of new research
studies and some attempts by major
organizations to apply HRA. In United States,
interest has been accelarated by a focus on
employee productivity. Some of Japanese
Corporates have shown interest in applying a
new approach to their human resources ( as
lifetime a.ssets rather than expenses ). In
Western economies itself, there was a change of
primarily industrial manufacturing to high
technology service economies for which human
capital is a critical source.
1,5 METHODOLOGY
All the information are obtained and compiled
mostly from overseas magazines, accounting journals and
reference books.
The author has conducted an interview with En.
Salleh Yusof, a Personnel Officer in Bank Islam and En.
Khairuddin, a Human Resource Officer in Petronas, to get
some idea and opinion from them regarding the
application of Human Resource Accounting in their
respective organisations. Questionnaires were
distributed to both of them.
COPYRIGHT © UiTM
A letter of correspondence was sent to Malaysian
Institute of Accountant ( MIA ) to obtain their
perception on this matter.
1.6 SCOPE AMD LIMITATIOHS
The author feel that the analyzing of data is the
most important area. The technique of "how to measure
and record Human Resource in the accounting system is
important. The author will therefore stress on the
measurement iriethod of Human Resource Acc-ounting. The
various measurement method are comprise of Cost-based
measurement. Value-based measurement and Non-monetary
measurement. Those measurement methods are then
subdivided into different cost approach.
As a result of non implementation of HRA in the
accounting system in any organization in Malaysia, the
author has selected one organization in USA which has
applied this approach in their reporting and management
information system.
Benefits and limitations of HRA is the major scope
that should be covered as it is the main topic of this
study. The author will discuss these benefits and
limitations if applied to any organisation.
COPYRIGHT © UiTM
The limitation of this study is that no primary
data has been collected concerning the practicalities of
HRA since, none of the companies in Malaysia has adopted
this approach in their accounting system. All the
information are gathered from articles, accounting
Journals and reference books.
9
COPYRIGHT © UiTM
According to Eric Flamholtz, the main criteria for an
asset are :
i. it must possess future service potential
ii. it must be measurable in monetary terms and
iii. it must be subject to the ownership or control
of the accounting entity ( e.g. in the case of
long term lease it would be classified as an
asset).
The investment in people, is expected to poE3es.s
future service potential, they are measurable in
monetary terms and they are subject to the control of
the organisation ( at least on a probabilistic basis )
and thus they should be treated as assets.
( Eric Flamholtz, "Human Resource Accounting,p.293 )
Hermanson argued and classified two types of asset;
the first will be entitled owned assets and the second
category entitled operational assets which will consist
of all scare resources operating in the entity that are
not owned. E.g trained salesforce.
( Lee Khee Joo, "Human Resource Accounting", Akauntan
Masional, June 1989,p. 18 )
F.A Nicholls suggested that HRA advocates were
concerned that the missing of the value of human
10
COPYRIGHT © UiTM
resources in the balance sheet would be a serious
handicap to management and investors in decision making
process. As a matter fact, they appeared as a cost in
the profit and loss statement and some residue may be
found in finished stock or work-in-progress
The anxiety to get into the balance; sheet would
make that statement of resources more -of "mishmash" than
it is at present. He went on to say :
"It seems to be most unlikely that the effectiveness of the net asset value in a balance sheet will be much improved by the inclusion of an estimated capital value of the employees. Adding one more doubtful valuations will stretch the balance sheet beyond its limitations and make it lesSj not more useful. In addition, much of the statistical data generally available relating to employees can be supplied in more detail in published reports. Staff turnover figures, output for man-hour, changes in wages rates, number in. categories of skills, etc..".
( F.A Nicholls, " Human Assets Accounting'" Certified Accountant, June 1975, p. 324 )
During the last decade, several advocates of human
resource accounting, including Hermanson, Likert,
Likert and Pyle and Lev and Schwartz, have suggested
that HRA could benefit external users of financial
statements. External decision makers must know the
changes in human assets in order to evaluate properly
assets and income. If the condition of human assets
changes during the period, conventional accounting
income may be misstated and the asset base distorted.
11
COPYRIGHT © UiTM
The committee on Human Resource Accounting,
summarized the above position :
External users, particularly investors, could benefit from HRA through the provision of information on the extent to which the human assets of the organization have been increased or hav.e diminished during the period ".
( James A.Hendrikcs, " The Impact of H-uman Resource Accounting Information On Stock Investment Decisions", The Accounting Mevie^-51, April 1976, P.292 ).
In his 1971 study, Flamholts proposed.a normative
human resource valuation model which would trace the
movement of an employee through organizational positions
or 'service states' where the individual employee
...is expected to render a specified quantity of
services to the organization during a specified time
period".
( Pekin Ogan, " A Human Resource Value Model For Professional Service Organizations, The Accounting Review, April 1976, p.306 )
12
COPYRIGHT © UiTM
2.1 DETERMIMKTS OF M IHDIYIDUAL'S VALUE
An individual's value to an organisation is
thus multidimensional . It is comprised of two
interacting variables that are :
a. the individual's conditional value and
b. the probability that the individual will maintain membership in the organization^_
( Eric Flamholtz, " Towards A Theory Of Human Resource Value In Formal Organizations ", The Accounting Review. October 1972, p.669 )
An individual's 'conditional value' is the present
worth of the potential services that could be rendered
to the organization, if the individual maintained
organizational membership throughout his expected
service life.
The probability that the individual will maintain
membership in the organization is the complement of the
probability of turnover or exit. It determines the
extent to which the organization will realize the
individual's potential services or conditional value.
The product of these two variables is thus the
individual's 'expected realizable value' that is . the
present worth of services actually expected to derived
during the individual's anticipated tenure in the
organization. This is shown in Figure 1, below.:
' 13
COPYRIGHT © UiTM