Talk:Human resource accounting

Definition

Human Resource Accounting is the process of measuring and reporting the cost and economic value of people as organizational resources for managerial and financial accounting purposes (1).

Origins (edit)

Although it is currently recognized that human capital is a key to organizational success, the field of what is now termed “Human Resource Accounting” (“HRA”) only began to develop in the 1960s.

In its development, this filed has passed through several discernible stages. The first stage of development, from 1960 to 1966, was marked by interest in HRA and the derivation of basic HRA concepts from related bodies of theory. The initial impetus for the development of HRA came from a variety of sources, including the economic theory of human capital, organizational psychologists' concern for leadership effectiveness, the new human resource perspective, and a concern for human assets as components of corporate goodwill.

The second stage of the development of HRA was a period of basic academic research to develop and assess the validity of models for the measurement of human resource cost (both historical and replacement cost) and value (both monetary and non-monetary). It was also a time of research designed to formulate the present and potential uses of HRA as a tool for human resource professionals, line managers, and external users of corporate financial information. This stage, which occurred from 1966 to 1971, also included a few exploratory experimental applications of HRA in actual organizations.

One of the earliest studies in human resource accounting during the second stage was conducted by Roger Hermanson, who was at that time a Ph.D. candidate at Michigan State University. Hermanson dealt with the problem of how to measure the value of human assets as an element of goodwill when they have not been purchased. A great deal of the research done during the second stage of the development of HRA was done at the University of Michigan. In addition, beginning in 1967, a research team that included the late Rensis Likert, R. Lee Brummet, Eric G. Flamholtz and William C. Pyle carried out a series of projects designed to develop concepts and methods of accounting for human resources. Under the direction of William Pyle, then a Ph.D. candidate, research was conducted on the measurement of the historical cost of human resources at the R. G. Barry Corporation, a relatively small soft goods manufacturer headquartered in Columbus, Ohio. Pyle also completed a doctoral dissertation at the University of Michigan on accounting for human resource costs. Flamholtz completed his doctoral dissertation at the University of Michigan. It title was “The Theory and Measurement of an Individual’s Value to an Organization.

The third stage of development of HRA, which dated from 1971 to 1976, was a period of rapid growth of interest in human resource accounting. It involved a great deal of academic research throughout the Western world and in Australia and Japan. It was a time of increasing attempts to apply HRA in business organizations. Most of these applications were conducted by relatively small entrepreneurial organizations, such as R. G. Barry Corporation and Lester Witte & Company.

The research at R. G. Barry Corporation under the direction of William C. Pyle during HRA's second stage of development involved one of the first attempts to develop a system of accounting for the historical cost of human resources. During the third stage, the R. G. Barry experiment received considerable recognition because, at least for a few years, the company published pro forma financial statements that included human assets. This, in turn, stimulated increasing interest in HRA. Unfortunately, the publication of those financial statements also had a negative side effect; they led to the widespread erroneous impression that human resource accounting was concerned only with treating people as "financial objects." Although preparing financial statements that included human resources was undoubtedly a part of human resource accounting, it was not by far the most significant part. Yet precisely because it was dramatic and innovative, "putting people on the balance sheet" became the dominant image of HRA for many people.

The research conducted during stage three also involved assessments of the potential impact of HRA information on decisions by human resource professionals, line managers, and investors. It also involved the continued development of concepts and models for measuring and accounting for human resource cost and value. This stage was characterized by a considerable amount of published research dealing with HRA as well as a great deal of seminar activity. Many of the studies conducted during this stage are included in the annotated bibliography section of this book.

During the third stage, the American Accounting Association established committees on human resource accounting in 1971 1972 and 1972 1973. These committees published reports on the development of HRA.

The fourth stage in the evolution of HRA, from 1976 to 1980, was a period of declining interest both in academia and in the corporate world. One of the reasons for the reduced interest was that most of the relatively easy preliminary research had been accomplished; the remaining research required to develop HRA was complex, could only be accomplished by a relatively few scholars, and required the cooperation of organizations willing to serve as research sites for applied research studies. Since relatively few individuals had either the skills required to do such research or the qualifications required to obtain the necessary participation, few major studies were performed. During this period, corporate interest was diverted to other, more pressing issues. Furthermore, the required research involved the application of HRA in organizations, and the cost of subsidizing such research was significant while the benefits were either uncertain or would accrue to the field as a whole and not necessarily to the sponsoring firm. It was at this point that HRA seemed to have been an idea that was promising but that would not be developed much further. However, significant megatrends in the environment changed all that in just a few years.

Stage five, the current stage of development of HRA, which can be dated from 1980 to the present, has involved the beginnings of a resurgence of interest in the theory and practice of human resource accounting. Although interest in HRA had clearly waned during the period from 1976 to 1980, it never completely died. The first sparks of renewal occurred during 1980, and since that time there have been an increasing number of significant new research studies dealing with the development and application of HRA as well as an increasing (albeit relatively small) number of attempts to apply human resource accounting by major organizations.

At about this time, there was also growing recognition that most of the world’s advances economies have made a gradual yet fundamental transformation. They have shifted from industrial economies in which plant and equipment are the core assets to post-industrial economies, in which human capital and intellectual property are the core assets. This transformation is evident not only in the economy as a whole, but in the very organizations of which it is comprised. The shifting fortunes of specific organizations are concrete manifestations of the general and broad trend toward a human capital intensive economy. While most firms in the industrial era, by definition, relied on manufacturing capabilities, companies in the post-industrial era rely almost completely on knowledge and information for survival and profit. While long dominant companies such as U.S. Steel and General Motors have gone into decline, new companies such as Microsoft, Intel Corporation, and Amgen have emerged as the hallmark of the new era. Thus, in this era, the potential success of an organization lies in its intellectual capabilities rather than in its physical assets. Accordingly, organizations must pay particular attention to the development and deployment of intellectual capital, or the sum of human capital and intellectual property.

Unfortunately, accounting (both financial and managerial) has not responded to this change in circumstances. The accounting paradigm and related measurement technology has not been re-conceptualized to account for this economic transformation. As a result, anomalies have resulted which are caused by the use of measurement tools which are no longer well-suited to the era and circumstances in which they find themselves. In spite of the widespread recognition of the economic shift described above, accounting has lagged. Accounting today is still based on an industrial paradigm in which only physical and tangible property is considered an asset. The field of management accounting has not yet developed sufficient tools to measure the value of such assets as human capital and intellectual capital. Organizations now need systems that continually assess and re-assess the people who work there, including their skills, talents and behavioral attributes, while paying attention to how human resources impacts the bottom line. Thus, today’s competitive organization needs an integrated program designed to measure, develop, and launch its intellectual capital successfully. One accounting tool that is relevant to the measurement and, in turn, the management of intellectual capital, specifically human capital, is HRA.

Eric Flamholtz (talk) 17:47, 3 April 2018 (UTC)

References (1)Eric Flamholtz, Human Resource Accouinting: Advances in concepts, methods and applications, Third Edition Kluwer Academic Press, 1999