Research journey into HR accounting

D. MURALI | Updated on October 22, 2011


Human resource accounting is the focus of one of the chapters in Human Resource Development: Theory & Practice, edited by David McGuire and Kenneth Molbjerg Jorgensen ( > Employees have always been important in the production of goods and the provision of services, but what have traditionally been regarded as the primary engines of growth are land, financial capital, and technology, begins the essay.

With the emergence of the ‘knowledge' economy, human capital now represents firms' key assets, notes Peter Cleary, the author. However, it has been claimed that the increased importance of employees to organisational value creation has not been reciprocated from an accounting perspective; that is, the reporting of firms' past and current financial performance is no longer sufficient for progressive and forward-looking firms, he adds.


The initiation of a concerted effort to account for employees began with the work of Hermanson in the mid-1960s, the author traces. “He coined the term ‘Human Asset Accounting' to identify his attempts at incorporating employees into formal financial statements, especially the balance sheet (Roslender, 2000). The second phase of accounting for employees became known as ‘Human Resource Accounting' (HRA) and was used for the first time by Brummet et al. (1968).”

Stating the definition of HRA given by the American Accounting Association — as the process of identifying and measuring data about human resources and communicating this information to interested parties, the author lists the three primary functions of HRA, viz. providing numerical information about the cost and value of people as organisational resources, serving as a framework to facilitate decision-making, and motivating decision-makers to adopt a human resource perspective.

The essay recounts that during the first half of the 1970s, HRA was one of the most researched subjects within accounting, consuming a vast amount of academic endeavour; but by the end of the decade, interest in the topic had declined from both the academic and corporate standpoints. Among the reasons for the decline were beliefs such as ‘HRA was only concerned with treating people as financial objects', and that ‘putting people on the balance sheet was its dramatic and dominant image'.


Cleary draws our attention to developments parallel to HRA (such as of the models for estimating the financial utility of personnel selection and downsizing, by Cronbach and Glaser, and Naylor and Shine (1965), using a concept named ‘Utility Analysis'), while Grojer and Johanson come up with ‘Human Resource Costing and Accounting' (HRCA) in 1998, attempting to embrace both HRA and UA.

While HRCA attracted debate, headway was tough; for example, accord was wanting at a workshop held in Brussels in 1998 by HRCA researchers and policymakers. Reasons for discord were many: multiple agendas among those expressing an interest in the topic, apathy of the UK and Germany due to the dominance of financial accounting, and the US SEC declaring that there is no evidence of an information interest in non-financial HRCA information from a capital viewpoint.

Exploring the realms of financial accounting and reporting, the author finds that a major factor contributing to the deficiency in HRA can be the want of a commonly-accepted definition of intangible assets within the accounting community. Yet, there are some common characteristics: “Intangible assets are usually defined as identifiable (separable) non-monetary sources of probable future economic benefits to an entity that lack physical substance, have been acquired or developed internally from identifiable costs, have a finite life, have market value apart from the entity and are owned or controlled by the firm as a result of past transactions or events (Canibano et al., 2000).”


Number-crunchers may appreciate some of the statistical studies cited in the essay, such as of Eustace, and Pilch (2000). For example:

“During the period from 1945 to 1990, book values and market values for all US companies were approximately equal. However, during the 1990s, the average market-to-book ratio rapidly increased, and is now greater than 3 for firms operating in traditional industries, while for technology and software stocks, it can exceed 50.”

“A study of more than 2,000 US manufacturing firms found that tangible assets accounted for just one-third of their stock market value in 1994, whereas a decade earlier this was closer to two-thirds.”

Corroborating these is the fact highlighted in the essay, that most of the privately-disclosed information used by financial analysts in the fundamental analysis process relates to intangible assets; and that not only do institutional investors pay attention to non-financial indicators, but they also actively utilise such knowledge in making investment decisions.

On a related note is this snatch from a report of Ernst & Young, mentioned in the book: “When non-financial factors were taken into account, earnings forecasts were more accurate, thus reducing the risk to investors. If a firm's non-financial data are strong, this could facilitate its ability to raise capital… Non-financial factors can be used as leading indicators of future financial performance.”


The essay speaks of how management accountants, too, have been busy with human resource accounting, especially with the advent of strategic management accounting (SMA), in the late 1980s. There have been arguments that SMA can potentially provide a ‘vital fulcrum' in leveraging a firm's intangible assets to achieve a competitive advantage (Tayles et al., 2002); and that management accounting has a ‘natural affinity' with human capital, and that the movement to manage intangible assets is fundamentally a management accounting issue (Lynn, 1999).

Drawing upon published studies (Edwards et al., 2005), the author's suggestion to management accountants is to take a more strategic focus, expand their view to a range of non-financial measures, and understand and demonstrate the links between improved knowledge management processes, organisational performance and intangible assets.

Conceding that the original rationale for initiating research on HRA remains as valid today, and probably more so than it was in the 1960s, Cleary reminds that the proposition made by Rhode et al. (1976) — that the most apparent reason for the non-acceptance of HRA is an absence of demonstrated usefulness — still holds true today.

Educative account on the HR journey of the bean-counters.


Published on September 08, 2011

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