WORKER migration from the traditional agrarian work to manufacturing and services-based industries has been going on for the last two decades. This migration has been accompanied by two conspicuous developments.
The first is an evolution from rational (engineered, fragmented, bureaucratic) to natural (organic, psychosocial, humanistic) and open systems (multiply-connected) frames of meaning in the management and organization. Due to this, it has been observed that organizational designs and managerial practices are becoming less bureaucratic.
The second development involves the post-industrial revolution spurred especially by the information revolution. It has installed knowledge as a primary factor of production. It is now accepted that the productive economic core is being relocated from land, labour, capital and machinery to intellectual resources.
Many analysts summarize that the nature of life and work will thus be fundamentally transformed for this and all subsequent generations. Since the late 1980s, various authors have advanced the idea that the knowledge age is breeding knowledge workers who are employed in what might be termed ‘knowledge-intensive’ organizations. These are the places where employees are being treated as the valuable ‘assets’ and the harbinger of knowledge. It is in such circumstances that Human Resource Accounting (HRA) comes into play.
HRA involves accounting for people as the valuable human “assets”. Although HRA has important implications for external financial reporting, in the contemporary economic environment HRA has even greater significance as a powerful managerial tool in internal HRM decisions.
In light of the history of labour and HRM, HRA suggests a vehicle for improvement of management as well as measurement of the potential of organization’s human resources. If HRA can demonstrate that improvement in HRM enhanced profits, then managers will integrate knowledge of their worker, which can also be termed as ‘human capital’ and its implications in their decision making.
External financial reporting, information disclosed in a company’s annual report to shareholders, is geared primarily to external users such as stockholders, bankers, potential investors and lenders. Currently, financial accounting treats human resource costs as current expenses that reduce the net income of the company, as opposed to investments that will provide future benefits to the company and that are reported as assets on the company’s balance-sheet.
There are problems with reporting human assets on the balance sheet. Value-based models resolve this problem by estimating the probability of exit along with probabilities of promotions, mortality and future wages.
One main reason why “generally accepted accounting principles” encourage objective, reliable and verifiable measurement is the aim of comparability among organizations. However, it has also made it difficult for investors to compare human capital investments in firms. The result is likely considerable imperfection in the capital markets because of lack of information about management quality.
Besides, the absence of human resources on the balance sheet, other significant intangible assets, such as goodwill, are not shown on the balance sheet, unless paid for in a company purchase transaction. Large expenditures in developing new products and patents are written off to research and development expense rather than capitalized as assets.
Although HRA measures, incorporate subjectivity, they are very relevant to the real needs of decision-makers and investors.
Management can use HRA measures for HR decision making. If management has gone through the process of measuring and has HRA information available, it is likely that important management decisions such as those involving job cuts and layoffs will be made differently.
HRA paradigm has been described in terms of the “psycho-technical systems” (PTS) approach to organizational measurement.
One role of HRA measurement is to provide numerical information as an input to management and financial decisions. But another more important role comes from the measurement process, from the act of monitoring and quantifying the costs and value of people from a human resource perspective.
It is more important for companies to measure the relative value of human capital from one year to the next than to arrive at a grand total of their intelligence and knowledge. Especially since they can contribute for the success of the company and to eliminate any fortuity of “career plateau” of the employees.
Human resource professionals, accountants, lawyers, corporate acquisition specialists, and company management are applying HRA in many companies worldwide. Now companies have begun to apply HRA, its development might be expected to proceed at an increasing rate. Simultaneously, there is a need for understanding of how HRA technology can be adapted and extended to the measure of various types of intellectual property in the Pakistani corporate culture.
Along with improving internal managerial decisions such as in layoffs, implementation of HRA will lead to better overall firm valuation techniques and better decision making in buy-sell-merge transactions.
