Can anybody please give information regarding Human Resource Accounting. Regarding REFERENCE BOOKS AND ARTILCES Regs Damodaran
From South Africa,
Hr Executive

Use factoHR and automate your HR processes

Mobile-first hire to retire HR and Payroll software that automates all HR operations and works as a catalysts for your organisational growth.



I have an article on the same

Hope it will be of help to you

Human Resource Accounting




Human resources is an old field of research in economics, as reflected by accounting treatments. This paper reviews this contribution from accounting literature and the European legal framework. Different institutional attitudes toward this topic were collected from such organizations as the Financial Accounting Standards Board [1984, 1993] and the American Accounting Association [1970]. After that, a detailed revision is made of the main costs related to human resources: training and selection costs and exit costs. This analysis is made from the points of view of external and internal (or managerial) accounting and from historical costs and opportunity costs. Finally, no unique solution to this problem is given, but all possible alternatives are evaluated and open for discussion. (JEL J40)


Human resource accounting is not a new issue in economics. Economists consider human capital as a production factor, and they explore different ways of measuring its investment in education, health, and other areas. Accountants have recognized the value of human assets for at least 70 years. Research into true human resource accounting began in the 1960s by Rensis Likert [Bowers, 1973]. Likert defends long-term planning by strong pressure on human resources' qualitative variables, resulting in greater benefits in the long run.

Looking at different proposals [Conner, 1991], the resource theory considers human resources in a more explicit way. This theory considers that the competitive position of a firm depends on its specific and not duplicated assets. The most specific (and not duplicated) asset that an enterprise has is its personnel. It takes advantage of their interdependent knowledge. That would explain why some firms are more productive than others. With the same technology, a solid human resource team makes all the difference [Archel, 1995].

The American Accounting Association [1970] defines human resource accounting as "the human resources identification and measuring process and also its communication to the interested parties." There are two reasons for including human resources in accounting [Ripoll and Labatut, 1994]. First, people are a valuable resource to a firm so long as they perform services that can be quantified. The firm need not own a person for him to be considered a resource. Second, the value of a person as a resource depends on how he is employed. So management style will also influence the human resource value.

Conceptual Frame

Human resources, like any other asset, bring with them several costs (Table 1). Using criteria to determine elements that can be recorded [Financial Accounting Standards Board, 1984, 1993; International Accounting Standards Committee, 1989, 1994], Table 2 shows the possibilities of considering human resources as an asset [Financial Accounting Standards Board, 1984, 1993] and as a current expense.

Legal Frame

Following the fourth directive of Comunidad Economica Europea [1978], no party that is referred to human resources is considered in the different balance sheet models, and only in the profit and loss account are the costs most directly related to them, such as salaries and staff welfare expenses (including pensions). The number of employees classified in categories is mentioned only in the explanatory report, the same as the board of directors' payment. In Spain, the treatment followed by the Plan General de Contabilidad [Ministerio de Economía y Hacienda, 1990] is more or less what has just been shown, which implies a continuation of the Plan General de Contabilidad [Ministerio de Economía y Hacienda, 1973].

Training and Selection Cost Analysis


No doubt, when a firm invests in human resources by acquisition and training, it anticipates a future generation of profits and services that will be produced by these assets. Referring to training, the (AECA) [1994] states that one of the techniques showing a greater capacity to stimulate efficiency is based on the idea that an employee who is induced to get to know his job better is more productive and quicker on the job.

Training in firms is an activity that develops the worker's capacity to improve efficiency and job quality, therefore, the enterprise increases its profitability. The training concept is generally used to define three different issues which, in practice, are difficult to distinguish: capacitation, training, and development [Guzmán et al., 1996]. Capacitation is the worker's acquisition of knowledge and skills necessary for his job. Training better adapts the worker to the job, and development focuses on promotion to higher job levels.

Even though there are different training classifications, the one proposed by Marqués [1974] reports several criteria:

1) When does training take place? It can be at the contracting moment or any moment during employment.

2) How long is the training period? It can take from one or two days to one or two weeks. In some cases, it can take six months, one year, or more.

3) Does this training relate to the nature of the job by updating an employee's knowledge and teaching new techniques or does it open doors to new skills not related to the worker's professional activity?

4) Is there internal or external training taking place?

The criteria based on the job's nature is also proposed by AECA [1994] in its managerial accounting document Number 6 where it distinguishes between creative training and competitive strategy training. Therefore, creative training comes from the firm's planning process and makes personnel capable of doing their job. On the contrary, competitive strategic training maintains the firm's competitive level. Inside creative training, three different actions can be distinguished that will incur some expenses [Robleda, 1994]. Those training expenses are related to jobs and profession evolution, improvements in global services, and innovation or change in projects. In any case, expenses derived from creative training are considered long-term because they increase the firm's added value. In other words, with creative training, the firm becomes more competitive and increases its income. Expenses derived from competitive strategic training will be considered as current expenses since they appear as a consequence of short-term actions that maintain the firm's competitive level, even though its absence may lead to a decrease in the employee's qualifications.

Treatment from a Financial Accounting Perspective

Following the definitions already explained, as long as future benefits are expected to come from these training costs, they can be treated as assets. However, this does not hold true in reality. As Cea García [1990] states:

"There is a clear absence of correspondence between the real assets in the present firms and those recognised in the balance sheet... In fact, assets are too related to its juridical conception (that is, owned by the firm...), in front of a pure economic approach where asset is every instrument or way that can be used in the production-distribution firm's process or, in general, every category of economic value which can be transformed into goods or service or any instrument at the service of the firm or that the firm uses, regardless [of] its juridical state...and also all those goods and rights that the firm does not own now but used to own or will own later on, by virtue of collateral contracts or agreements which may induce it."

So, a diagnosis is reached about the predominant asset concept. This situation can be explained by two important problems that are met when referring to intangibles: Identify the assets cost and estimate the period in which the asset should be amortized.

In international accounting, besides clearly recognizing some items as assets (cash, stock, machinery, and so on) there is great debate whether certain other items are considered capitalization. These are known as deferred charges in English accounting literature [Hendriksen, 1992]. It can be said then that not only are the limits unclear between intangible, fixed assets and deferred charges, but also which elements are considered assets and which elements are considered expenses.

Treatment from a Managerial Accounting Perspective

Personnel working for a determined enterprise is actually participating in a value-creation process. That is, any economic activity makes the firm incur costs. One traditional classification takes into account the cost categories of raw materials, industrial plants, and personnel. When adding income flow to an organization's market goods and services, if it is superior to the cost flow, it becomes added value. This value is a consequence of the interaction between material and human resources in production. Because it is difficult to know and measure value, accounting has used substituted measures such as acquisition cost, substitution cost, and even opportunity cost [Marqués, 1974].

Historical Costs

When referring to training costs, historical costs means the sacrifice necessary to hire and train people. Determining training costs is difficult when training takes place in-house, considering teachers' and organizers' dedication, occupied rooms, salaries and staff welfare expenses with no remuneration, general expenses, and so on. It is much easier to have external training. Ortigueira Bouzada [1977] divides all these costs into the groups of acquisition costs and learning costs. Table 3 further divides acquisition costs, and Table 4 further divides learning costs.

From the management accounting point of view, an accurate estimation of the learning factor is essential to obtain a good prediction of the product cost and is also important in the labor force. On the other hand, the enterprise can make decisions about its human resource investments if it knows which benefits will be reported. In this sense, the learning factor or experience curve provides information for decisionmaking and resolution of problems regarding the rising costs of the labor force where new fabrication processes or specialized jobs are important. In both cases, the cost will decrease as long as employees get to know their jobs better.

Substitution Costs

Likert [Bowers, 1973] imagines an extreme situation for the firm's management:

"Suppose that tomorrow all the jobs are empty, but you still have available all the rest of the resources: buildings, factories, industrial plants, patents, stocks, money, and so on; except, of course, for the personnel. How much time would it take you to recruit the necessary personnel, train it until they are able to assume all the existing functions at the present competitive level and integrate it in the organisation in the same way they now are?"

The mental exercise necessary to rebuild an organization is an excellent way to attract attention to human resources, which is now seen in a new light. Certainly, Professor Likert's fiction includes the implicit posing of human resource valuation under substitution (or replacement) cost criteria.

Even though Likert's proposal is very unlikely, it enables calculating the cost of totally substituting (or replacing) human resources. To calculate substitution cost, figure in the cost of sacrifice to replace a human resource that is already employed. This cost includes exit costs of the leaving employee and recruiting and training of the replacement.

Opportunity Costs

Some authors consider that opportunity costs are not the alternative to historical costs nor substitution costs, but estimates these costs without mistake. Opportunity costs are considered as "an asset value when [they are] the target of an alternative use" [Hekimian and Jones, 1967].

Cost valuation is based upon the conflict of interest that can take place in a firm's internal, fictitious market where several organizational units (divisions) participate. These units must be profit centers, that is, their objectives must be expressed in terms of profitability.

Exit Cost Analysis


Exit costs can be classified into the three categories [Ripoll and Labatut, 1994] of lost efficiency prior to separation, job vacancy cost during the new search, and termination pay.


It is difficult to put a value on lost efficiency prior to separation. Productivity per employee seems to be the most adequate measure. However, this measure (generally calculated by means of a ratio) is not problem-free. For example, consider administrative or management jobs where productivity is so hard (if not impossible) to identify. The vacancy cost prevents taking into account how much the firm ceases to gain because the employee is not working there anymore. If this loss is expressed according to the productivity ratio, the same problems arise that were discussed in previous points (except for the estimated wasted return percentage that, in this case, becomes unnecessary). Regarding termination pay, accounting normally refers to this as indemnities.

Referring to the indemnity accounting treatment, is it necessary to record a provision for the total possible indemnities of the staff? That is, does an expense or loss exist, whether potential or real, and is the provision necessary? Use the example of an employee who spends his entire professional life in a firm from the beginning through retirement. It is obvious that the provision is not necessary. The provision has been recorded to the debit of expenses, therefore, it remains that the previous entry cannot possibly be recorded because future events in this particular issue are unknown. The provision entry must not be recorded for the entire staff because this would be acting against the accrual, register, and prudent accounting principles. When is the best moment for recording a staff indemnity provision? An indemnity provision must be recorded only when the enterprise has decided to put an end to the existing contracts and has already estimated (based upon the prevailing law) the quantity accrued. Recording the provision beforehand would not be correct because the firm's decision is still needed, not just personal opinions.

Do any restrictive factors exist for recording it? Not only is this not trivial, but it poses an important problem. It is obvious that if a firm cannot financially afford the indemnities because it does not have enough cash, then the provision must not be recorded. Since the firm is not able to pay it, the liability does not exist.

Referring to the indemnities accrued or paid to the staff when finishing their contracts, two questions arise that are heavily discussed in accounting literature. Must the indemnities be classified in the profit and loss account as operating or extraordinary expenses? Can indemnities be considered an asset? At this point, two different situations can be distinguished. There are those firms that because of their size, activity, or other factors, have a high personnel turnover, therefore, indemnities are a frequent issue. In this case, it seems reasonable that its accounting treatment must be inside operating expenses because, here, indemnities become something quite usual. However, there are those firms that need to cancel contracts for the firm to survive. In this case, indemnities must be classified as extraordinary expenses because they comply with certain conditions. They do not form part of the typical and ordinary activities of the firm and they are not supposed to happen frequently. If the extraordinary expense definition holds true, then, no doubt, indemnity expenses can be considered extraordinary.

It can be concluded that personnel indemnities are a necessary expense for the firm, so they should never be considered an asset. The reason is obvious. As a general rule, an asset is a good or a right that the firm owns in a determined moment. Other elements are also considered assets such as prepayment adjustments or capitalized expenses, which are neither a good nor an expense but are considered assets for other reasons. Indemnities, because of their nature, cannot be included in any of the previous concepts. However, it could be argued that the concept is greater than these definitions, therefore, something is lacking. Obviously, this possibility could be considered, but logic and common sense says that when a firm pays an indemnity to an employee, it has an expense and is not buying or creating an asset.

Some authors argue that if accrued indemnities make it possible for a firm to increase its profits by means of decreasing the firm's expenses, then these indemnities should logically be registered as assets and considered as deferred expenses, strictly following the principle of income and expense correlation. Real situations are considered above accounting principles, whether generally accepted or not. An asset is an asset and by no means can an element be recorded as an asset only to justify an accounting principle.


In a systematic way, this paper presented the accounting treatment for human resources in organizations. First, general costs relating to human resources have been analyzed, considering the possibility of including them as assets in financial statements. Second, this paper has focused on the training costs, studying different alternatives regarding recording. After a detailed exposition, it is concluded that training costs can be treated in a similar way as any other capitalized expense. Last, exit costs have been proposed. Although several treatments have been suggested in order to record them as an expense, a provision, or a capitalized expense, this paper prefers the first option. There cannot be one alternative only when treating discharge indemnities, but any approach can be considered when it better suits the individual firm's needs.


American Accounting Association. A Statement of Basic Accounting Theory, Evanston, IL: AAA, revised ed., 1970, p. 35.

Archel, P. "Activos intangibles: análisis de lagunas partidas polémicas," Revista técnica del Instituto de Censores Jurados de Cuentas de España, 7, 1995.

de Empresas. "Mano de obra: y Control," Principios de Contabilidad de Madrid, Spain: AECA, 1994, p. 31.

Bowers, David G. A review of Rensis Likert's "Improving the Accuracy of P/L Reports and Estimating the Change in Dollar Value of the Human Organization," Michigan Business Review, 25, March 1973.

Cea García, J. L. "Las cuentas anuales y la imagen fiel," Partida Doble, 4, September 1990.

Comunidad Economica Europea. Cuarta Directriz de la Comunidad Europea, Brussels, Belgium: CEE, July 1978.

Conner, K. "A Historical Comparison of Resource-Based Theory and Five Schools of Thought Within Industrial Organization Economics: Do We Have a New Theory of the Firm?," Journal of Management, 17, 1, 1991, pp. 121-54.

Financial Accounting Standards Board. Goodwill and Intangible Assets: Working Paper for Discussion at Public Hearing, Norwalk, CT: FASB, December 1993.

_____. "Statement of Financial Accounting Concepts No. 5," Recognition and Measurement of Financial Statements of Business Enterprises, Norwalk, CT: FASB, 1984.

Flamholtz, E. "Contabilidad de los recursos humanos," ESIC-MARKET, January-April 1976, pp. 70-9.

Guzmán, Isidro; Gomariz, Eugenio; Navarro, J. Carlos; Puerto, A. José. "Los gastos de del personal: problemática contable y fiscal," Revista de Estudios Empresariales de Cartagena, 1, 1996, pp. 91-109.

Hekimian, J. S.; Jones, C. H. "Put People on Your Balance Sheet," Harvard Business Review, January-February 1967, pp. 88-96.

Hendriksen, E. S.; Van Breda, M. S. Accounting Theory, Homewood, IL: Richard D. Irwin, 1992.

International Accounting Standards Committee. "Intangible Assets," Draft Statement of Principles Issued for Comment, London, United Kingdom: IASC, January 1994.

_____. Marceo conceptual para la de estados financieros, London, United Kingdom: IASC, 1989.

Marqués, E. "Contabilidad y de los recursos humanos," Pirámide, 1974.

Ministerio de Economía y Hacienda. "Royal Decree 1643/1990," Plan General de Contabilidad, Madrid, Spain: MEH, December 20, 1990.

_____. Plan General de Contabilidad, Madrid, Spain: MEH, 1973.

Ortigueira Bouzada, M. "Contabilidad de Recursos Humanos," estudios monográficos de contabilidad y economía de la empresa en homenaje al profesor doctor Jose María Fernández Pirla, Editorial ICE, 1980.

Ripoll, V.; Labatut, G. "La contabilidad de y los costes de recursos humanos: implicaciones contables y fiscals de su ," Técnica Contable, January 1994.

Robleda, H. "Análisis de los costes de del personal," Revista y contabilidad, XXIII, 81, October-December 1994, pp. 969-82.

Zubiarre, Miguel A. "Nuevas tendencias en el tratamiento contable de los activos intangibles," VII Congreso de AECA, September 1995, pp. 1025-45.

From India

I highly recommend Eric Flamholtz's Human Resource Accounting. Probably the definitive book on HRA.
Check this link.
Hope this helps.

From United Kingdom, Portsmouth

If you are knowledgeable about any fact, resource or experience related to this topic - please add your views.

About Us Advertise Contact Us Testimonials
Privacy Policy Disclaimer Terms Of Service

All rights reserved @ 2022 CiteHR®

All Material Copyright And Trademarks Posted Held By Respective Owners.
Panel Selection For Threads Are Automated - Members Notified Via CiteMailer Server