Human Resource Accounting

CARME BARCONS-VILARDELL, SOLEDAD MOYA-GUTIERREZ,

ANTONIO JOSEP
AND CARLOS GRIFUL-MIQUELA

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)

Introduction
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
Concept
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
Concept
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.
Treatment
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.

Conclusions
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.

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