Human Resource Accounting 132

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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 accountingtreatments. 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 exitcosts. This analysis is made from the points of v iew of external and internal (ormanagerial) accounting and from historical costs and opportunity costs. Finally, nounique solution to this problem is given, but all possible alternatives are evaluatedand 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 theyexplore different ways of measuring its investment in education,health, and other areas. Accountants have recognized the value ofhuman assets for at least 70 years. Research into true human resourceaccounting began in the 1960s by Rensis Likert [Bowers, 1973]. Likertdefends 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 theoryconsiders human resources in a more explicit way. This theoryconsiders that the competitive position of a firm depends on its specificand not duplicated assets. The most specific (and not duplicated) assetthat an enterprise has is its personnel. It takes advantage of theirinterdependent knowledge. That would explain why some firms aremore 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 resourceaccounting as "the human resources identification and measuringprocess and also its communication to the interested parties." Thereare two reasons for including human resources in accounting [Ripolland Labatut, 1994]. First, people are a valuable resource to a firm solong as they perform services that can be quantified. The firm need notown a person for him to be considered a resource. Second, the value of


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a person as a resource depends on how he is employed. Somanagement 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; InternationalAccounting Standards Committee, 1989, 1994], Table 2 shows thepossibilities of considering human resources as an asset [FinancialAccounting Standards Board, 1984, 1993] and as a current expense.


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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 lossaccount are the costs most directly related to them, such as salariesand staff welfare expenses (including pensions). The number ofemployees classified in categories is mentioned only in the explanatoryreport, the same as the board of directors' payment. In Spain, thetreatment followed by the Plan General de Contabilidad [Ministerio deEconoma y Hacienda, 1990] is more or less what has just been shown,which implies a continuation of the Plan General de Contabilidad[Ministerio de Economa y Hacienda, 1973].

Training and Selection Cost AnalysisConcept

No doubt, when a firm invests in human resources by acquisition andtraining, it anticipates a future generation of profits and services thatwill be produced by these assets. Referring to training, the

(AECA) [1994] states that oneof the techniques showing a greater capacity to stimulate efficiency isbased on the idea that an employee who is induced to get to know hisjob better is more productive and quicker on the job.


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Training in firms is an activity that develops the worker's capacity toimprove efficiency and job quality, therefore, the enterprise increasesits profitability. The training concept is generally used to define threedifferent issues which, in practice, are difficult to distinguish:capacitation, training, and development [Guzmn et al., 1996].

Capacitation is the worker's acquisition of knowledge and skillsnecessary for his job. Training better adapts the worker to the job, anddevelopment focuses on promotion to higher job levels.

Even though there are different training classifications, the oneproposed by Marqus [1974] reports several criteria:

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

2) How long is the training period? It can take from one or two days toone 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 anemployee's knowledge and teaching new techniques or does it opendoors 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 itdistinguishes between creative training and competitive strategytraining. Therefore, creative training comes from the firm's planning

process and makes personnel capable of doing their job. On thecontrary, competitive strategic training maintains the firm'scompetitive level. Inside creative training, three different actions canbe distinguished that will incur some expenses [Robleda, 1994]. Thosetraining 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 consideredlong-term because they increase the firm's added value. In otherwords, with creative training, the firm becomes more competitive andincreases its income. Expenses derived from competitive strategictraining will be considered as current expenses since they appear as a

consequence of short-term actions that maintain the firm's competitivelevel, even though its absence may lead to a decrease in theemployee's qualifications.Treatmentfrom a Financial Accounting PerspectiveFollowing the definitions already explained, as long as future benefitsare expected to come from these training costs, they can be treated asassets. However, this does not hold true in reality. As Cea Garca[1990] states:


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"There is a clear absence of correspondence between the real assets inthe present firms and those recognised in the balance sheet... In fact,assets are too related to its juridical conception (that is, owned by thefirm...), in front of a pure economic approach where asset is everyinstrument or way that can be used in the production-distribution

firm's process or, in general, every category of economic value whichcan be transformed into goods or service or any instrument at theservice of the firm or that the firm uses, regardless [of] its juridicalstate...and also all those goods and rights that the firm does not ownnow but used to own or will own later on, by virtue of collateralcontracts or agreements which may induce it."

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

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

Treatment from a Managerial Accounting Perspective

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

Historical CostsWhen referring to training costs, historical costs means the sacrificenecessary to hire and train people. Determining training costs isdifficult when training takes place in-house, considering teachers' andorganizers' dedication, occupied rooms, salaries and staff welfareexpenses with no remuneration, general expenses, and so on. It ismuch easier to have external training. Ortigueira Bouzada [1977]divides all these costs into the groups of acquisition costs and learning


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costs. Table 3 further divides acquisition costs, and Table 4 furtherdivides learning costs.


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From the management accounting point of view, an accurateestimation of the learning factor is essential to obtain a goodprediction of the product cost and is also important in the labor force.On the other hand, the enterprise can make decisions about its humanresource investments if it knows which benefits will be reported. In thissense, the learning factor or experience curve provides information fordecisionmaking and resolution of problems regarding the rising costsof the labor force where new fabrication processes or specialized jobsare important. In both cases, the cost will decrease as long asemployees 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 haveavailable all the rest of the resources: buildings, factories, industrialplants, patents, stocks, money, and so on; except, of course, for thepersonnel. How much time would it take you to recruit the necessarypersonnel, train it until they are able to assume all the existing


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functions at the present competitive level and integrate it in theorganisation in the same way they now are?"

The mental exercise necessary to rebuild an organization is anexcellent way to attract attention to human resources, which is nowseen in a new light. Certainly, Professor Likert's fiction includes theimplicit posing of human resource valuation under substitution (orreplacement) cost criteria.

Even though Likert's proposal is very unlikely, it enables calculatingthe cost of totally substituting (or replacing) human resources. Tocalculate substitution cost, figure in the cost of sacrifice to replace ahuman resource that is already employed. This cost includes exit costsof the leaving employee and recruiting and training of thereplacement.Opportunity CostsSome authors consider that opportunity costs are not the alternative to

historical costs nor substitution costs, but estimates these costswithout mistake. Opportunity costs are considered as "an asset valuewhen [they are] the target of an alternative use" [Hekimian and Jones,1967].Cost valuation is based upon the conflict of interest that can take placein a firm's internal, fictitious market where several organizational units(divisions) participate. These units must be profit centers, that is, theirobjectives must be expressed in terms of profitability.Exit Cost AnalysisConceptExit costs can be classified into the three categories [Ripoll and

Labatut, 1994] of lost efficiency prior to separation, job vacancy costduring the new search, and termination pay.TreatmentIt 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 notproblem-free. For example, consider administrative or managementjobs where productivity is so hard (if not impossible) to identify. Thevacancy cost prevents taking into account how much the firm ceasesto gain because the employee is not working there anymore. If this lossis expressed according to the productivity ratio, the same problems

arise that were discussed in previous points (except for the estimatedwasted return percentage that, in this case, becomes unnecessary).Regarding termination pay, accounting normally refers to this asindemnities.

Referring to the indemnity accounting treatment, is it necessary torecord a provision for the total possible indemnities of the staff? Thatis, does an expense or loss exist, whether potential or real, and is the


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provision necessary? Use the example of an employee who spends hisentire professional life in a firm from the beginning through retirement.It is obvious that the provision is not necessary. The provision has beenrecorded to the debit of expenses, therefore, it remains that theprevious entry cannot possibly be recorded because future events in

this particular issue are unknown. The provision entry must not berecorded for the entire staff because this would be acting against theaccrual, register, and prudent accounting principles. When is the bestmoment for recording a staff indemnity provision? An indemnityprovision must be recorded only when the enterprise has decided toput an end to the existing contracts and has already estimated (basedupon the prevailing law) the quantity accrued. Recording the provisionbeforehand would not be correct because the firm's decision is stillneeded, 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 firmcannot financially afford the indemnities because it does not haveenough cash, then the provision must not be recorded. Since the firmis not able to pay it, the liability does not exist.

Referring to the indemnities accrued or paid to the staff when finishingtheir contracts, two questions arise that are heavily discussed inaccounting literature. Must the indemnities be classified in the profitand loss account as operating or extraordinary expenses? Canindemnities be considered an asset? At this point, two differentsituations can be distinguished. There are those firms that because oftheir size, activity, or other factors, have a high personnel turnover,

therefore, indemnities are a frequent issue. In this case, it seemsreasonable that its accounting treatment must be inside operatingexpenses because, here, indemnities become something quite usual.However, there are those firms that need to cancel contracts for thefirm to survive. In this case, indemnities must be classified asextraordinary expenses because they comply with certain conditions.They do not form part of the typical and ordinary activities of the firmand they are not supposed to happen frequently. If the extraordinaryexpense definition holds true, then, no doubt, indemnity expenses canbe considered extraordinary.It can be concluded that personnel indemnities are a necessary

expense for the firm, so they should never be considered an asset. Thereason is obvious. As a general rule, an asset is a good or a right thatthe firm owns in a determined moment. Other elements are alsoconsidered assets such as prepayment adjustments or capitalizedexpenses, which are neither a good nor an expense but are consideredassets for other reasons. Indemnities, because of their nature, cannotbe included in any of the previous concepts. However, it could beargued that the concept is greater than these definitions, therefore,


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something is lacking. Obviously, this possibility could be considered,but logic and common sense says that when a firm pays an indemnityto an employee, it has an expense and is not buying or creating anasset.

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 andconsidered as deferred expenses, strictly following the principle ofincome and expense correlation. Real situations are considered aboveaccounting principles, whether generally accepted or not. An asset isan asset and by no means can an element be recorded as an assetonly 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 tohuman resources have been analyzed, considering the possibility ofincluding them as assets in financial statements. Second, this paperhas focused on the training costs, studying different alternativesregarding recording. After a detailed exposition, it is concluded thattraining costs can be treated in a similar way as any other capitalizedexpense. Last, exit costs have been proposed. Although severaltreatments have been suggested in order to record them as anexpense, a provision, or a capitalized expense, this paper prefers thefirst option. There cannot be one alternative only when treatingdischarge indemnities, but any approach can be considered when it

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