No doubt HRA provides valuable information both for management and investors, yet its development and application has not been very encouraging. It is so because HRA suffers from some limitations. They are:
Limitations
1. Not easy to value human assets:
There are no guidelines differentiating the “cost” and “value” of human resources. The existing valuation system suffers from many drawbacks. After valuing human resources in a specific way, many of them may leave the organisation.
Human life itself is uncertain and hence valuing the asset under such “foggy” conditions is not proper. Like physical assets, human assets cannot be owned, retained and utilised at the sweet will and pleasure of an organisation.
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Hence, treating them as “asset” in the strict sense of the term would not be appropriate. The so called “asset” – after getting enriched within a company – may simply disappear, causing irreparable loss to the company.
2. Results in Dehumanising Human Resources:
There is a possibility that HRA may lead to dehumanising and manipulation employees. For example, a person having a lower value may feel discouraged and this, in itself, may affect his competence in work.
3. No Evidence:
The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a managerial tool facilitates better and effective management of human resources.
4. HR is full of measurement problems:
There is no agreement among the accountants and financial professionals regarding the measurement process. In what form and manner should their value be included in the financial statements?
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To compound the problems further, there is the question of deciding the recovery rates. If a valuation has to be placed on human resources, how should it be amortised?
Should the rate of amortisation be decreasing, constant or increasing? Should it be the same or different for different categories of personnel?
5. Employees and Unions may not like the idea:
There is constant fear of opposition from trade unions. Placing a value on employees would prompt them to seek rewards compensation based on such valuation.
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HRA may lead to division among the ranks of employees. A group of employees may be valued lower than their real worth owing to manipulative practices on the part of the management. Unions may fight such manipulative practices.