Top Menu

HR Accounting

ADVERTISEMENTS:

Everything you need to know about human resource accounting. Human resources accounting (HRA) is one of the latest concept adopted by few corporations in our country.

Most of the corporations have realised that human resources are their most precious resources. So it is required to taken some measures to develop their human resources but also taken measures to accelerate their values.

The concept of human resource accounting has been defined by the committee on Human Resource Accounting of the American Accounting Association as “the process of identifying and measuring data about human resources and communication this information to interested parties.”

ADVERTISEMENTS:

The American Accounting Society Committee on Human Resource Accounting defines it as follows –

“Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.”

In simple terms, it is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms.

Learn about:- 1. Meaning of Human Resource Accounting 2. Definition of Human Resource Accounting 3. Historical Perspectives 4. Concept 5. Need 6. Costs Involved 7. Significance 8. Methods 9. Applications 10. Advantages 11. Limitations.


HR Accounting: Meaning, Definitions, Concept, Need, Methods, Advantages and Limitations

Human Resource Accounting – Meaning

Since the beginning of globalisation of business and services, the human resources are becoming more important and decisional input for the success of any corporate enterprise. Human resource accounting (HRA) involves accounting for expenditures related to human resources as assets.

ADVERTISEMENTS:

All the processes of the organisation are operated by human resources, thereby the changes in the HR cost and benefits must be considered. Though it has been accepted that HR is capital resource thereby the valuation of this resource is very necessary and information about the valuation should be given to the investors, the management and others through financial statements.

Human resources accounting is basically an information system that tells management what changes are occurring over time to the human resources of the business.

Human resources accounting (HRA) is one of the latest concept adopted by few corporations in our country. Most of the corporations have realised that human resources are their most precious resources. So it is required to taken some measures to develop their human resources but also taken measures to accelerate their values.

ADVERTISEMENTS:

Human Resources are invaluable asset in an organization. It is a live asset of any business concern but their value cannot be measured accurately. The value of manpower, present and potential, to the management is conceptually well established. From a macroeconomic view point, the services which people can potentially provide constitute a form of capital. Recently Indian Corporate Sector has shown growing interest in the accounting for human resources.

The concept of human resource accounting has been defined by the committee on Human Resource Accounting of the American Accounting Association as “the process of identifying and measuring data about human resources and communication this information to interested parties.”

Human beings are the active agents and economic growth is the consequence of the progress in the areas of human resource. Thus human resource accounting consists of valuation of human resources and recording it in the books of accounts and presenting the information in the financial statement for communication.

Flamholtz has specifically underlined the primary role of human resource accounting as that of providing information essential for management to perform the functions of acquiring, developing, allocating, conserving, utilizing, evaluating and rewarding human resources.

The basic objectives of human resource accounting are as under:

(1) HRA facilitates managing the people as one of the resources of the organization.

(2) To help the management for making decision about acquiring, allocating, developing and maintaining human resources in order to keep control on human resource cost as one of the organizational objective.

(3) To provide information to the management regarding human resource cost and value.

(4) To see whether the human resources are effectively utilized or not

ADVERTISEMENTS:

(5) To see whether the human resources are producing a return on investment of the persons interested in the organization or not.

(6) Provide human resources accounting detail to outsiders like financers such as bankers, financial institutions and creditors etc.


Human Resource Accounting – Definitions Provided by American Accounting Society Committee, Mr. Woodruff, M.N. Baker, Flamholtz & Stephen Knauf

The American Accounting Society Committee on Human Resource Accounting defines it as follows –

“Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.” In simple terms, it is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms.

ADVERTISEMENTS:

Mr. Woodruff Jr., Vice President of R. G. Batty Corporation defines it as follows –

“Human Resource Accounting is an attempt to identify and report investments made in human resources of an organisation that are presently not accounted for in conventional accounting practice. Basically it is an information system that tells the management what changes over time are occurring to the human resources of the business.”

M.N. Baker defines Human Resource Accounting as follows –

“Human resource accounting is the term applied by the accountancy profession to quantify the cost and value of employees to their employing organisation”

ADVERTISEMENTS:

According to Flamholtz, “Human resources accounting means accounting for people as an organizational resource. It involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to organization.”

Another management consultant, Stephen Knauf, has defined HRA as –

“The measurement of quantification of human organisation inputs such as recruitment, training, experience and commitment”. Thus, human resources accounting may be defined as, “a process of accounting which identifies, quantifies and measures human resources for the use of management to cope up with the changes in its quantum and quality so that equilibrium could be achieved between the required resources and the provided human resources”.

To ensure growth and development of any organisation, the efficiency of people must be augmented in the right perspective. Without human resources, the other resources cannot be operationally effective. The original health of the organisation is indicated by the human behaviour variables, like group loyalty, skill, motivation and capacity for effective interaction, communication and decision making. Men, materials, machines, money and methods are the resources required for an organisation.

These resources are broadly classified into two categories, viz. animate and inanimate (human and physical) resources. Men, otherwise known as the human resources, are considered to be animate resources. Others, namely, materials, machines, money and methods are considered to be inanimate or physical resources. The success or otherwise of an organisation depends on how best the scarce physical resources are utilised by the human resource. What is important here is that the physical resources are being activated by the human resources as the physical resources cannot act on their own.

Therefore, the efficient and effective utilisation of inanimate resources depends largely on the quality, caliber, skills, perception and character of the people, that is, the human resources working in it. The term human resource at macro level indicates the sum of all the components such as skills, creative abilities, innovative thinking, intuition, imagination, knowledge and experience possessed by all the people. An organisation possessed with abundant physical resources may sometimes miserably fail unless it has right people, human resources, to manage its affairs.

ADVERTISEMENTS:

Thus, the importance of human resources cannot be ignored. How, generally accepted system of accounting this important asset, viz. the human resources has not been evolved. For a long period, the importance of human resource was not taken care of seriously by the top management of organisations. Therefore, at this juncture, it becomes imperative to pay due attention to the proper development of such an important resource of an organisation.


Human Resource Accounting – Historical Perspectives

It is fact that over the last four decades, it was the era of human values and recognition, the organisations believes that the actual assets are the human resources. The skills, ability, creativity and motives cannot be replaced by machines. There were some remarkable studies and contributions made by several behavioural scientist and scholars.

The experts in this field were Shulz (1960) and William Pyle (1967) who recognised the actual value of human resources. Flam Holth (1973) and Kenneth Sinclare (1978) contributed appropriate methodology for finding out the value of the employees to the organisation.

Methods of Accounting Valuation of Human Resources:

The different approaches invariably denotes the methods or techniques for evaluation of the human resources.

In order to measure the value of HR, there are few decisional aspects to be considered, are as given here:

ADVERTISEMENTS:

i. Performance evaluation part for human resources;

ii. Present value of salary/wages payments;

iii. Real capital cost;

iv. Matching the cost of HR with the revenue of organisation.

Generally the methods for HR Accounting with its valuation may be given here:

1. Historical Cost Approach:

This approach was developed by William C. Pyle, which is based on the concept that there are certain cost incurred by the organisation with regard to human resources. Cost is a sacrifice aspect incurred to obtain some anticipated benefits or services.

ADVERTISEMENTS:

In this approach the actual cost incurred on recruiting, selecting, hiring, training and development of human resources, of the organisation is maintained and a proportion of it is written off to the income of the next and expected useful life of human resources.

The approach of the cost of human resources is very similar to the book value of the other physical assets. This method is simple to understand and easy to work out. It is based on traditional accounting concept of matching cost with revenue.

2. Replacement Cost Approach:

This approach was first opined by Rensis Likert and was developed by Eric G. Flamholth. Human resource of an organisation are to be values on the assumption that a new similar organisation has to be created from cut down and what would be the cost to the firm if the existing resources were required to be replaced with other persons of equivalent talents and experience.

According to this model the value of employee is estimated as the cost of replacement with a new employee of equivalent ability and efficiency. There are two costs, individual replacement cost and positional replacement cost. The cost of recruiting, selecting, training and development and familiarisation cost are account in individual replacement cost.

When an employee change the present position to another or leave the organisation then the cost of moving, vacancy, carrying and other relevant costs reflect in individual replacement cost. Positional replacement cost refers to the cost of filling different position in an organisation.

3. Opportunity Cost Approach:

This approach analyse the alternative earning sources from the productive capacity of human resources by putting some alternative use. Opportunity cost is the value of an asset (HR) when there is an alternative use of it. The perspective chances of opportunity cost are declined for those employees that are not scarce.

ADVERTISEMENTS:

Here, only the scarce people may be comprised the value of human resources. But the alternative use of HR within the organisation is restricted and at the same moment, the use of HR with finding out their alternative cost may not be incorporated properly.

4. Standard Cost Approach:

This approach is based on the line and staff as well as functional relationship of employees in an organisation. The employees of an organisation are categorised and divided into different groups with hierarchical levels or positions. Standard cost is fixed for each category of employees and their worthwhile role may be calculated. Due to some of the static position of employees on account of their status and position, it does not take any differences of them put in the same group.


Human Resource Accounting Concept

The concept of human resource accounting can be better understood if one goes through some of the important definitions given by the competent authors in the accounting field. The American Accounting Society Committee on HRA defines it as follows – “HRA is the process of identifying and measuring data about human resources and communicating this information to interested parties”. In simple terms, it is an extension of the accounting principles of matching costs and revenues and of organising data to communicate relevant information in financial terms.

Mr. Woodruff, Jr. Vice President of R. G. Batty Corporation defines it as follows – “HRA is an attempt to identify and report investments made in human resources of an organisation that are presently not accounted for in conventional accounting practice. Basically it is an information system that tells the management what changes over time are occurring to the human resources of the business.”

M. N. Baker defines HRA as follows – “HRA is the term applied by the accountancy profession to quantify the cost and value of employees to their employing organisation”.

Another management consultant Stephen Knauf has defined HRA as – “The measurement of quantification of human organisation inputs such as recruitment, training, experience and commitment.” Thus, HRA may be defined as a process of accounting which identifies, quantifies and measures human resources for the use of management to cope up with the changes in its quantum and quality so that equilibrium could be achieved in between the required resources and the provided human resources.

In short, HRA is the art of valuing, recording and presenting systematically the worth of human resources in the books of account of an organisation.

This definition brings out the following important characteristic features of human resource accounting:

1. Valuation of human resources.

2. Recording the valuation in the books of account.

3. Disclosure of the information in the financial statements of the business.

HRA provides useful information to the management, financial analysts and employees as stated below:

1. It helps the management in the employment, locating and utilisation of human resources.

2. It helps in deciding the transfers, promotion, training and retrenchment of human resources.

3. It provides a basis for planning of physical assets vis-a-vis human resources.

4. It assists in evaluating the expenditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm.

5. It helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it.

6. It helps in locating the real cause for low return on investment, like improper or under-utilisation of physical assets or human resource or both.

7. It helps in understanding and assessing the inner strength of an organisation and helps the management to steer the company well through most adverse and unfavourable circumstances.

8. It provides valuable information for persons interested in making long term investment in the firm.

9. It helps employees in improving their performance and bargaining power. It makes each of them to understand his contribution towards the betterment of the firm vis-a-vis the expenditure incurred by the firm on him.


Human Resources AccountingNeed

The need for human resources accounting arose primarily as a result of the growing concern for human relations management — in industry. Behavioural scientists concerned with the management of organisation pointed out that the failure of accountants to value human resources was a serious handicap for effective management.

1. A business manager has to use resources carefully to achieve immediate and long-term goals for the organisation. This necessitates valuable information about resources. The human beings constitute an important asset for an organisation. Without people in the organisation, other resources physical and financial cannot be effectively used. In conventional accounting, not much information is available about human resources.

2. The levels of income shown in the conventional statements in profit and loss accounts do not accurately reflect the level of business performance.

3. Expenses on human resources are charged to current revenue instead of being treated as investments to be amortised over the economic service of the employees with the result that the figures of net income shown are significantly distorted.

The result in the conventional balance sheets fail to reflect the value of human assets, hence there is distortion in value of organisation and the rate of return of investment. Distorted measures render assessment of organisation and inter-organisation comparison difficult.

4. Conventional treatment of investments on human resources may lead to the erosion of investors, interest through management decisions which is harmful for the long-run success of an organisation and to the investor’ equity.

5. Traditional accounting involves treatment of human capital and non-human capital differently; the recorded value of other assets is indicated as non-human capital. There is no such record of human assets corresponding to the human capital of the organisation although the productivity and profitability depend largely on contribution by human assets.

To make it more explicit, two firms engaged in the same business line, use identical physical assets under similar market conditions, may have different end results in terms of their profitability and growth due to differences in their human assets. It is, therefore, not possible to assess the total value of the firm, since the value of human capital (i.e., human assets) is not taken into consideration while assessing the total valuation of the firm’s assets.

6. Expenses incurred by a firm on recruitment, training and development of human resources, employees are at present as per practice, treated as current costs and written off against current revenue in the conventional accounts. Similarly, other employee related expenses such as welfare expenses, incentives, benefits are treated under the present system of accounting.

But all such expenses are in reality, expenses in the nature of investment in human resources and, the benefits of such investment on human resources are often derived or accrued over a longer period than the ‘one year’ in which these expenses are debited to the current revenue in the year a balance sheet is prepared.

The managements generally are interested to keep these costs on ‘welfare’ of human resources as low as possible, i.e., controlling or cutting down the ‘costs.’ These results in immediate savings in costs and resulting profits are achieved, neglecting the long-term impact of such a policy on the motivation or the morale of the employees.

7. The impact of management decision on human assets of the firm cannot be clearly perceived if the value of human resources is not reported in the profit and loss account and balance sheet.


Human Resources Accounting – Top 3 Costs Involved: Acquisition, Training and Development & Welfare

1. Acquisition Cost:

It refers to the costs incurred in acquiring the right man for the right job at the right time and in right quantity. It includes the expenses incurred on recruitment, selection and placement entire cost is taken into consideration including those who are not selected.

i. Recruitment cost – It is the cost incurred to identify sources of human resources both from within and outside the organisation. For example, cost of recruiting materials, administrative expenses, advertising costs, agency fees, recruiter’s salary and travel and outstation costs.

ii. Selection cost – It depends on several factors such as the type of personnel being recruited and the method of recruitment. The cost of selection depends on the position for which a person is being selected. The higher the position, the greater is the selection cost. It includes cost of application blanks, administrative cost of processing applications, conducting tests, interview, medical examination and the consulting fees of the selectors.

iii. Placement cost – In deciding upon the placement, the individual’s ability, attitude, interest, temperament and aspirations are taken into consideration with reference to the job requirements. The cost of placement can be collected for the purpose of human resource accounting.

2. Training and Development Cost:

It refers to the sacrifice that must be made to train a person either to provide the expected level of performance or to enrich the individual’s skill. Training improves the productivity potential of both the individual and the organisation.

The training cost includes the following:

i. Formal training cost – It refers to the cost incurred in conventional training for the orientation of an individual so that he can handle the work. The remuneration to the training staff and the fixed cost of the training schools are essentially Human Resource Investment items.

ii. On the job training cost – Once the employee is placed on the job, he must be trained to do the job efficiently and effectively and in this regard the employee learns while he is on his job. In the process, the costs of mishandling the job and the payments to the employee more than what he actually contributes, are on-the-job training cost. Thus it is an investment in Human Resource.

iii. Special training cost – To achieve the performance standards sometimes specific training programmes may be devised. The costs of such training are called special training costs and fall under the human resource investment of the organisation.

iv. Development programme cost – Employees may be allowed to participate in a variety of development programmes to enrich their faculties. These programmes may range from ordinary lectures to international conferences and seminars. The participants have an opportunity to interact with other executives on national and international level. Such association involves cost such as delegate fees, the travel cost, loss of output during the development programme etc. which are to be accounted for as a human resource investment.

3. Welfare Cost:

Management is after all the creation and maintenance of an environment. Therefore, it is a vital function of an employer to provide an atmosphere to the employees to perform their work in healthy, congenial climate conducive for good health and high morale. The expenses incurred for this purpose will facilitate the employee to increase the quality of his civic life.

These welfare costs can be classified as follows:

i. Welfare and amenities within the organisation – Creches, rest shelters and canteens, latrines and urinals, washing and bathing facilities, drinking water and occupational safety etc., are the welfare facilities provided by the employer within the organisation.

ii. Welfare outside the organisation – Social insurance measures, maternity benefit, medical facilities, education facilities, housing, recreational facilities, holiday homes and leave travel facilities are some of the welfare measures provided outside the establishment.


Human Resource Accounting – Significance

The signifying part of HRA are as given here:

1. It provide a basic platform of planning in that the objectives, aims and methods for acquiring human resources are included;

2. It provide various assistance to the management in employment and utilisation of human resources;

3. It helps the management in planning and executing personnel policies and plans pertaining to the recruitment, transfer, promotion and retrenchment of human resources;

4. It helps to study and assessing the inner strength of an organisation and helps the management to overcome the most adverse and unfavourable circumstances;

5. It helps to analyse the causes of high labour turnover at various levels and taking preventive measures for control over it;

6. It helps to give the cost of developing human resources and as such it will enable the management to ascertain the cost of labour turnover also;

7. It helps in evaluating the expenditure incurred for imparting further education and training of employees in terms of benefits derived by the organisation;

8. It helps to find out the real cause for low utilisation of HR, under utilisation of assets as well as low return on investment;

9. It helps the HR managers for conducts a better ways and means for organisational development in the organisation;

10. It helps in improving the efficiency of employees towards improving their performance and their worth;

11. It helps the each employee to understand his contribution towards the perspective results of the firm as well as the expenditure incurred by the firm on him.


Human Resource Accounting – 2 Important Models: Cost Based and Economic Value (With Limitations)

Quite a few Models have been suggested in the past for the Human Resource Accounting and these can be classified into 2 parts each having various Models.

Some of the important ones are:

A. Cost Based Models:

1. Capitalisation of Historical Costs:

As per this method of HR Accounting, the sum of all costs related to Human Resources (i.e. Recruitment, Acquisition, Formal Training, Informal Training, Informal familiarisation, experience and development) is taken together to represent the value of the human resources.

The value is amortised annually over the expected length of the service of individual employees and the unamortised cost is shown as Investments in the Human Assets. If an employee leaves the firm (i.e. Human Assets expire) before the expected service life period, then the net value to that extent is charged to the Current Revenue.

Limitations:

i. This Model of HR Accounting is simple and easy to understand and satisfies the basic principles of matching the costs and revenues.

ii. As the historical costs are sunk costs and are irrelevant for decision making, this model was severely criticised as it failed to provide a reasonable value to the human resources.

iii. This method of HR Accounting capitalises only the Training and Development Costs incurred on the employees and ignores the future expected costs to be incurred for their maintenance.

iv. This Model of HR Accounting distorts the value of the highly skilled human resources as such employees require less training and therefore, according to this model, they will be valued at a lesser cost.

2. Replacement Costs:

The Historical Cost Method was highly criticised as it only takes into account the Sunk Costs which are irrelevant for Decision Making. Thus, a new model for Human Resource Accounting was conceptualised which took into the account, the costs that would be incurred to replace its existing human resources by an identical one.

a. Individual Replacement Costs – Which refers to the cost that would have to be incurred to replace an individual by a substitute who can provide the same set of services as that of the individual being replaced.

b. Positional Replacement Costs – Which refers to the cost of replacing the set of services referred by an incumbent in a defined position

Thus, the Positional Replacement Cost takes into account the position in the organisation currently held by the employee and also the future positions expected to be held by him.

Limitations:

i. As per this method of HR Accounting, the determination of replacement cost of an employee is highly subjective and often impossible.

ii. Particularly at the management cadre, finding out an exact replacement is very difficult. The exit of a top management person may substantially change the human assets value.

3. Opportunity Cost Model:

This model was advocated by Hekimian and Jones in the year 1967 and is also known as the Market Value Method. This method of measuring Human Resources under this Model is based on the concept of opportunity cost i.e. the value of an employee in its alternative best use, as a basis of estimating the value of human resources.

The opportunity cost value may be established by competitive bidding within the firm, so that in effect, managers bid for any scarce employee. A human asset therefore, will have a value only if it is a scarce resource, that is, when its employment in one division denies it to another division.

Limitations:

i. One of the serious limitations of this method for Human Resource Accounting is that it excludes employees of the type which can be hired readily from outside the firm.

ii. Thus, this approach seems to be concerned with only one section of a firm’s human resources, having special skills within the firm or in the labour market.

B. Economic Value Models:

1. Present Value of Future Earnings Model:

This Model of human resource accounting was developed by Lev and Schwartz in the year 1971 and involves determining the value of human resources as per the present value of estimated future earnings discounted by the rate of return on Investment (Cost of Capital). As per this valuation model of Human Resource Accounting, the following expression is used for calculating the expected value of a person’s human capital

Limitations:

i. This Model of HR Accounting ignores the possibility and probability that an Individual may leave an organisation for reasons other than Death or Retirement.

ii. This Model of HR accounting also ignores the probability that people may make role changes during their careers. For example, an Assistant Engineer will not remain in the same position throughout the expected service life in the Organisation.

iii. Despite the above limitations, this model is the most commonly used model across the Globe for the purpose of Human Resource Accounting.

2. Reward Valuation Model/ Flamholtz Model:

Flamholtz advocated that an Individual’s Value to an organisation is determined by the services he is expected to render. This model of Human Resource Accounting is an improvement to the “Present Value of Future Earnings Model” as it takes into account the probability that an individual is expected to move through a set of mutually exclusive organisational roles or service states during a time interval. Such movement can be estimated probabilistically by using the following model

Limitations:

i. The major drawback of this model of Human Resource Accounting is that it is difficult to estimate the probabilities of likely service states of each employee.

ii. Determining the monetary equivalent of service states is also very difficult and costly affair.

iii. Since the analysis is restricted to Individuals, it ignores the value added element of Individuals working as groups.

3. Valuation on Group Basis:

While applying the above models, the Accountants realised that proper Valuation as per Human Resources Accounting is not possible unless the contributions of the Individuals as a Group are taken into consideration. An Individual’s expected service tenure in the organisation is difficult to predict but on a group basis it is relatively easier to estimate the percentage of people in a group likely to leave the organisation in the future.

This model of Human Resource Accounting attempted to calculate the present value of all existing employees in such in each rank.

Such Present Value is ascertained with the help of the following steps:

a. Ascertain the number of employees in each rank- Estimate the probability that an employee will be in his rank within the organisation or will be terminated in the next period. This probability will be estimated for a specified time period.

b. Ascertain the economic value of an employee in a specified rank during each time period.

c. The present value of existing employees in each rank is obtained by multiplying the above three factors and applying an appropriate discount rate.

Limitations:

i. Although this process simplifies the process valuation of Human Resource Accounting by considering a group of employees as a valuation base, but this method ignores the exceptional qualities of certain skilled employees.

ii. Thus, the performance of a group may be seriously affected in the event of exit of a single individual.


Human Resource Accounting – Applications in Public Sector and Private Sector

If we look at the annual reports of public enterprises and private enterprises in India, we find that chairman’s report invariable contains the statements highlighting the significance of human resources. The chairman of these enterprises make their remarks at the annual general meeting of the shareholders that our employees are most important assets and without their significant contribution, the present growth in the operation would not have been attained. ‘I wish to place it as record of my sincere gratitude for the hard work done by the employees of our company’.

‘I thankfully acknowledge the contribution made by our employees’. These qualitative pronouncements reflect the importance of human resources in an enterprise but the quantitative information relating to their contribution or their value is nowhere recorded or shown in the financial accounts.

However, in practice, a few enterprises, stated below, value their human resources and report this information in their annual reports:

(a) Public Sector Enterprises:

i. Bharat Heavy Electrical Ltd.,

ii. Cement Corporation of India,

iii. Project and Equipment Corporation of India,

iv. Engineers India Ltd.,

v. Minerals and Metals Trading Corporation of India,

vi. Electrical India Ltd.,

vii. Oil and Natural Gas Commission,

viii. Hindustan Shipyard Ltd.,

ix. Steel Authority of India Ltd., and

x. Oil India Ltd.

(b) Private Sector Enterprises:

i. Tata Engineering and Locomotive Works (TELCO)

ii. Associated Cement Company (ACC), and

iii. Southern Petro Chemical Industries Corpo­ration (SPIC).

Many companies such as BHEL do not consider labour as a cost but as a resource and in valuing this asset and ‘Lev and Schwartz’ model is mostly adopted with the following assumptions:

(a) Present pattern in employee compensation including direct benefits including the effect of wage revision;

(b) Normal career growth as per the present policies, with vacancies filled from the levels immediately below,

(c) Weightage for changes in efficiency due to age, experience and skills; and

(d) Application of discount factor of 12 per cent annum on the future earnings to arrive at the present value.

According to this method, the value of human resources is taken as the present value of estimated future earnings of employees discounted by the rate of return on investment; and applying employee group-wise weights for the firm. For this, the value of future services of an employee is estimated in terms of wages and salaries. The period for which the employee will be with the firm is also taken into consideration.

The methodology of human asset accounting encompasses the elements such as:

(a) The composition of employees in different grades for five years;

(b) Productivity of human resources for five years;

(c) Programmes for employee development;

(d) Personnel payments to the employees and expanses on social welfare per employee;

(e) Human asset valuation;

(f) Human assets vis-a-vis total assets, and

(g) Value of human assets in an organisation etc.


Human Resource Accounting8 Main Advantages: Information for Manpower Planning, Making Personnel Policies, Utilization of Human Resources and a Few Others

Advantage # 1. Information for Manpower Planning:

HRA provides useful information about the cost and value of human resources. It shows the strengths and weakness of the human resources. All this information helps the managers in planning and making the right decisions about human resources. Thus, it provides useful information for Manpower Planning and Decision Making.

Human Resource Planning anticipates not only the required kind and number of employees but also determines the action plan. It provides scope for advancement and development of employees by effective training and development.

Advantage # 2. Information for Making Personnel Policies:

HRA provides useful information for making suitable personnel policies about promotion, favorable working environment, job satisfaction of employees, etc. It checks the corporate plan of the organisation.

The corporate plan aiming for expansion, diversification, changes in technological growth etc. has to be worked out with the availability of human resources for such placements or key positions. If such manpower is not likely to be available, HR accounting suggests modification of the entire corporate plan.

Advantage # 3. Utilization of Human Resources:

HRA helps the organisation to make the best utilization of human resources.

Advantage # 4. Proper Placements:

HRA helps the organisation to place the right man in the right post depending on his skills and abilities. It offsets uncertainty and change, as it enables the organisation to have the right person for the right job at the right time and place. It aims to see that the human involvement in the organisation is not wasted and brings high returns to the organisation.

It helps to take steps to improve employee contribution in the form of increased productivity. It provides different methods of testing to be used, interview techniques to be adopted in the selection process based on the level of skill, qualifications and experience of future human resources.

Advantage # 5. Increases Morale and Motivation:

HRA shows that the organisation cares about the employees and their welfare. This increases their morale and it motivates them to work hard and achieve the objectives of the organisation. It helps individual employee to aspire for promotion and better benefits. It can foresee the change in value, aptitude and attitude of human resources and accordingly change the techniques of interpersonal management

Advantage # 6. Attracts Best Human Resources:

Only reputed organisations conduct HRA. So, competent and capable people want to join these organisations. Therefore, it attracts the best employees and managers to the organisation.

Advantage # 7. Designing Training and Development Programs:

HRA helps the organisation to design (make) a suitable training and development program for its employees and managers.

Advantage # 8. Valuable Information to Investors:

HRA provides valuable information to present and future investors. They can use this information to select the best company for investing their money.


Human Resource Accounting – 9 Major Limitations

1. The valuation of human assets is based on the assumption that the employees are going to remain with the organisation for a specified period. However, this assumption is wrong because employee mobility is very high.

2. The human resource accounting may lead to the dehumanization in the organisation. If the valuation is not done correctly or the results of the valuation are not used properly.

3. In the case of financial accounting, there are certain specified accounting standards which every organisation must follow. However, there are no standards for HRA. Each organisation has its own standards for it. So, there are no uniform standards for it. Therefore, the HRA of two organisations cannot be compared.

4. There are no specific and clear cut guidelines for ‘cost’ and ‘value’ of human resources of an organisation. The present valuation systems have many limitations.

5. The life of a human being is uncertain. So its value is also uncertain.

6. Calculation the value of human resources is not so easy because it is most difficult to calculate the value of the quality of any person. What worth will be of honesty, morality, benevolence and generosity? But these moral values are so important for developing any company from bottom point.

7. Jealousy to see the high value of other employee can decrease the efficiency of any employee because he can think why my price is sow low and other employee’s price is so high.

8. From human resource accounting, we cannot get short period benefits like general historical accounting system.

9. Indian company law 1956, Indian Income tax law 1961 and other legal laws are no rule for showing human resource assets in the balance sheet.

Consequences of Human Resources Accounting:

The consequences of the current accounting practice relating to human resources are deep and wide. It’s behavioural and policy impacts are too significant to be dismissed lightly.

They may be listed as under:

(i) By charging expenses of recruitment, training and development of human resources to current period’s profit and loss account, profits during that period are understated or losses are overstated. By doing so the boundaries of principles of conversion are stretched beyond its logical limits and even at the cost of ignoring the tenet of accrual.

(ii) By not capitalising expenses relating to human resources, even when they are substantial, the assets are concealed and net worth is understated to that extent.

(iii) The combined effect of the foregoing two points would be a blatant negation of the cardinal principle of true and fair disclosure in published accounts.

(iv) By writing off goodwill when profits are rising, accountants create secret reserves.

(v) Though physical assets are fully recorded under the existing system, human assets are ignored in the internal as well as external reports. This leads to faulty evaluations and decisions.

By not valuing human resources, depreciation of human assets is also ignored. It is a stark reality that human resource deteriorates in terms of its efficiency and productivity due to several indigenous and exogenous man-made factors. Had there been any attempt to systematically measure and report the “depreciation” or “appreciation” of human resources, the quality of management would certainly improve.


,

hit counter