Meaning

Human Resource Accounting is the offshoot of various

research studies conducted in the areas of accounting and finance. Human resource is an asset whose value gets appreciated over the period of time provided placed, applied and developed in the right direction. The traditional concept suggested that expenditure on human resource is treated as a charge against revenue as it does not create any physical asset. At present there is a change in this concept and the expenses incurred on any asset (as human resources) should be treated as capital expenditure as it yields benefits which can be derived for a long period of time and could be measured in monetary terms. The people are the most important assets of an organization but the value of this asset yet to appear in financial statements. It does not get included in management information systems too. Conventional accounting of human resources took note of all expenses of Human capital formation which does not seem to be correct or meeting the actual needs. Human Resource Accounting is the measurement of the cost and value of people to the organization. It involves measuring costs incurred by the organizations to recruit, select, hire, train and develop employees and judge their economic value to the organization.
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Definition of Human Resource Accounting: 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. 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 in between the required resources and the provided human resources.

Importance of Human Resource Accounting:

Human Resource Accounting provides useful information to the management, financial analysts and employees as stated below: 1. Human Resource Accounting helps the management in the Employment, locating and utilization 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-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 labor 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-utilization of physical assets or human resource or both. 7. It helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavorable circumstances. 8. It provides valuable information for persons interested in making long term investment in the firm.
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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-vis the expenditure incurred by the firm on him.Human Resource Accounting is the process of identifying and measuring data about Human Resources and communicating this information to the interested parties. It is an attempt to identify and report the Investments made in Human Resources of an organization that are currently not accounted for in the Conventional Accounting Practices. Thus, Human Resource Accounting is a term applied by the Accountancy Profession to quantify the cost and value of employees of their employing organisation.

Objective of Human Resource Accounting

1. Helpful in making management decisions. 2. Helps to management to monitor efficiency. 3. Human resource accounting provides determination of asset control. 4. Effective management of human resources. 5. Greater accountability for human resources 6. Better Human resource Plaining.

Benefits of Human Resource Accounting

The main benefits of Human Resource Accounting are:1. HR Accounting helps the company ascertain how much Investment it has made on its Employees and how much return it can expect from this Investment 2. The Ratio of Human Capital to Non-Human Capital computed as per the HR Accounting Concept indicates the degree of Labour Intensity of an Organisation. 3. HR Accounting provides a basis for planning of physical assets vis-a vis Human Resources 4. HR Accounting provides valuable information to Investors interested in making Long Term Investments in Service Sector Companies

There are several approaches for the valuation of human resources. The monetary approaches to
measurement of human assets are broadly based either upon cost or economic value. The cost approaches involve computation of the cost of human resources to the organization. The cost are capitalized and amortized over the useful life of the asset.

MODELS SOF HUMAN RESORCE ACCOUNTING

COST BASED MODELS

VALUE BASED MODELS

Some important cost based Models to Human Resource Accounting (HRA) are:
1. Historical Cost Model: In Historical Cost method, the basic contributing factors sfor developing the human resource of the organization has been equated to the actual cost incurred. In this approach, the actual costs of recruiting, selecting hiring, training , placing and developing the employees of an organization are capitalized and amortized over the expected useful life of the asset concerned. If the asset is liquidated prematurely, losses are recorded, and if an asset has a longer life than estimates, revisions are made in the amortization schedule.

HISTORICAL COST MODEL

ACQUISTION COST

DEVELOPMENT COST

Historical cost approach relies primarily on accounting techniques which have been in common use for many years. It is easy to develop and operate these systems. Management also has little difficulty in interpreting the meaning and the information supplied by cost based systems since the underlying concepts are consistent with those of the conventional accounting data. It simply involves an extension of the concept of proper matching of costs with revenue. Historical cost of human resources is treated very much like the cost of fixed assets. The same principles of capitalization and amortization are applied. ADVANAGES It is quite simple to understand and can be easily worked out. It satisfies the traditional accounting concept of relating cost revenue. It provides a basis for evaluating the companys returns on investment in human resources. LIMITATIONS: It takes into account only a part of the employees acquisition cost and ignores the aggregate value of their potential services. It is not easy or it may not be possible to estimate the number of year over which the capitalized expenditure is to be amortized.
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 Because of the above problem, it will be difficult to determine a precise rate of amortization. A question may arise as to whether it should constant, increasing or decreasing. One fact to be considered is that gaining experience economic value of human resources increase. But under this method the capital cost decreases, with amortization. The question arises as to how the difference could be recover.

2. REPLACEMENT COST MODEL

The approach was propounded first by Rensis Likert and was further developed by Eric G. Flamholtz. This is mainly based on the concept of Replacement cost. This is a measure the cost to replace a firms human resource. Rensis Likert had suggested determination of the value of total human organization on the basis of the assumption that a new similar organization has to be created from scratch. He says Suppose that tomorrow, your firm had all of its present facilities but no personnel except the Chairman and he had to rebuild the human organization back to its present effectiveness. How much would t cost? All costs would be included which are involved in the recruiting, hiring, training the developing the replacement to the present level of proficiency and familiarity with the organization. This should serve the basis of valuation of human resources of the organization from time to time.
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This approach incorporates the current value of the companys human resources. It takes into account the fluctuations of the job market and the general rise in price level. Replacement costs have the advantage of being present oriented. This method is regard as as good surrogate for the economic value of the asset in the sense that market considerations are essential in reaching a final figure. Such a final figure is also generally intended to be conceptually equivalent to a notion of a persons economic value. REPLACEMENT
COST MODEL

ACQUISITION COST

DEVELOPMENT COST

SEPARATION COST

DIRECT COST

INDIRECT COST

DIRECT COST

INDIRECT COST

DIRECT COST

INDIRECT COST

Recruitment Selection Hiring Placement

Cost of Promotion On the job training

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Cost of Trainers time

Separation Pays
Loss of efficiency prior to separation Cost of vacant position during search

Formal Training

DISADVANAGES replacement cost is that it may not always be possible to obtain such a measure for a particular employee. It is difficult to fit identical replacement of the existing human resources in actual practice. Replacement cost does not necessarily reflect the knowledge, competence and loyalties concerning an organization that an individual can build over time. Further, the managers asked to estimate the cost of completely replacing their human organization may have difficulty doing so, and different managers may arrive at quite different estimates.

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3. Opportunity Cost Model:

To meet the deficiencies of the Replacement cost, Hekimain and Jones have suggested the use of Opportunity Cost Concept. For capital equipment and assets Joel Dean has defines Opportunity Cost as The most profitable alternative use that is foregone by putting it to present use. Under this method the value of an employee in his alternative use is determines that value is taken as the basis for estimating. If employees can be hired early eternally there is no opportunity cost for them. Hekimian and Jones have suggested a competitive bidding process for the scarce employee in a organization. Under opportunity cost method, the investment center managers will bid for the scare employee they to recruit. These scare employees come from within the firm and include only those who are the subjects of recruitment request made by an investment center manager. In other words, employees not considered scare are not included in the human asset base of the organization. In opportunity cost concept, the divisional of investment center manager may bid for the services of the various personnel here quires. This bid price is then included in the investment base. The maximum bid price may go to the extent of the capitalized value of the extra profits likely to be generated by the ability and competence of the executive.
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ADVANTAGES: Suitable scarce employees only All mangers will be encouraged to bid. Concept of opportunity cost is applied by establishing an internal labour market within an organisation through the process of competitive bidding. DISADVANTAGES: The method does not show the true cost of human resources in an organization because it excludes from its purview the employees who are not being bid by other departments of investment centers. The method provides only a partial solutions as the employees of the type that can easily be hired from outside are not assets under this approach. To determine the bid price for an employee, a Manager must make a judgmental estimate of that employees value. Hence a low degree of objectivity can be expected form the opportunity cost. To ensure growth and development of any organization, the efficiency of people must be augmented in the right perspective. Without human resources, the other resources cannot be operationally effective. The success or otherwise of an organization depends on how best the scarce physical resources are utilized by the human resource. What is important here is that the physical resources are being activated by the human resources as the physical
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resources cannot act on their own. Therefore, the efficient and effective utilization 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.

Value based models

LEV AND SCHWARTZ MODEL FLAMHOLTZ'S MODEL HARMAN'S MODELS JAGGI AND LAU'S MODEL

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1) THE LEV AND SCHWARTZ MODEL This model was developed in 1971.It determining the value of human capital embodied in a person of age It is the present value of his remaining future earning from employment in the form of salaries, wages, etc. It is also called Compensation Model. (Vx) = T (t+1) t li Px (1+r) t-x t=x i=x (Vx) = Expected human capital value of x years old. Px (t) =Probability of a person dying at age t Li=Persons estimated future earnings per annum. r= Discount rate specific to the person. T=Retirement age of the person .

Steps:1.Total labour force is divided into homogeneous groups of employess. 2.Averagen earnin g profile based on census data will be construced for each group of employees. 3.Present value of human capital will be caluclaed.

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Evaluation of lev and Schwartz Model.

This model ignores the possibility and probability of an individual leaving the organisation for reasons other than retirement and death. The assumption of lev Schwartzs model that human beings will not make role changes during their tenure in the organisation seems unrealistic . Model also fail to accurately evaluate the group and team work involved. This model ignore the security, bargaining capacity, skill and experience which may affect the payment of more or low salaries . A value of human being to the organisation is not determining future level of salaries even about determination of discount rate.

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2) FLAMHOLTZ MODELS (1971) This method determined an individuals value to an organisation by the services he is expected to render to the organisation during the period he is likely to remain with the organisation in various position or services states. The present value of human resource may be derived by discounting the realisable value of expected future services at a specified rate.

Steps :Estimation of period. Identification of position or services. Estimation of probable period. Calculate the expected services. Calculation of present value at a predetermined rate. Flamholtz has given formula for calculation of expected realisable value of an individual m Si P(Si) n i=1 S= (1+r)t t=1 S=Expected realisable value Si= The value S to be derived by the organisation in each possible service state,i. P(Si)= probability that the organisation will obtained Si t =time period m=state of exist
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(1+r)t = discount factor for money. Determinants Elements Of Conditional of Value Conditional Value
Skill Promotability Individual Conditional value
Individuals Expected

Activation Level

Productability

Realisable Value to a
Probability of maintaining oragnisational membership

Role

Transferbility

Formal organisation

Satisfaction

Role

Reward

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3.HERMANSONS MODEL Roger H. Hermanson has suggested two models for the measurement of human resources. These are:UNPURCHASED GOODWILL MODEL HR is calculated by capitalising earnings in excess of normal earnings for the industry or the group of companies of which the firm is a part Evaluation Merits This model uses information from published statements. This model is based on a logical indication of the presence of human resources in an organisation . Model is easy to understand and easy to make human beings understand. Demerits: This model ignores the human resource base that is required to carry out normal operations of the organisation. Model only uses the actual earnings of the most recent year as the basis for calculating human assets which put restrictions on the scope of making very
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much discounts the reliability of forecasts of future earnings that could be more relevant for managerial decisions ADJUSTED DISCOUNTED FUTURE WAGE MODEL This model uses compensation as a surrogate measure of a Persons value to the firm. Compensation means the present value of future stream of wages and salaries to employees of the firm. The discounted future wage stream is adjusted by an efficiency ratio which is the weighted average of the ratio of return on investment of the given firm to all the firms in the economy for a specified period, usually five years. The weights are assigned in the reverse order, i.e. 5 to the current year RF0 RF1 RF2 RF3 RF4 5 +4 +3 +2 +1 RE0 RE1 RE2 RE3 R E4 Efficiency= Ratio 15 RF0=Rate of accounting income on owned assets for the firm for the current year. RE0=Rate of accounting income on owned assets for the economy for the current year. RF4=Rate of accounting income on owned assets for the firm for forth preceding year
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RE4=Rate of accounting income on owned assets for the economy for fourth preceding year

STEPS:1. Estimation of annual salaries and wages for the next five years . 2. Discount factor is applied to the annual wages. This discount factor is to be taken from discount table. 3. Calculate efficiency ratio by using formula discussed above . 5. Present value of wages and salaries are multiplied with efficiency ratio.

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4) JAGGI AND LAU MODEL The valuation is on a group basis rather on individual basis. GROUP means a homogeneous group of employees who may not be necessarily working in the same department. It might be difficult to predict an Individual s future period stay and chances of promotion, but on a group basis, it is easier to ascertain the future period of services, chances of promotion and those who are likely to leave the firm during each of the forthcoming period. It assumed that the pattern of movement is likely to remain constant overtime and the probabilities determined for one period can be extended to future periods. Merits: Based on homogeneous groups A markov chain representation is used Duration of employment is taken into consideration. Promotion paths are taken into cosidration Multiple probabilities of future changes are taken into consideration. FORMULA n n Tv =(N) r (T) (V) Tv=Column vector indicating the number of employees currently in each rank.
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(N)=Column vector indicating the number of employees currently in each rank. n = Time period r =Discount rate (T)= Rank of traditional matrix indicating the probability that an employee will be in each rank within the organisation (V) Column Vector indicating the economic value of an employee of each period.

STEPS:1.The whole organisation is divided into various homogeneous groups. 2.homogeneous may not belong to the same department or division . 3.A rank transitional matrix is to be derived on the basis of historical data using markovian analysis. 4.The multiple probabilities of future changes are determined by assuming that the pattern of movement is likely to remain constant. 5.The economic value of each employee of each rank is determined. 6.Number of employees occupying each rank is to be ascertained. 7.The value of human resource of the group is determined by carrying out matrix operations . Finaally by using appropriate discount rate present value is calculated.
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HUMAN RESOURCE ACCOUNTING IN INDIA

Human Resources Accounting was introduced way back in the 1980s, but it started gaining popularity in India after it was adopted and popularized by NLC. Human Resources accounting, also known as Human Asset Accounting, involved identifying, measuring, capturing, tracking and analyzing the potential of the human resources of a company and communicating the resultant information to the stakeholders of the company. A growing trend towards the measurement and reporting of human resources particularly in public sector is noticeable during the past few years. BHEL Cement corporation of INDIA ONGC Engineers INDIA ltd National thermal corporation Minerals and metals trading corporation Madras refineries, oil INDIA ltd., Associated cement companies SPIC, metallurgical and engineering consultants India limited, Cochin refineries ltd. Etc
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Are some of the organizations, which have started disclosing some valuable information regarding

human resources in their financial statements

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Reasons of slow progress of HRA in india

MACRO LEVEL
1 No legal binding and backing. 2 Lack of initiative in private sector. 3 India is trend follower not settler. 4 Lack of initiation from professional institutes 5 No contribution from universities. 5 Families dominations in private Sector.

MICRO LEVEL
1. Lack of Computer technology. 2. Costs are more than the benefits. 3.Fear of bargaining by trade unions.

A. TO ENTERPRENEURS:-

B. TO INVESTORS:1.Lack of awareness among investors. 2.No Standard Model 3.Difficulty in Comparisons. C. TO WORKERS 1.Workers are liabilities not assets.
2 .High labour turnover 3.Illiteracy among working class.

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HOW ACCOUNTING IS DONE..?

The issue is to be addressed is how to measure the economic value of the people to the organization and various cost based measures to be taken for human resources. The two main components of Human Resources Accounting were investment related to employees the value generated by them. Ex-gratia Payment Tour expenses Welfare fund Medical expenses Training cost Selection cost advertisement investment After analyzing the investment pattern in the human resources of an organization the current cost of human resources can be ascertained. Current cost consists of salary and wages, Dearness allowance, overtime wages, bonus, house rent allowance, special pay and personal pay. Human Resources accounting is used to measure the performance of all the people in the organization, and when this was made available to the stakeholders in the form of a report, it helped them to take critical investment decisions. From the above discussions, it is felt that, Human resource accounting provides quantitative information about the value of human asset, which helps the to4 management to take decisions regarding the adequacy of human res

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CASE STUDY
HRA IN INFOSYS INFOSYS used LEV and SCHWARTZ method. According to this method the present value of future earning capacity of an employee, from the date of joining till retirement is estimated. The method was based on the following assumptions: An employee salary package includes all the benefits , whether direct or indirect. Additional earnings on the basis of age groups were also taken into account.

The method is as follows.

All the employees of Infosys were divided into five groups, based on their average age .Each groups average compensation was calculated. Infosys also calculated the compensation of each employee at retirement by using an average rate of increment. The increments were based on industry standards, and the employees performance and productivity. Finally the total compensation of each group was calculated. This value was discounted at the rate percent per annum which was the cost of capital at Infosys to arrive at the total human resources of Infosys.
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BENEFITS..
Benefit experienced By Infosys by valuing its human resources: Infosys could determine whether its human asset was appreciating over the years or not. The company could also use this information internally to compare the performance and productivity of employees in various departments. The company ensured that it compensated each employee according to his / her net worth. HRA also helped Infosys in identifying and retaining valuable employees. When human resources gets quantified it gave Infosys investors and other clients true insights into the organization and its future potential. It restored faith amongst shareholders. BY adopting HRS the following information could be obtained Cost per employee Human capital investment ratio The amount of wealth created by each employee The profit created by each employee. To sum up HRA in Infosys helped in identifying the right person for the right job, based on the persons specialized skills, knowledge, capabilities ,experience.

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