This document discusses human resource accounting, which aims to identify and quantify the costs and value of employees to their organization. It provides 3 methods for valuing human resources:
1) Cost-based models that value employees based on recruitment/training costs (historical or replacement costs).
2) Value-based models that estimate the present value of employees' future earnings or rewards within an organization.
3) Valuation on a group basis by estimating probabilities of employee ranks/tenure and calculating present value.
This document discusses human resource accounting, which aims to identify and quantify the costs and value of employees to their organization. It provides 3 methods for valuing human resources:
1) Cost-based models that value employees based on recruitment/training costs (historical or replacement costs).
2) Value-based models that estimate the present value of employees' future earnings or rewards within an organization.
3) Valuation on a group basis by estimating probabilities of employee ranks/tenure and calculating present value.
This document discusses human resource accounting, which aims to identify and quantify the costs and value of employees to their organization. It provides 3 methods for valuing human resources:
1) Cost-based models that value employees based on recruitment/training costs (historical or replacement costs).
2) Value-based models that estimate the present value of employees' future earnings or rewards within an organization.
3) Valuation on a group basis by estimating probabilities of employee ranks/tenure and calculating present value.
This document discusses human resource accounting, which aims to identify and quantify the costs and value of employees to their organization. It provides 3 methods for valuing human resources:
1) Cost-based models that value employees based on recruitment/training costs (historical or replacement costs).
2) Value-based models that estimate the present value of employees' future earnings or rewards within an organization.
3) Valuation on a group basis by estimating probabilities of employee ranks/tenure and calculating present value.
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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 organisation 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. b!ective of Human Resource Accounting The Aim of HR Accounting is to depict the Potential of the "mployees in #onetary Terms. This concept can be e$amined from % directions i.e. 1. Cost of Human Resources i.e. the expenditure incurred for recruiting, stafng and training the Quality of the Employees and 2. Value of Human Resources i.e. the yield hich the a!o"e in"estment can yield in the future. Importance of Human Resource Accounting The %& st Century has been referred to as the Century of the 'ervice 'ector. All ma!or e$pansion scope seems to be happening in the service sector and the scope of e$pansion of the manufacturing sector is minimal. (ut are the Accountants properly able to value this 'ervice 'ector and sho) this on the Company*s (alance 'heet+ ,or any Company operating in the #anufacturing 'ector, its core assets are its #achinery and ,i$ed Assets but for a Company operating in the 'ervice 'ector, its core assets are its employees )hich are Intangible Assets. ,or a 'ervice 'ector Company, the value of employees gains importance as earnings are based on the per- employee per hour billing model and profitability is lin.ed to the value added by the )or.force. The Concept of Human Resource Accounting )as established primarily for the service sector has no) started gaining so much relevance that no) Companies in all 'ectors have applying HR Accounting and a good )eightage is given to these reports )hen ma.ing any Company Analysis. (enefits of Human Resource Accounting The main benefits of Human Resource Accounting are/- 1. HR #ccounting helps the company ascertain ho much $n"estment it has made on its Employees and ho much return it can expect from this $n"estment 2. %he Ratio of Human Capital to &on'Human Capital computed as per the HR #ccounting Concept indicates the degree of (a!our $ntensity of an )rganisation. *. HR #ccounting pro"ides a !asis for planning of physical assets "is'a'"is Human Resources +. HR #ccounting pro"ides "alua!le information to $n"estors interested in ma,ing (ong %erm $n"estments in -er"ice -ector Companies Methods of Human Resource Accounting 0uite a fe) #odels have been suggested in the past for the Human Resource Accounting and these can be classified into % parts each having various #odels. 'ome of the Important ones are/- A. Cost (ased #odels I. Capitalisation of Historical Costs #odel II. Replacement Costs #odel III. pportunity Cost #odel (. 1alue (ased #odels I. Present 1alue of ,uture "arnings #odel2 3ev and 'ch)art4 #odel II. Re)ard 1aluation #odel2 ,lamholt4 #odel III. 1aluation on 5roup (asis A. COST BASED MODELS I. Capitaisation of Historica Costs As per this #ethod of HR Accounting, the sum of all costs related to Human Resources 6i.e. Recruitment, Acquisition, ,ormal Training, Informal Training, Informal ,amiliarisation, e$perience and development7 is ta.en together to represent the value of the human resources. The value is amortised annually over the e$pected length of the service of individual employees and the unamortised cost is sho)n as Investments in the Human Assets. If an employee leaves the firm 6i.e. Human Assets e$pire7 before the e$pected service life period, then the net value to that e$tent is charged to the Current Revenue. 3imitations This #odel of HR Accounting is simple and easy to understand and satisfies the basic principles of matching the costs and revenues. 1. #s the historical costs are sun, costs and are irrele"ant for decision ma,ing, this model as se"erely criticised as it failed to pro"ide a reasona!le "alue to the human resources. 2. %his method of HR #ccounting capitalises only the %raining and .e"elopment Costs incurred on the employees and ignores the future expected costs to !e incurred for their maintenance. *. %his /odel of HR #ccounting distorts the "alue of the highly s,illed human resources as such employees re0uire less training and therefore, according to this model, they ill !e "alued at a lesser cost. II. Repacement Costs The Historical Cost #ethod )as highly criticised as it only ta.es into account the 'un. Costs )hich are irrelevant for 8ecision #a.ing. Thus, a ne) model for Human Resource Accounting )as conceptualised )hich too. into the account, the costs that )ould be incurred to replace its e$isting human resources by an identical one. 1. $ndi"idual Replacement Costs 1 hich refers to the cost that ould ha"e to !e incurred to replace an indi"idual !y a su!stitute ho can pro"ide the same set of ser"ices as that of the indi"idual !eing replaced 2. 2ositional Replacement Costs 1 hich refers to the cost of replacing the set of ser"ices referred !y an incum!ent in a de3ned position Thus, the Positional Replacement Cost ta.es into account the position in the organisation currently held by the employee and also the future positions e$pected to be held by him. 3imitations As per this method of HR Accounting, the determination of replacement cost of an employee is highly sub!ective and often impossible. Particularly at the management cadre, finding out an e$act replacement is very difficult. The e$it of a top management person may substantially change the human assets value. III. Opportunit! Cost Mode This model )as advocated by He.imian and 9ones in the year &:;< and is also .no)n as the #ar.et 1alue #ethod. This method of measuring Human Resources under this #odel 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 )ithin the firm, so that in effect, managers bid for any scarce employee. A human asset therefore, )ill have a value only if it is a scarce resource, that is, )hen its employment in one division denies it to another division. 3imitations ne of the serious limitations of this method for Human Resource Accounting is that it e$cludes employees of the type )hich can be hired readily from outside the firm. Thus, this approach seems to be concerned )ith only one section of a firm*s human resources, having special s.ills )ithin the firm or in the labour mar.et. B. ECO"OMIC #AL$E MODELS I. %resent #aue of &uture Earnings Mode This #odel of human resource accounting )as developed by 3ev and 'ch)art4 in the year &:<& 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 6Cost of Capital7. As per this valuation model of Human Resource Accounting, the follo)ing e$pression is used for calculating the e$pected value of a person*s human capital 3imitations 1. %his /odel of HR #ccounting ignores the possi!ility and pro!a!ility that an $ndi"idual may lea"e an organisation for reasons other than .eath or Retirement. 2. %his /odel of HR #ccounting also ignores the pro!a!ility that people may ma,e role changes during their careers. 4or example, an #ssistant Engineer ill not remain in the same position throughout the expected ser"ice life in the )rganisation. 8espite the above limitations, this model is the most commonly used model across the 5lobe for the purpose of Human Resource Accounting. II. Re'ard #auation Mode( &amhot) Mode ,lamholt4 advocated that an Individual*s 1alue to an organisation is determined by the services he is e$pected to render. This model of Human Resource Accounting is an improvement to the =Present 1alue of ,uture "arnings #odel> as it ta.es into account the probability that an individual is e$pected to move through a set of mutually e$clusive organisational roles or service states during a time interval. 'uch movement can be estimated probabilistically by using the follo)ing model 3imitations 1. %he ma5or dra!ac, of this model of Human Resource #ccounting is that it is difcult to estimate the pro!a!ilities of li,ely ser"ice states of each employee. 2. .etermining the monetary e0ui"alent of ser"ice states is also "ery difcult and costly a6air. *. -ince the analysis is restricted to $ndi"iduals, it ignores the "alue added element of $ndi"iduals or,ing as groups. III. #auation on *roup Basis ?hile applying the above models, the Accountants realised that proper 1aluation as per Human Resources Accounting is not possible unless the contributions of the Individuals as a 5roup are ta.en into consideration. An Individual*s e$pected 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 li.ely to leave the organisation in the future. This model of Human Resource Accounting attempted to calculate the present value of all e$isting employees in such in each ran.. 'uch Present 1alue is ascertained )ith the help of the follo)ing steps/- 1. #scertain the num!er of employees in each ran, 2. Estimate the pro!a!ility that an employee ill !e in his ran, ithin the organisation or ill !e terminated in the next period. %his pro!a!ility ill !e estimated for a speci3ed time period. *. #scertain the economic "alue of an employee in a speci3ed ran, during each time period. +. %he present "alue of existing employees in each ran, is o!tained !y multiplying the a!o"e three factors and applying an appropriate discount rate. 3imitations Although this process simplifies the process valuation of Human Resource Accounting by considering a group of employees as a valuation base, but this method ignores the e$ceptional qualities of certain s.illed employees. Thus, the performance of a group may be seriously affected in the event of e$it of a single individual.