Human resource accounting: managerial implications

By R.K. Gupta http://books.google.co.in/books?

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Yb__dfMCi&sig=GoXhXB_yab1z1lKVHKZOoH-pQYU&hl=en#v=onepage&q&f=false

Human resource accounting: advances in concepts, methods, and

applications

By Eric Flamholtz

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id=dNwPVJ1cp2kC&printsec=frontcover&dq=human+resource+accounting&source=bl&ots=c
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HUMAN RESOURCE ACCOUNTING (HRA) PRACTICES IN INDIA

by Assistant on September 27, 2009

Success of corporate undertakings purely depends upon the quality of human resources. It
is accentuated that; Human element is the most important input in any corporate
enterprise. The investments directed to raise knowledge; skills and aptitudes of the work
force of the organization are the investments in human resource. In this context, it is
worth while to examine and human resource accounting practices in corporate sector in
India.

Human resource accounting is of recent origin and is struggling for acceptance. .It is
clearly said that, Human resources accounting is an accounting measurement system and
a large body of literature has been published in the last decade setting for the various
procedures for measurement. At the same time the theory and underlying concepts of
accounting measurement have received sizeable attention from academics and a
substantial body of literature has developed. The conventional accountings of human
resources are not recognized as physical or financial assets.

Though Human Resources Accounting was introduced way back in the 1980s, 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. It was a method by which a cost was assigned to every employee when
recruited, and the value that the employee would generate in the future. Human Resource
accounting reflected the potential of the human resources of an organization in monetary
terms, in its financial statements.

Even though the situation prevails, yet, 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. are some of the organizations,
which have started disclosing some valuable information regarding human resources in
their financial statements. It is needless to mention here that, the importance of human
resources in business organization as productive resources was by and large ignored by
the accountants until two decades ago.

During the early and mid 1980’s, behavioral scientists attacked the conventional
accounting system for its failure to value the human resources of the organization along
with its other material resources. In this changing perspective the accountants were also
called upon to play their role by assigning monetary value to the human resources
deployed in the organization. Human Resource Accounting involves the dimension of
cost incurred by the organization for all the personnel function. Hence 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 and the value
generated by them. Investment in human capital included all costs incurred in increasing
and upgrading the employees’ skill sets and knowledge of human resources. The output
that an organization generated from human resources was regarded as the value of its
human resources. 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.All the models
stressed that human capital was considered an investment for future earnings, and not
expenditure.

For valuing human resources, different models have been developed. Some of them are
opportunity cost Approach, standard cost approach, current purchasing power Approach,
Lev and Schwartz present value of future earnings Model Flam holtz’s stochastic rewards
valuation Models etc. Of these, the model suggested by Lev and Schwartz has become
popular. Under this method, the future earnings of the human resources of the
organization until their retirement is aggregated and discounted at the cost of capital to
arrive at the present value.

Human resources accounting system consists of two aspects namely:

a) The investment made in human resources

b) The value human resource

Measurement of the investments in human resources will help to evaluate the charges in
human resource investment over a period of time. The information generated by the
analysis of investment in human resources has many applications for managerial
purposes. The organizational human performance can be evaluated with the help of such
an analysis. It also helps in guiding the management to frame policies for human
resource management. The present performance result will act as input for future
planning and the present planning will have its impact on future result. The same
relationship is also applicable to the areas of managerial applications in relation to the
human resource planning and control.Investment in human resources can be highlighted
under two heads, namely,

Investment pattern:

The human resource investment usually consists of the following items:-

1) Expenditure on advertisement for recruitment

2) Cost of selection

3) Training cost

4) On the job training cost

5) Subsistence allowance

6) Contribution to provident Fund

7) Educational tour expenses

8) Medical expenses

9) Ex-gratia payments

10) Employee’s Welfare Fund

All these items influence directly or indirectly the human resources and the productivity
of the organization.

Investment in current costs

After analyzing the investment pattern in the human resources of an organization the
current cost of human resources can be ascertained. For this purpose, current cost is
defined as the cost incurred with which derives benefit of current nature. These are the
costs, which have little bearing on future cost. Thus, the expenses incurred for the
maintenance of human resources are termed as current costs. Current cost consists of
salary and wages, Dearness allowance, overtime wages, bonus, house rent allowance,
special pay and personal pay.

Amidst this background, it is significant to mention that the importance and value of
human assets were recognized in the early 1990s when there was a major increase in
employment in firms in service, technology and other knowledge-based sectors. In the
firms in these sectors, the intangible assets, especially human resources, contributed
significantly to the building of shareholder value. The critical success factor for any
knowledge-based company was its highly skilled and intellectual workforce.Soon after,
the manufacturing industry also seemed to realize the importance of people and started
perceiving its employees as strategic assets. For instance, if two manufacturing
companies had similar capital and used similar technology, then it was only their
employees who were the major differentiating factor. Due to the above development, the
need for valuing human assets besides traditional accounting of tangible assets was
increasingly experienced.

From the above discussions, it is felt that, Human resource accounting provides
quantitative information about the value of human asset, which helps the top management
to take decisions regarding the adequacy of human resources. Hence, It is Concluded that,
the Human Resources are an indispensable but often neglected element is thus to be fore
grounded into the industrial area for the betterment of the economy.

Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral

degree from Alagappa University in 1997. He currently teaches financial management and
Research Methodology Subjects in Post graduate and Research Department of Corporate
Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry
University, Puducherry. Before Joining BGCW, he was teaching in SNR College, Coimbatore,
Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the
industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of
teaching experience and having research experience of 15 years. His interests are in Accounting
and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development
Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20
papers in national and international conferences and has published twenty papers in the areas of
Finance and Human resource Management in National Journals. Co-authored a book titled,
‘Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in
contemporary finance topics at Pondicherry University. He is involved in consultancy projects
for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number
of research projects in the area of corporate finance and Human Resource Management. He is
the Board of examiner in corporate Secretaryship and Management for the past two decades.
.

Article Source:http://www.articlesbase.com/human-resources-articles/human-resource-
accounting-hra-practices-in-india-1272765.html

From Wikipedia, the free encyclopedia

Human Resource Accounting is a method to measure the effectiveness of personnel
management activities and the use of people in an organization.

Approaches to Human resourceaccounting approaches to HRAwas first devloped 1691

the next stage was durig 1691-1960 and third phase post 1960. there are two approaches
to HRA. They are as follows

1. Cost approach:Cost approach is also called human resource cost accounting method or
model. Under this there are two important model

a)Aqvisition cost model

b)replacement cost model

2. value approach:-under this value approach there are three important approaches they
are

a)present value of future earnings method.

b)discounted future wage model
c)compitative bidding model

Contents

• 1 Historical cost approach

o 1.1 Limitations
• 2 Replacement Cost approach
o 2.1 Limitations
• 3 Present Value of Future Earnings
o 3.1 Limitations
• 4 Value to the organization
o 4.1 Limitations
• 5 Expense model

• 6 References

1 Historical cost approach

This approache is also called as aqvisition cost model.This approach is developed by

Brummet, Flamholtz and Pyle but the first attempt towards employee valuation made by
R. G. Barry Corporation of Columbus, Ohio in the year 1967. This method measures the
organization’s investment in employees using the five parameters: recruiting, acquisition;
formal training and, familiarization; informal training, Informal familiarization;
experience; and development. The costs were amortized over the expected working lives
of individuals and unamortized costs (for example, when an individual left the firm) were
written off.
Limitations

• The valuation method is based on false assumption that the dollar is stable.
• Since the assets cannot be sold there is no independent check of valuation.
• This method measures only the costs to the organization but ignores completely
any measure of the value of the employee to the organization (Cascio 3).

2 Replacement Cost approach

This approach measures the cost of replacing an employee. According to Likert (1985)
replacement cost include recruitment, selection, compensation, and training cost
(including the income foregone during the training period). The data derived from this
method could be useful in deciding whether to dismiss or replace the staff.

Limitations

• Substitution of replacement cost method for historical cost method does little
more than update the valuation, at the expense of importing considerably more
subjectivity into the measure. This method may also lead to an upwardly biased
estimate because an inefficient firm may incur greater cost to replace an employee
(Cascio 3-4).

3 Present Value of Future Earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the
present value of future earnings, adjusted for the probability of employees’
death/separation/retirement. This method helps in determining what an employee’s future
contribution is worth today.

According to this model, the value of human capital embodied in a person who is ‘y’
years old, is the present value of his/her future earnings from employment and can be
calculated by using the following formula:

E(Vy) = Σ Py(t+1) Σ I(T)/(I+R)t-y

T=Y Y

where E (Vy) = expected value of a ‘y’ year old person’s human capital T = the person’s
retirement age Py (t) = probability of the person leaving the organisation I(t) = expected
earnings of the person in period I r = discount rate

Limitations

• The measure is an objective one because it uses widely based statistics such as
census income return and mortality tables.
 • The measure assigns more weight to averages than to the value of any specific
group or individual (Cascio 4-5).

4 Value to the organization

Hekimian and Jones (1967) proposed that where an organization had several divisions
seeking the same employee, the employee should be allocated to the highest bidder and
the bid price incorporated into that division’s investment base. For example a value of a
professional athlete’s service is often determined by how much money a particular team,
acting in an open competitive market is willing to pay him or her.

Limitations

• The soundness of the valuation depends wholly on the information, judgment, and
impartiality of the bidder (Cascio 5).

5 Expense model

According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to
the behavioral outcomes produced by working in an organization. Criteria such as
absenteeism, turnover, and job performance are measured using traditional organizational
tools, and then costs are estimated for each criterion. For example, in costing labor
turnover, dollar figures are attached to separation costs, replacement costs, and training
costs.

References

• Blau, Gary E. Human Resource Accounting, 1st ed. Scarsdale, N.Y.: Work in
America Institute, 1978.
• Caplan, Edwin H. and Landekich, Stephen. Human Resource Accounting: Past,
Present and Future. New York: National Association of Accountants, 1974.
• Cascio, Wayne F. Costing Human Resources: The Financial Impact of Behavior
in Organizations, 3rd ed. Boston: PWS-Kent Pub. Co., 1991.
• Flamholtz, Eric. Human resource accounting : [advances in concepts, methods,
and applications]. 2nd edition San Francisco : Jossey-Bass, 1985.
• Monti–Belkaoui Janice and Riahi–Belkaoui Ahmed. Human Resource Valuation:
A Guide to Strategies and Techniques. Quorum Books: Westport, Connecticut–
London, 1995.
• Ulf Johanson, Gunilla Eklöv, Mikael Holmgren, Maria Mårtensson School of
Business Stockholm University, Human Resource Costing and Accounting versus
The Balanced Scorecard: A literature survey of experience with the concepts 1998
(PDF)
• Human resource accounting - interests and conflicts, CEDEFOP [1]
• Accounting for People: Taskforce and Beyond! -
http://alpha.hubcapdigital.com/asset/show/d/UjFQqAz7s3I.hubcap
• Management accounting: Ravi.M.Kishore- taxmann allied publications
Meaning of human resource accounting :
Meaning of human resource accounting 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. It was a method by which a cost was
assigned to every employee when recruited, and the value that the employee would generate in the future. Human
Resource accounting reflected the potential of the human resources of an organization in monetary terms, in its financial
statements.

Definitions of Human Resource Accounting :

Definitions of Human Resource Accounting AAA Definition: “ The process of identifying and measuring data about
human resources and communicating this information to the interested parties ” Stephen Knauf (1983): “ The
measurement and quantification of human organizational inputs such as recruiting, training, experience and commitment ”
Eric Flamholtz “ Accounting for people as organizational resources. It is the measurement of the cost and value of
people for the organization ”

Why HRA? :
Why HRA? It furnishes cost/value information for making management decisions about acquiring, allocating, developing,
and maintaining human resources in order to attain cost-effectiveness; It allows management personnel to monitor
effectively the use of human resources; It provides a sound and effective basis of human asset control, that is, whether
the asset is appreciated, depleted or conserved; It helps in the development of management principles by classifying the
financial consequences of various practices.

Need for hra :

Need for hra HR Accounting is very much needed to provide effective & efficient management within the organization.* If
there is any change in the structure of manpower, it is HRA which provides information on it to the management. * HRA
provides qualitative information & also assess the cost incurred in personnel.* It gives a platform to the management by
providing factors for better decision-making for future investment.* The return on Investment on human capital is best
evaluated through HRA.* HRA communicates to the organization & public about the worth of human resources & also its
proper allocation within the organization.* HR helps the management in developing principles by classifying the financial
consequences of the various practices.

Valuation Approaches of Human Resource :

Valuation Approaches of Human Resource Measurement is arbitrary and there are mainly 2 approaches; Cost based
approaches Present Value of Future Earning Cost Based Approaches 1. Historical Cost Approach 2. Replacement Cost
Approach 3. Opportunity Cost Approach

Historical Cost Approach :

Historical Cost Approach The cost of recruitment, selection, development are all capitalized and amortized over the useful
life time of the employee. This amortization may be dealt according to the situation. Benefits: Easy to operate, Conforms
with the matching principle, Similar to the treatment of other fixed assets Shortcomings: Estimation of the useful life time
may not be easy, The value of humans are generally increasing over time - but this method gives a declining picture, This
method doesn’t actually measure the value but undermines it

Replacement Cost Approach :

Replacement Cost Approach The cost to replace the existing human resources are estimated. All costs incurred to attain
the current level of competence of an existing employee. Created from scratch Benefits: Is present/ future oriented
Disadvantage: Not always possible to obtain such a measure (identical replacement), It is hence subjective

Opportunity Cost Approach :

Opportunity Cost Approach Is based on economic concept which overcomes the deficiency in replacement cost app.
Measured through a competitive bidding process within the entity. Steps: 1. The entity is divided in to investment centers
2. The investment centre managers bid for scarce employees they need within the entity 3. The maximum bid price may
obtained by the capitalization of the excess profits generated by the employee

Present Value of Future Earnings :

Present Value of Future Earnings Lev and Schwartz (1971) proposed an economic valuation of employees based on the
present value of future earnings, adjusted for the probability of employees’ death/separation/retirement. This method
helps in determining what an employee’s future contribution is worth today. According to this model, the value of human
capital embodied in a person who is ‘y’ years old, is the present value of his/her future earnings from employment and can
be calculated by using the following formula: E(Vy) = Σ Py(t+1) Σ I(T)/(I+R)t-y T=Y Y where E (Vy) = expected value of a
‘y’ year old person’s human capital T = the person’s retirement age Py (t) = probability of the person leaving the
organisation I(t) = expected earnings of the person in period I r = discount rate Limitations The measure is an objective
one because it uses widely based statistics such as census income return and mortality tables. The measure assigns
more weight to averages than to the value of any specific group or individual

Investment pattern :
Investment pattern The human resource investment usually consists of the following items:- 1) Expenditure on
advertisement for recruitment 2) Cost of selection 3) Training cost 4) On the job training cost 5) Subsistence
allowance 6) Contribution to provident Fund 7) Educational tour expenses 8) Medical expenses 9) Ex-gratia
payments 10) Employee’s Welfare Fund All these items influence directly or indirectly the human resources and the
productivity of the organization.

Hra in india :
Hra in india Though Human Resources Accounting was introduced way back in the 1980s, it started gaining popularity in
India after it was adopted and popularized by NLC. Even though the situation prevails, yet, 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. are some of the organizations, which have started
disclosing some valuable information regarding human resources in their financial statements. It is needless to mention
here that, the importance of human resources in business organization as productive resources was by and large ignored
by the accountants until two decades ago.