HUMAN RESOURCE ACCOUNTING

Submitted To: Ms Malti Submitted By: Madhurima Mitra 11712303911 MBA IIB (2011-2013)

HUMAN RESOURCE MANAGEMENT

Delhi Institute of Advanced Studies (Affiliated to Guru Gobind Singh Indraprastha University) Plot No.-6, Sector-25, Rohini New Delhi-110085

Human resource Accounting is the process of identifying and reporting the Investments made in the Human Resources of an Organisation that are presently not accounted for in the conventional accounting practices. In simple terms, it is an extension of the Accounting Principles of matching the costs and revenues and of organising data to communicate relevant information in financial terms. The Quantification of the value of Human Resources helps the management to cope up with the changes in its quantum and quality so that equilibrium can 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 Employment and utilisation of Human Resources. 2. It helps in deciding transfers, promotion, training and retrenchment of human resources 3. It provides a basis for the planning of physical assets vis-a-vis human resources 4. It helps in evaluating the expenditure incurred for imparting further education and training of 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 underutilisation of physical assets or human resources 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 the most averse and unfavourable circumstances. 8. It provides valuable information for persons interested in making long term investments in the firm. 9. It helps the employees in improving their performance and bargaining power. It makes each employee understand his contribution towards the betterment of the firm vis-a-vis the expenditure incurred by the firm on him Objectives of Human Resource Accounting 1. To furnish cost value information for making proper and effective management decisions about acquiring, allocating developing and maintaining human resources in order to achieve cost effective organisational objectives. 2. To monitor effectively the use of human resources by the management. 3. To have an analysis of the Human Asset, i.e. whether such assets are conserved, depleted or appreciated. 4. To aid in the development of management principles and proper decision making for the future by classifying financial consequences of various practices. It is one of the latest mode of accounting technique (s)

Methods of Human Resource Accounting Approaches to Human resource accounting was first developed 1691 the next stage was during 1691-1960 and third phase post-1960. There are two approaches to HRA. Under the cost approach, also called human resource cost accounting method or model, there is a) Acquisition cost model and b)replacement cost model. Under the value approach there are a) present value of future earnings method, b) discounted future wage model, c) competitive bidding model. Cost Approach This approach is also called as acquisition cost model.This approach is developed by Brummet, Flamholmay tz and Pyle but the first attempt towards employee valuation made by a foot ware manufacturing company R. G. Barry Corporation of Columbus, Ohio with the help of Michigan University in the year 1967 . This method measures the organizations investment in employees using the five parameters: recruiting, acquisition; formal training and, familiarization; informal training, Informal familiarization; experience; and development. this model suggest instead of charging the costs to p&l accounting it should be capitalized in balance sheet.the process of giving an status of asset to the expenditure item is called as capitalization. in case of human resource it is necessary to amortize the capitalized amount over a period of time. so here one will take the age of the employee at the time of recruitment and at the time of retirement. out of these a few employee may leave the organization before attaining the superannuation. This is similar to a physical asset. e.g.:- If company spends one lakh on an employee recruited at 25 years, and he leaves the organization at the age 50, he serves the company for 25 years (his actual retirement age was 55 years). The company has recovered rupees 83333.33 so the unamortized amount of rupees 16666.66 should be charged to p&l account i.e. This method is the only method of human resource accounting which is based on sound accounting principals and policies. 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.

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.

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 employees 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) = Py(t+1) I(T)/(I+R)t-y where E (Vy) = expected value of a y year old persons human capital T = the persons 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.

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 divisions investment base. For example a value of a professional athletes 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 .

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. Limitations of Human Resource Accounting Human Resource Accounting is the term used to describe the Accounting Methods, systems and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in their knowledge, ability and motivation in the same organisation as well as from organisation to organisation. It means that some employees become a liability instead of becoming a human resource. HRA facilitates decision making about the personnel i.e. either to keep or to dispense with their services or to provide training. There are many limitations which make the management reluctant to introduce HRA. Some of the Attributes are:1. There is no proper clear cut and specific procedure or guidelines for finding costs and value of human resources of an organisation. The systems which are being adopted have certain drawbacks. 2. The period of existence of Human Resource is uncertain and hence valuing them under uncertainty in future seems to be unrealistic. 3. The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a tool of management facilitates better and effective management of human Resources. 4. As human resources are incapable of being owned, retained, and utilised, unlike the physical assets, there is a problem for the management to treat them as assets in the strict sense. 5. There is a constant fear of opposition from the trade unions as placing a value on employees would make them claim rewards and compensations based on such valuations. 6. In spite of all its significance and necessity, the Tax Laws dont recognise human beings as assets. 7. There is no universally accepted method of the valuation of Human Resources