T te hai apandefine Levs Schwatrz Model used in Human Resource Accounting wid a suitabl eg.

of service sector
Abstract

Human is the core factor and which is required to be recognized prior to any other 'M's But
till now an urgent need based modification is required while identifying and measuring data
about human resources. In this paper my objective is to identify the extensive use of Lev &
Schwartz model of Human resource accounting, in spite of several criticized from various
sides regarding its applicability. Further more, it also portrays the applicability in wide
variety of organization of such model (some pubic sector units and IT based sector).

Human is the buzzword in the modern knowledge based society. It is the most vital input on
which the success & failure of the organization very much depend upon. Starting from the
classical economist to modern human capital economist such development in considered to
be a continuous process.

It is one of the most important 'M' associated, which is considered while taken care of 4M's
associated with any organization and they are money machines, materials and men. But the
most interesting thing is that the first three are recognized and find a place in the assets
side of the Balance sheet of the organization. But in case of fourth one ambiguity prevails
among the accountant. In spite of its usefulness has been acclaimed is various literature
over the decades but its application still remain a suspectable issue, the IASB and the ASB
in different countries have not been able to formulate any specific accounting standard for
measurement & reporting of such valuable elements.
It is a popular phenomenon among the Indian corporate world is to disclose information
relating to human resource in annual statements. In this context, it is necessary to conduct
a study to assess the disclosure pattern of HRA information in Indian corporate World.
It first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public enterprise,
during the financial year 1972-73. Later it was also adopted by other leading public and
private sector Organization in the subsequent years. Some of them are Hindustan Machine
Tools Ltd.(HMTL). Oil and Natural Gas Corporation Ltd.(ONGC), NTPC, Cochin Refineries Ltd.
(CRL), Madras Refineries Ltd.,(MRL), Associated Cement Company Ltd.(ACC) and Infosys
Technologies Ltd.(ITL).
However, adaptability of various model (mainly Lev and Schwartz model, Flamholtz model
and Jaggi and Lev model) and discount rate fixation and disclosure pattern ie. either age
wise, skill wise etc in BHEL, SAIL, MMTC (Minerals & Metals Trading Corporation Of India
Ltd.) HMTL, NTP make it clear, that there has been no uniformity among Indian enterprises
regarding HRA disclosure.
Meaning Of Human Resource Accounting:
HRA has been defined by American Accounting Association's committee –"HRA is the
process of identifying & measuring data about human resources & communicating this
information to interested parties". Stephen knauf defined HRA as "The measurement &
quantification of human organizational inputs such as recruiting, training,
experience & commitment."
According to Eric. G flamholtz HRA represents-"Accounting for people as an
organizational resource. It is the measurement of the cost & value of people for
the organization".
Hence, it can be said that, it is the process of developing financial assessment for people
within organization & society & monitoring of these assessment through time, it deals with.
Although HR valuation has important implication for external financial reporting, in the
contemporary economic scenario valuing HR has been greater significance for internal HRM
decision.
Problem Statement:
Understanding the way of valuation of human resources by using Lev & Schwartz
model and how valuation of such asset are related with the other financial variables for
financial reporting purpose.
Research Objectives:
The main objectives of the study are:

i) To asses the way of presenting HRA information in the financial statement by selected
companies

ii) To identify HRA methods and models (mainly the extensive use of Lev & Schwartz
model) which are used to arrive at human resource value.

iii) How human resource are related with the other accounting variables for the purpose of
human financial reporting in selected companies.
The ways of presentation of HRA information disclosed
by some of the companies
Name of the HRA introduce
Model Discount
organization in the
year rate (in%)
BHEL 1973 – 74 Lev & Schwartz model 12
SAIL 1983 – 84 Lev & Schwartz model with 14
Some refinements as suggested by Eric.G.
Flamholtz& Jaggi and Lev
MMTC 1982 – 83 Lev & Schwartz model 12
ONGC 1981 – 82 Lev & Schwartz model
12.25
NTPC 1984 – 85 Lev & Schwartz model 12
INFOSYS 1999 Lev & Schwartz model
12.96
2006-07 Lev & Schwartz model
14.97
Source: Secondary
PRODUCTIVITY & PERFORMANCE INDICATORS
Source: Secondary
Terminology used:

1) PBT-Profit Before Tax

2) HR- Human Resource
3) TA-Total Assets
4) Turn-Turnover ( or Sales)
5) FA-Fixed Assets
6) VA- Value Added
Models of Human Capital Valuation
Many models have been created to value human capital. Some are based on historic costs
while some are based on future earnings. But each has its own limitations and one model
has proved to be more valid than other. Although the Lev and Schwartz model has been
the most widely use model for its ease of use & convenience.
The Lev & Schwortz Model
The Lev and Schwartz model states that the human resource of a co is the summation of
value of all the Net present value (NPV) of expenditure on employees. The human capital
embodied in a person of age r is the present value of his earning from employment
Under this model, the following steps are adopted to determine HR Value.

i) Classification of the entire labour force into certain homogeneous groups like skilled,
unskilled, semiskilled etc. and in accordance with different classed and age wise.eg. In
Infosys the classification is based on software professionals & support staff etc.

ii) Construction of average earning stream for each group.eg. At Infosys Incremental
earnings based on group/ age have been considered.

iii) Discounting the average earnings at a predetermined rate in order to get present value
of human resource's of each group.
iv) Aggregation of the present value of different groups which represent the capitalized
future earnings of the concern as a whole,
Where, Vr = the value of an Individual r years old
I (t) = the individual's annual earnings up to retirement
t = retirement age
r = a discount rate specific to the cost of capital to the company.
Critical appraisal of the Lev & Schwartz model: –
1] It is essentially an input measure .It ignores the output i.e. productivity of employees.
2] Service state of each individual employee is not considered.
3] The training expenses incurred by the company on its employees are not considered.
4] The attrition rate in organization is also ignored.
5] Factors responsible for higher earning potentiality of each individual employees
like seniority, bargaining capacity, skill, experience etc. which may cause
differential salary structure are also ignore.
Conclusion
The conceptual thinking about valuation human resources is still in a developing stage. No
model of HR accounting is accepted by the accounting bodies all over the world. However,
still we find some application of Lev & Schwartz model is most public sector units and IT
based sectors. In knowledge based sectors where human resources are considered to be the
key elements for monitoring the business activities to attend their goals successfully, may
not overlooked this side. Hence, considering the great significance of HRA proper initiation
should be taken by the government along with that other professional & accounting bodies
both at the national & international levels for the measurement & reporting of such valuable
assets.

Lev and Schw artz’s model is based on human capital theory,

which recognizes human capital as one of several forms of holding wealth for a business
enterprise, such as money, securities and physical capital. In this model of accounting,
human capital is treated like other forms of earning assets and thus is an important factor
explaining
and predicting the future economic growth of the company.

Lev and Schw artz’s accounting model is based on the measurement of human capital using
the formula:
Vr = ÓTt=r I(t)/(1+r)t-r,

where Vr = the human capital value of a person “r” years old;

I(t) = the person’s annual earnings up to retirement;
r = a discount rate specific to the person;
T =retirement age

The formula uses an earnings profile, which is a graphic mathematical

representation of the income stream generated by a person. Typically, earnings increase
with age. As the person reaches retirement age, productivity declines as a result of
technological obsolescence and health deterioration.

This model postulated in 1971 remains largely unused as a result of criticism from
Accounting professionals who argue that human capital cannot be purchased or owned by
the firm and therefore would not be recognized as an asset. Additionally, critics of human
capital theory state that labor force does not have a “service potential”; meaning employees
are paid for rendering current services and no asset is formed by these
payments.

The concept of HRA was not new in India. HRA was pioneered by public sector companies like Bharat
Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way back in the 1970s. However,
the concept did not gain much popularity and acceptance during that time.

It was only in the mid-1990s, after Infosys started

valuing its employees, that the concept gained
popularity in India. By 2002, HR accounting had
been introduced by leading software companies
like Satyam Computers and DSQ Software, as
well as leading manufacturing firms like Reliance
Industries.

HR managers were quick to respond on the above

developments by stating that more and more
organizations had now started to realize the
importance of skilled workforce. They felt that to
be successful in highly competitive markets,
companies require to continuously improve the
level of performance of their workforce.
HRA enabled companies to understand whether the skill sets of their human capital was appreciating
or not. R. Krishnaswamy, an actuarial accountant, said, "The value can be used internally by an
organization to make comparisons from unit to unit, from year to year, as well as within its industry."

For the past 14 years, IT giant Infosys has been gauging the “real worth” of its employees. The
Bangalore-based IT bellwether has used the Lev & Schwartz model— covering the present value of
future earnings of its employees, discounted for productivity decline—to put a number on this
seemingly intangible asset. “We want to give investors a complete picture of the real assets at
Infosys,” says T.V. Mohandas Pai, Director, Facilities and Administration, Infosys.

Another intangible that Infosys is trying to pin a value on is its brand, a key driver to retain
customers and talent. For the last fiscal, Infosys pegged its brand value at Rs 32,345 crore or 42.7 per
cent of its market capitalisation. While it’s not a bad record, it is still not as good as global giants
such as Google who topped the Financial Times’ third annual “Brandz top 100 Most Powerful” list
with a brand value of $100 billion on a market cap of $84 billion.
Name of the HRA introduce Model Discount
organization in the year rate (in%)

BHEL 1973 – 74 Lev & Schwartz model 12

SAIL 1983 – 84 Lev & Schwartz model with 14
Some refinements as suggested by Eric.G.
Flamholtz& Jaggi and Lev

MMTC 1982 – 83 Lev & Schwartz model 12

ONGC 1981 – 82 Lev & Schwartz model 12.25

NTPC 1984 – 85 Lev & Schwartz model 12

INFOSYS 1999 Lev & Schwartz model 12.96

2006-07 Lev & Schwartz model 14.97

Source: Secondary

PRODUCTIVITY & PERFORMANCE INDICATORS

Human resources play the most important part in the development of an enterprise. Human resource
accounting (HRA) helps to measure the value of employees, which helps management, take the vital
decisions related to human resources in order to increase production. It requires the measurement of the
performances of an organisation and the optimum use of the resources under its direct and indirect
control. HRA has been analysed for a profit making heavy engineering public sector company, Bharat
Heavy Electricals Limited (BHEL), Bhopal, India. The economic value model of Lev & Schwartz has been
used for this study of BHEL to evaluate the HRA. The obtained results are verified by using the T-test. We
have examined the correlation between the total human resources and the personnel expenses for their
fitness and their impact on production of BHEL. The HRA valuation is important for decision making in
order to achieve the organisational objectives and to improve the output.

HUMAN RESOURCE ACCOUNTING (HRA) PRACTICES IN INDIA

Posted: Sep 26, 2009 | Comments: 1 | Views: 2,022 |
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Syndicate this Article

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

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ts
Identifying and measuring the value of human capital can be a process worth investing.

The concept of value has essentially two different meanings. 'Value' expresses the utility or
service of a particular resource (e.g. the future use of a capital asset) and the purchasing
power of the resource (e.g. money, securities). If an object is not capable of rendering
future economic services in the form of utility to the possessor, no value can be attached to
it.

Employees are the most valuable resources of comparison in the service (software, banking,
management consultancy, etc.) sector. Like all other resources of the company, the
employees possess value because of providing future services.

"Human Resource Valuation means identifying and measuring value of human resources and
communicating the information to the interested parties."
Why value our value ?

The need to meet the increasing business opportunities of future, and simultaneously
maintain or improve upon the current level of performance, has made organisations to look
consciously into the manpower as the future leverage for success. Coupled with the above
mentioned situation, adopting a 'prudent and comprehensive disclosure policy' has become
the key differentiating agent among players in the same industry.

These default factors has laid the foundation stone for the ongoing popularity of the Human
Resource Valuation. In India HR valuation was first implemented by the public sector giants
(e.g. BHEL, SAIL, etc.) For the last two years, HR value reporting has gained momentum
amongst the software companies. These companies have valued their Human Resources
which has been disclosed in their Annual Reports as a statement of intangibles (additional
notes to the accounts). The benefits that result from HR valuation exercise are enumerated
below :

A move towards investor friendly disclosure, to make them fully aware of the company's
human assets. The investors can also assess the return on human capital, which is in
essence the return they are getting from people who are managing their wealth /
investment. For the foreign institutional investors, who are not fully aware of the day to day
happenings of the company, HR value reporting is a decision making for investment in the
company's equity.
An assurance to customers - the company has the human capital reserve to service their
demand.
A feeling of comfort for the company's employees that they are assets and not expenses of
the firm.
A future tool for better performance appraisal and manpower assessment. The management
can also realise the present value of its future commitment of providing employee
compensation.
HR value services as a benchmarking parameter with other value presenters of the
industry.

Valuation methodologies

Before suggesting an approach to HR valuation, let us look into the various methods
available for HR valuation :

Cost based approaches :

Historical cost method : This method was proposed by Brummet to measure a firm's
investment in human resources. The human resource costs are current sacrifices for
obtaining future benefits and therefore to be treated as assets. The method suggest to
capitalise the firm's expenditure on recruitment, selection, training and development of
employees and treat them as assets for the purpose of human resource accounting.

However, capitalisation of costs, besides being contrary to traditional accounting norms,

does not reflect value. Also, accumulated costs of human resource acquisition and
development may not reflect their value. Instead, total performance needs to be judged in
relation to the total cost associated with HR to reflect their value.

Replacement cost method : This method involves assessment of replacement cost of

individuals, and rebuilding cost of the organisation to reflect HR asset value of both the
individuals and the organisation. However, the replacement cost may not reflect either the
actual costs or the contribution associated with HR.
Opportunity cost method : This model envisages computation of monetary value and
allocation of people to the most promising activity and thereby to assess the opportunity
cost of key employees through competitive bidding among investment centres.

As an example, let us suppose that oracle applications development business unit's target
ROI is 16% and it has a capital base of Rs.1,00,00,000 but its profit is only Rs.13,00,000
which is Rs.3,00,000 short of the target. It is felt by the unit that if it can acquire the
services of a particular executive, its profit improves by Rs.4,00,000. The profits will be
Rs.17,00,000, i.e., Rs.100,000 more than Rs.16,00,000 (the target ROI). Rs.100,000
capitalised at 16% comes to Rs.6,25,000 and the unit can bid upto Rs.6,25,000 for the
services of the executive.

Behavioural model : This model aims to establish a set of casual variables through
psycho-social test results reflecting the appreciating or depreciating condition of human
organisation as reflected by a set of intervening variables, which in turn, are likely to result
in the achievement of the end result variables. The investments in HR value have been
proposed to be amortised over the years in tune with the condition of the human
organisation. However, psycho-social measures of the condition of the human organisation
may not be reliable towards measure of HR as an asset in the absence of its established
valid relationships with the organisational performance.

Economic model : Lev & Schwartz advocated the estimation of future earnings during the
remaining life of the employee and then arriving at the present value by discounting the
estimated earnings at the employee's cost of capital. The formula adopted for computation
of the present value of the future earnings is An extension to the above formula propounded
by Lev & Schwartz is that one can consider the probability of the person dying before the
retirement age.

Flamholtz proposed HR value on parlance with the roles the employees perform which is in
accordance with the service state they occupy. The model also considers the present value
of the future services at different service states and takes into consideration the migration
of an employee from one service state to the other. However, the estimates of the
employees occupying different service states in his/her career in the organisation can be
highly probabilistic and unreliable.

Harmonson advocated the HR value as the present value of the future wages payable for
the next five years discounted at the adjusted rate of return. The adjusted rate of return is
the average rate of return on the owned assets of all firm in the economy multiplied by
efficiency ratio of the organisation. This method attempts to bring into question the
effectiveness of ROI of the industry on the assumption that there are no extraneous factors
and that the results were due to efforts of the employees.

However, the model is very subjective as it considers the present value of the future wages
only for the next five years, efficiency ratio based on the rate of return of the last five years
and the assignment of weights to past rate of return.

Each model has its own negatives and positives when it comes to practical application. In an
Indian context, the Lev & Schwartz model has an edge over the other models. Since the
method has been widely adopted by Indian companies such as Infosys, DSQ Software Ltd.,
Satyam Computers, BHEL and SPIC, it enables the company to benchmark the performance
and the efficiency of their human resources with others. The assumptions in this model are
realistic and scientific. The method has practical applicability when availability of
quantifiable and analysable data is concerned.

Suggested methodology

We may adopt the basic premises of Lev & Schwartz model for valuing their human
resources of a company after parallely ascertaining a human organisational inventory (HOS)
to assess the effect of qualitative human variables (e.g., employee job satisfaction, 360
degree peer evaluation, etc.) on HR value.

In a nutshell, the approach involves valuing the employees of the organisation by projecting
the current direct and indirect benefits (cost to company - CTCs) enjoying by the employees
(a future cash outflow to the company) till retirement and consequently discounting the
CTCs at the Weighted Average Cost of Capital of the firm (WACC) to arrive at the present
value which is to be furnished in Annual Report. The WACC is calculated taking into
consideration the target debt equity proportion, weighted average cost of debt, and cost of
equity adjusted with company specific beta value, volume of trading and equity premiums.
The optimum HR strategy for the future can be formulated by combining groupwise HR
value, the findings from the HR inventory, and analysing the efficiency of the recruitment
and training cost centres of the company..

Some basic assumptions for HR valuation

Each employee's cost to company (CTC) should be forecasted and discounted back
separately. Thus a separate database comprising compensation details, age and experience
details, historical promotion pattern for each employee should be constructed. The database
serves as a powerful MIS tool for value interpretation.

The growth rate of earnings of each employee till retirement should be determined for
projecting the CTCs after looking into the company's compounded annual growth in CTC's
for different employee classes, global industry trends for the future (e.g., what happens
after 5 years when the demand for Y2K jobs in the software sector obliterates), and
sustainable growth rates for the next 25-30 years given the nominal interest rates of the
Indian economy.

The attrition rates for the company / industry should not be considered as a deduction
factor, as the employees who leave the company will be replaced by others to maintain the
level of operations, and thereby the employee strength remains unchanged (conservation of
employee stock / inventory). This is also consistent with the going concern concept.

Underlying meaning of HR value

The HR value per se throws valuable insights into the HR strategy of the firm. On one hand,
it is a value of the employees of the company - thinking differently managements should
realise that HR value is the future commitment which the firm has to pay to its employees
for the career span in the company.

Thus, a high or low HR value will have to be justified with the returns it can achieve. Hence
the return on HR value (ROHA) should be the efficiency measure of human resources on a
year to year basis. The ROHA factor will assist management to manage the value /
commitment better in future years. The HR turnover ratio can also be taken as an indicator
of efficiency.
Companies can also make a conscious move to capture its costs related to HR department
by developing a human resource accounting system which compliments the HR valuation
exercise. The system can provide a cost clarity in all relevant areas related to the human
resources of the company. In future, managements should begin to use HR value in regular
MIS reports, in areas such as measurement of SBU profitability, SBU performance trend
analysis, etc. which can fine-tune the appraisal system.

Human resource accounting is recording and identification of human cost . It includes calculation and
recording the cost of recruiting , selection , training and developments of employees .

Explanation of human resource accounting :-

Under HRA , organization deals with employees as assets and shows in balance sheet .

Method of calculating the value of human assets

There are many method for maintaining accounting under this system and also calculate human
resource value with following ways .:-

I ) Historical cost method

Under this method , we calculate the value of human assets on the basis of historical transaction with
employees on the basis of wages and salaries . His value is directly charges on the total cost of
finished product and all managerial staff salaries are shown in profit and loss account only. There is no
extra account is made under this method .

2. Present value method of future earning

Under this method , we can calculate the value of employee with following formula

Value of employee =
 Employee’s annual earning up to retirement / ( retirement age + discount ) power( t+r )

= $ 1000000 / (60+10) power 60 age+10rate

3. Cost benefit method

Under this method we can calculate total estimated benefit which is given by employee to organization
and then we calculate the total value of benefits which is give by co. to employee and its difference is
surplus which is real value of human resource asset .

4. Way of showing HR in balance sheet under total cost method

Balance sheet

Liability side

HR capital $ 4000000

Assets side

HR asset $ 4000000

☼ Benefits of HRA

There are many benefits of HRA accounting which can be explain in following way.

1. HRA provides the information of total cost of human assets which can use for calculating their benefits

for business by comparing it with the benefits provided by employees.

2. HRA is top work in the field of accounting because in accounting , we includes all physical assets and

intangible assets but before making of HRA accounting we are ignoring a very important asset and its

name is human being who works in any company or industry.

3. Human resource accounting is very important where human element is more important than any other

factor of production or services. For instance education sector is top sector who human resource

accounting must be used for maintaining the accounts of education department .

Demerits of Human resource accounting

1. 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.

2. 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.

3. From human resource accounting, we can not get short period benefits like general historical

accounting system.

4. 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 .

Do you know about something new about human resource

accounting?

• In 1891 , first William patty calculate the value of human resource in the form of money

• Lev and Schwartz (1971) is the first person who discover above formula of value of employee.
• Most popular book of human resource accounting is Human Resource Accounting: Past, Present and

Future which is written by Caplan, Edwin H. and Landekich, Stephen

• Employees are the most valuable resources of comparison in the service (software, banking,
management consultancy, etc.) sector. Like all other resources of the company, the employees
possess value because of providing future services."
• - Samrat Gupta, MIS Manager, DSQ Software Ltd