Human Resource Accounting HRA

Definition

It is the dynamics of the organisation. It is the assessment of condition of human resources within an organisation and the measurement of the changes in the condition through time.

MEANING
It

is simply an attempt to identifying measuring and communicating information about human resources and it ought to be viewed as a metaphor. Its the way of thinking about management of people. It is a recording of transactions related to the value of human resources.

Basic Premises
VALUE
USEFULNESS

INFORMATION

PEOPLE ARE VALUABLE RESOURCES USEFULNESS OF MANPOWER IN THE WAY IT IS MANAGED INFORMATION IS USEFUL FOR DECISION MAKING

SIGNIFICANCE OF HRA
Accounting now a days regarded as a services activity, a descriptive analytical discipline. Primary role of accounting is to provide an effective measurement and reporting system for decision making.

Formulations of policies Decision regarding cost reduction Training and development Recruitment and selection Manpower planning and control Conservation and reward of human resources

Objectives of HRA Determine the return on investment Determine the human resource management Determine the worth of human resource Provide a sound and effective basis for asset control Allows management personnel to monitor effectively the use of human resource

ADVANTAGES OF HRA
Human resource accounting helps in knowing whether human asset is being built up in the business or not.

a) ASCERTAIN THE COST OF LABOUR TURNOVER. b) DEVELOPMENT OF HUMAN RESOURCES. c) PLANNING AND EXECUTION OF PERSONNEL POLICIES. d) RETURN ON INVESTMENT ON HUMAN RESOURCES. e) IMPROVE THE EFFICIENCY OF EMPLOYEES.

ASPECTS/METHODS OF HUMAN RESOURCE ACCOUNTING

HUMAN RESOURCE VALUE ACCOUNTING (HRVA)

HUMAN RESOURCE COST ACCOUNTING (HRCA)

HUMAN RESOURCE COST ACCOUNTING

Definition

It is the measurement and reporting of the costs incurred to acquire and develop people as organisational resources.

HRCA INCLUDES accounting for the costs of-

personnel activities and functions such as recruitment,

selection,placement and training. developing people as human assets. Also called HUMAN ASSET ACCOUNTING

APPROACHES OF HUMAN RESOURCE COST ACCOUNTING

Historical Cost Approach Replacement Cost Approach

Opportunity Cost Approach

HISTORICAL COST APPROACH

The actual cost incurred on recruiting,selecting, training,placing and developing the human resources of an enterprise are capitalised and written off over the expected useful life of human resources. Any amount spent on training and developing human resource increases its efficiency,hence capitalised. The amortization of human resource assets is done in the same way as that of other physical assets. If the asset is liquidated prematurely then its underwritten off amount is charged to revenue account. On the other hand,if it has a longer life than expected,its amortization is rescheduled.

MERITS OF HCA
Simple to understand and easy to work out. Traditional accounting concept of matching cost with revenue is followed. Help a firm in finding out a return on human resource investment

LIMITATIONS OF HCA.
Very difficult to estimate the number of years an employee will be with the firm. Difficult to determine the extent to which an employee will utilise the knowledge acquired. Difficult to fix a rate of amortization Difficult to measure the contribution of each person.

REPLACEMENT COST APPROACH

The cost of replacing employees is used as the measure of companys human resources. The human resources of a company are to be valued on the assumption as to what it will cost the concern if existing human resources are required to be replaced with other persons of equivalent experince and talent. In this the cost of recruiting,selecting,training, etc. of new employees to reach the level of competence of existing employees are measured.

MERITS OF RCA
It has the advantage of adjusting the human value of price trends in the economy and thereby provides more realistic value in inflationary times. It has the advantage of present-oriented.

LIMITATIONS OF RCA
May not always be possible to obtain such a measure
for a particular employee. Not always possible to find out the exact replacement of an employee. Difficult to find out the cost of replacing human resources and different persons may arrive at different estimates.

OPPORTUNITY COST APPROACH

It is based on economic concept of opportunity cost which removes the deficiency in replacement cost approach. Measured through a competitive bidding process within the entity. STEPS-: The entity is divided into investment centres. The investment centre managers bid for scarce employees they need within the entity. The maximum bid price may be obtained by the capitalization of the excess profits generated by the employee.

FOR INSTANCELet us assume that a firm has a capital base of Rs.15,00,000 and it earned profits of Rs.2,10,000.The required rate of return is 15%.If the services of a particular manager are acquired,it ia expected that the profit will rise by Rs.45000 over and above the target profits. If we capitalise Rs.45000 at 15% rate of return,it works to be Rs.3,00,000 (45000*100/15).The firm may bid upto Rs.3lakhs for the manager.The new capital base shall be Rs.18,00,000 (15lakhs+3lakhs). 15% of Rs.18,00,000 is Rs.2,70,000.Thus the excess profit earned shall be Rs.60,000(2,70,000-2,10,000) and the maximum bid may go upto the capitalised value of Rs.60,000,the excess profit to be generated by the manager; i.e. Rs.60,000*100/15= Rs.4,00,000.

LIMITATIONS OF OCA
The total valuation of human resource on the competitive bid price may be misleading and inaccurate.A person may be valuable person for the department in which he is working and may have a lower price in the bid by other departments. Only scarce employees are included and as a result unscarce employees may lose their morale as they are not counted. It would be difficult to identify the alternative use of an employee in the organisation.

HUMAN RESOURCE VALUE ACCOUNTING

THE LEV AND SCHWARTZ MODEL

HERMONS MODEL UNPURCHASED GOODWILL ADJUSTED DISCOUNTED FUTURE WAGE

FLAMHOLTZ MODEL(1971)

JAGGI AND LAU MODEL

GILES AND ROBINSONS HUMAN ASSET MULTIPLIER METHOD

MORSE NET BENEFIT MODEL(1973)

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 t is the present value of his remaining future earning from employment in the form of salaries ,wages, etc. 2) FLAMHOLTZ MODEL(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 to be followed:Estimation of period. Identification of position or services. Estimation of probable period. Calculate the expected services. Calculation of present value at a predetermined rate.

3) GILES AND ROBINSONS HUMAN ASSEST MULTIPLIER METHOD This method is developed in 1972 & it was sponsored by ICMA and IPM. The valuation of human resource should be made in the same way as other business assets on a GOING CONCERN BASIS.
4) 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. 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

5) 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 individuals 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. 6) MORSE NET BENEFIT MODEL(1973) Calculation is on the basis of the present value of net benefits derived by the organisation from the expected future services of its employees. Steps to be followed:Determination of the gross value of future services. Determination of the cost. Calculation of net benefit to the organisation on account of human resources by subtracting (ii) from (i). Calculation of the present value of the net benefits by discounting at predetermined rate of discount.

Objections against Human Resource Accounting.

Assumptions based not recognized by Tax laws

Lacks comparison

objections

Not measured in monetary terms

New concept

The objections are discussed as follows:

There is difference between other assets and human resource. There

valuation is different from other assets. The methods for the valuation of human resources are different from each other. Human resources are not recognized by tax laws. It remains only a theoretical concept. The factors included for valuing human resource accounting are not measurable in monetary terms. The method of HRA involves certain assumptions. The use of different models make comparison difficult. Employees may be underestimated since numeric figures does not show true capabilities.

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. Are some of the organizations, which have started disclosing some valuable information regarding human resources in their financial statements

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.
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Ex-gratia payment

Selection cost

Tour expenses

investment

Training cost

Welfare fund

Medical expenses

After analyzing the investment pattern in the human resources of an organization th 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 top management to take decisions regarding the adequacy of human resources

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. an average rate of increment.

Infosys also calculated the compensation of each employee at retirement by using

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.

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, etc.