HUMAN RESOURCE ACCOUNTING

Human is priceless.. Can Account?

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What is human resource accounting?

To record, report and analyse human resource related figures

through accounting system.
The result can be used for decision making purpose.

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Human Resource An Asset ?

IASC Definition of an Asset:

Is a resource controlled by the enterprise, as a result
of past event and from which future benefits are
expected to flow to the enterprise
Theoretical Questions:
1. Are Humans resources?
2. Are they controlled by the enterprise?
3. Do they result from past events?
4. Do they bring future economic benefits?
If Yes for all it is an asset
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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.
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Definition

AAA Definition:

The process of identifying and measuring data about human

resources and communicating this information to the interested
parties

Stephen Knauf:

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

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Objectives

Furnish cost information for managerial decision regarding

acquiring, allocating, developing and maintaining HR.
Allow management personnel to monitor effectively the use
of HR.
Provide a determination of HR control.
To aid in the development of management principles, and
proper decision making for the future
Attract and retain qualified people
Improve management by analyzing investment in HR
Evaluate ROI in HR.

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Importance of HRA

Furnishes cost/value information for making

management decisions about acquiring, allocating,
developing, and maintaining human resources in order
to attain cost-effectiveness
Helps the management in the employment, locating
and utilization of human resources
Helps in deciding the transfers, promotion, training and
retrenchment of human resources
Assists in evaluating the expenditure incurred for
imparting further education and training in employees
in terms of the benefits derived by the firm

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Contd

Management tool designed to assist senior management in

understanding the long term cost and benefit implications of
their HR decisions
Helps in identifying the causes of high labour turnover at
various levels and taking preventive measures to control it
Helps in identifying improper or under-utilization HR
Provides valuable information for persons interested in
making long term investment in the firm
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Valuation of HR

Historical Cost Approach

Replacement Cost Approach
Opportunity Cost Approach
Standard Cost Approach
Present Value Approach

Present Value of Future Earnings Model

Rewards Valuation Model
Net Benefit Model
Certainty Equivalent Model
Aggregate Payment Approach
Total Cost Concept

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Historical Cost Approach

William C Pyle & R.G. Bary Corporation

Actual cost incurred for recruiting, hiring, training and developing
HR are capitalised and amortised over the expected useful life of
HR.
Proportion of expenditure is written off to the income of next few
years.
If HR are liquidated prematurely, write off the whole remaining
amount.
Similar to the book value of physical assets.
Additional costs incurred in training and developing are also
capitalised and amortised.

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Historical Cost approach... Contd...

Takes into account the acquisition cost, ignores value of their

potential service.
Difficult to estimate the number of years over which capitalised
expenditure are to be amortised.
Difficult to determine the rate of amortisation.
What about the value of employee as he gains experience?

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Replacement Cost Approach

Rensis Likert, Eric G Flamholtz

What would be the cost of the firm for replacing existing
resources with other persons of equivalent talents and
experience!
Takes into consideration all cost.
Incorporates current value of companys HR in the financial
statements.
Not matching with historical accounting.
Can a person be replaced with another?!
Replacement value is biased!

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Opportunity Cost

Hc Kimman & Jones

Several divisional heads bidding for the services of various people
they need.
Bid price is the investment cost.
There is no opportunity cost for the employees that are not scarce.
No auction for top management people no value for them?!
Affect morale of employees.
Value changes according to department.
Concept of alternative is wrong.

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Standard Cost Approach

Establish a standard cost per grade of employee.

Updated every year.
Replacement cost can be used for developing standard cost of
recruitment, training and development.
Compare standards.
Controlling is easy.
But Standard cost???

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Present Value of Future Earnings Model

Brauch Lev, Aba chwartz

Divided the whole labour in to homogeneous group.
Average earning for different classes and age groups are prepared
for each group separately.
The aggregate present value of different groups represents the
capitalised future earnings of the firm as a whole.
Value of HR is the present value of his remaining future earnings
from his employment.

Future earnings can not be calculated.

Value determined on situations.
No Promotion/ Role change?
Ignored teamwork.
Skill, experience, bargaining capacity etc ignored.
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Rewards Valuation Model

Flamholtz
Forecasting the period of service.
Identify the services states, ie, roles till he leaves.
Estimate the value derived by the organisation.
Estimate the probability of occupying each state.
Discounting the value at a predetermined rate to get present value
of HR.
As the people move from one role to another they render services
and rewards.
Can predict carer movements?
Expensive.

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Net Benefit Model

Morse
Value of HR is equivalent to the present value of the net benefits
derived by the enterprise from the services of its employees.
Calculate the gross services to be provided by the employees.
Value of payments to employees is determined.
The excess of gross services represents the net benefit to the
enterprise because of HR.
By applying predetermined discount rate, the present value is
determined.

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Certainty Equivalent Net Benefit Method

Pekin Ogan
Taking in to consideration the certainty with which the net
benefit in future will accrue to the enterprise.
Multiply Net benefit from each employee with certainty
factor.

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Aggregate Payment Approach

S.K Chakraborty
The value of HR on a group basis can be found by multiplying the
average salary of the group with the average period of employment
in that group.
Employment costs are to be treated as deferred revenue
expenditure.
Written off over the expected average stay of employees.
Present value calculated on average capital employed.

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Total Cost Concept

N. Dasgupta
Total Cost incurred by an individual, the
state and the organisation to bring that
individual up to the present position
should be taken as the value of that
person.
Costs such as Education, training, etc are
ascertained.
Revise value at the end of each year.

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Limitations

No specific procedure for finding cost and value of human

resources of an organization
Form and manner of including HRA value in the financial
statement is not clear
Life is uncertain
Employee with a comparatively low value may feel
discouraged
Can not own employees
Fear of opposition from trade unions
Amortization of HR value is not clear
Tax laws do not recognize human beings as assets
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