Emerging Issues in HRM

Dr.Saket Jeswani

MBA Sem - 4 RCET, Bhilai

[DR.SAKET JESWANI]

Human Resource
Accounting

Unit - III [2015]

Dr.Saket
Dr. SaketJeswani, Associate
Jeswani, Associate Professor,
Professor, MBA, RCET, Bhilai
MBA, RCET, Bhilai Page 1
 HUMAN RESOURCE
ACCOUNTING

“Treating Expenditure on
HR as an Asset”

Dr.Saket Jeswani,
Associate Professor,
Unit - 3 MBA, RCET, Bhilai

Introduction
1. HR Accounting refers to the method of reflecting the rupee value
of the human asset in the company's balance sheet.
2. Human Resources are identified as the values of the production
capacity of a firm’s human organization, and the value of its
customer’s goodwill.
3. A balance sheet that does not reveal the current value of a
company’s human assets, does not show the true & fair picture
of the company’s overall activities.
4. While most organizations can readily give detailed information
about their tangible assets like plant and machinery, land and
buildings, transport and office equipment, there is no formal
record of investment in employees. Human assets accounting or
human resource accounting (HRA), which stands for
measurement and reporting of the cost and value of people as
organizational resources.
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 Definition
1. “HRA is accounting for people as organizational resource.
Human resources accounting is measurement of the cost and
value of people for organizations.” - Eric Flanholtz

2. “The process of identifying & measuring data about HR &

communicating this information to interested parties”.
- American Accounting Association

3. “HRA is the term applied by the accountancy profession to

quantify the cost & value of employees to their employing
organization”. - Geofrrey M.N. Baker

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Objective
1. ROI on HR.
2. Proper utilization of HR.
3. Decision Making.
4. Communicates worth of HR.
5. Conservation, appreciation & depreciation of HR.
6. Increases accountability of management for its human assets.
7. Facilitate effective HRP.
8. Basis for asset control.

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 Need of HRA
1. The primary role of HRA is to provide an effective measurement
& reporting system for decision making.
2. Human Resource will be measured in terms of value.
3. Due to non-availability of information in conventional
accounting.
4. No record of human assets.
5. No balance sheet of HR.
6. Expenses on T&D.
7. Reflection in financial statement.
8. Expenditures on HR can be capitalized & can be treated as asset.
9. Knowledge about HR asset can affect the bargaining power.
10. Published HRA figure could affect the attitude of employees.

Dr.Saket Jeswani, Associate Professor, MBA, RCET

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Purposes of HRA
• According to Likert (1971), HRA serves the following purposes in
an organization:

1. It furnishes cost/value information for making management

decisions about acquiring, allocating, developing, and
maintaining human resources in order to attain cost-
effectiveness;
2. It allows management personnel to monitor effectively the
use of human resources;
3. It provides a sound and effective basis of human asset
control, that is, whether the asset is appreciated, depleted or
conserved;
4. It helps in the development of management principles by
classifying the financial consequences of various practices.
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 Purposes of HRA
5. Basically, HRA is a management tool which is designed to
assist senior management in understanding the long term
cost and benefit implications of their HR decisions so that
better business decisions can be taken.
6. If such accounting is not done, then the management runs
the risk of taking decisions that may improve profits in the
short run but may also have severe repercussions in future.
7. For example, very often organizations hire young people from
outside on very high salaries because of an immediate
business requirement. Later on, however, they find that the
de-motivating impact of this move on the existing
experienced staff has caused immense long term harm by
reducing their productivity and by creating salary distortions
across the organizational structure.

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Role
1. The disposition of resources can also be examined by allocating
relative human asset values to different job grades.
2. HRA also helps in examining expenditure on personnel and in re-
appraisal of expenditure on services and training.
3. It can also serve as a key factor in case of mergers and takeover
decisions, where the human asset value becomes a relevant
factor.
4. Another very significant role, which HRA can help in creating, is
goodwill for a company. The company can project itself in having
best practices with superior policies for HR.
5. Experts believe that this may help the organization attract more
investments.

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 Benefits

1. Helps to know cost of developing HR & cost of labour turnover.

2. Investments on development of HR can be compared with the
benefits & results derived.
3. ROI can be calculated only when investment on HR is taken into
account.
4. Helps in planning & executing personnel policies.
5. Helps in improving the efficiency of employees.
6. It prevents the faulty valuations of organizational resources.
7. Facilitates investors to choice of enterprise to invest.
8. It provides feedback to the performance of employees.
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Methods/Approaches
• Basically HRA can be tracked through two methods—

Cost-based Value-based
analysis or analysis or
Human Resource Human Resource
Cost Accounting Value Accounting
(HRCA) (HRVA)

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 Cost-based analysis or Human Resource Cost
Accounting (HRCA)
1. The cost-based approach focuses on the cost parameters.
2. HRCA may be defined as the measurement & reporting of costs
incurred to acquire & develop people as organizational
resources.
3. It deals with accounting of investments in acquiring, developing
& replacement cost of HR.
4. 3 types of HRCA approaches:

1) Historical Cost Approach

2) Replacement Cost Approach
3) Opportunity Cost Approach.

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Human Resource Cost Accounting (HRCA)

1. Historical Cost: HR are valued at the unexpired portion of the

cost of recruiting, T&D of employees.

2. Replacement Cost: This requires an estimation of the cost of

replacing the existing personnel under existing organizational
conditions.

3. Opportunity Cost: Value of an employee is determined by his

alternative. If the employee can be hired easily from external
source, there is no opportunity cost for them.

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 Value-based analysis or Human Resource Value
Accounting (HRVA)
1. The value-based approach suggests that the value of human resources depends
upon their capacity to generate revenue.
2. This approach calculates the economic value of HR.
3. The economic value of the firm can be determined by obtaining the present
value of future earnings.
4. 2 types of HRVA approaches:
• Non-monetary
• Harmanson Model – Adjusted Discounted Future Wage Method
• Harmanson Model – Goodwill Method
• Lev & Schwartz Model
• Eric Flamholtz Model
• Myers & Flowers Model
• Jaggi & Lau Model

• Monetary
• Likert Model
• Flamholtz Model
• Behavioural Model

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Human Resource Value Accounting (HRVA)

1. Harmanson Model (Adjusted Discounted Future Wage Method): PV of future
wages payable for next five years discounted at the attributed rate of return is
the HR value.
2. Harmanson Model (Goodwill Method): Extra profits earned by organization as
compared to industry average rate i.e. HR Value = Goodwill
3. Lev & Schwartz Model: All PV of likely future earnings of an employee till his
retirement
4. Eric Flamholtz Model: The cost of replacing individuals & rebuilding cost of
human organization reflects the HR asset value
5. Myers & Flowers Model: An employees attitude governs his productive
behaviour on the job. The employees attitude index multiplied by wages
payable should reflect the likely benefits to the organization & hence HR
asset.
6. Jaggi & Lau Model: HR value is dependent on rank & performance.

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 Human Resource Value Accounting (HRVA)

7. Likert Model: The model aims to establish through psychological test

results, how a set of casual variables reflecting the management systems
adopted by an organization determine the depreciation or appreciation of
human asset.

8. Flamholtz Model: The value of employee can be determined on the basis

of expected services in each service state that they may occupy during
their stay with the firm.

9. Behavioural Model: Measuring formal & informal group interactions may

be the key to the development of a valid & reliable asset evaluation
techniques.

Dr.Saket Jeswani, Associate Professor, MBA, RCET

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HRA in India
1. In India, there are very few companies like BHEL, Infosys and
Reliance Industries, which have implemented HRA and some are
working on it.

2. Infosys, which started showing human resource as an asset in its

balance sheet, has been reaping high market valuations.

3. NIIT has been following a similar method called Economic Value

Addition (EVA), which also helps in assessing the real value that
an employee can fetch for the company.

4. Other companies like ONGC, SAIL, NTPC etc have also adopted
the concept of HRA.
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 Experts Talk…
1. Experts point out that companies can derive many benefits by
going in for HRA. Not only they can measure the return on
capital employed on total organizational assets (including the
human assets), but the resources can also be planned
accordingly.

2. “Once organizations realise the actual benefit and take it as a

growth process, it will only help them in increasing their
shareholders’ value. When a company is able to assess an
individual’s worth, it helps in increasing its own worth,”
- says Ajay Sharma, senior HR manager of Cadence Systems.

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Contd…
3. What is needed is measurement of abilities of all employees in a
company, at every level, to produce value from their knowledge
and capability.

4. “Human Resource Accounting (HRA) is basically an information

system that tells management what changes are occurring over
time to the human resources of the business. HRA also involves
accounting for investment in people and their replacement
costs, and also the economic value of people in an
organization,”
- says P K Gupta, the director of strategic development
intercontinental operations, of Legato Systems India.

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 Limitations
1. Low level of awareness and acceptance
2. Lack of an industry standard
3. There is need for extensive research. Many companies do not
want to go into the intricacies of finding the value of their
human resources.
4. Naresh Taneja, the head of human resources of HCL
Technologies (Mumbai, formerly Gulf Computers), believes that
one cannot totally rely on this concept. “Considering the
dynamism of this industry, it is very difficult to predict as to
what is going to be your future requirements and how
technology is going to shape in the near future. This only raises
the question on the benefits of HRA.”

Dr.Saket Jeswani, Associate Professor, MBA, RCET

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Cost Control in Human Resources

There are two options for lowering HR costs:

1) Optimizing your daily processes and workflows so your HR

team – and your entire workforce – can do more in less
time and

2) Changing the HR technology you’re using, if any.

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 Cost Control in Human Resources
1. Convert Fixed Cost to Variable: If your organization is like most, labor is the
biggest line item in your operating budget. To minimize that expense,
implement a planned staffing model. Reduce core staff to levels necessary
to maintain normal operations. Then partner with qualified temporary
staffing vendors to supplement your staff to meet peak programmatic and
operational demands as needed. This strategy is particularly effective for
grant-funded environments where funding is available for a limited period
of time.

2. Eliminate Overtime: Overtime is an extremely expensive way to get work

done. Using temporary employees in place of overtime can reduce labor
costs by 20% or more.

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Cost Control in Human Resources

3. Limit Benefits Expense: On average, benefits cost 25% – 30% in excess of
payroll expenses. Where appropriate, use temporary and payrolled
employees (employees who are paid through a staffing firm or professional
employment service) to eliminate benefits expenses. This option is most
often used for interns, project professionals, and other short-term
employees. Using temporary and payrolled employees in place of
independent contractors will also reduce your employment risks.
4. Reduce Training Costs, Scrap & Rework: Training is expensive—and not
just the hard dollar cost of the training program. There are also the soft
costs of lower productivity and poorer quality that result from employing
novice staff. Cut training costs and improve productivity by employing
skilled temporary employees. By working closely with your staffing partner,
you can gain access to candidates who are well trained and have
experience in the skills you need. To enhance productivity further, partner
with your staffing firm to create an initial orientation and training program
for new hires.

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 Cost Control in Human Resources
5. Shift Administrative Burden: When you use temporary staff instead
of direct hires, all costs associated with processing and administering
payroll and benefits are transferred from your organization to the
staffing firm.
6. Prevent Unemployment Claims: Unlike short-term direct employees,
temporary staff work for your staffing partner—not you.
Consequently, their unemployment claims don’t affect your rating or
your bottom line.
7. Reduce the Risk of Hiring Mistakes
8. Avert Costs Associated with Burnout

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At the last…

1. However, it’s ultimately the people who deliver results.

2. Realizing the benefits, which it can provide, the responsibility

lies on the companies, as to how much importance can they or
do they give to their HR.

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