17 HUMAN RESOURCE ACOUNTING

17 OBJECTIVES HUMAN RESOURCE ACCOUNTING To Understand Human Resource Accounting and its Purpose Measurements of HRA Various Methods/Tools for HRA Balance Score Card Method Purpose, Process and Importance of HR Audit

17 PURPOSE OF HRA HUMAN RESOURCE ACCOUNTING 1. It furnishes cost/value information for making management decisions about acquiring, allocating, developing and maintaining HR. 2. It allows management personnel to monitor effectively the use of human resource accounting. 3. It provides a sound and effective basis of human asset control, i.e. 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. 5. It provides essential information of HR function of acquiring, developing, allocating, conserving, utilizing, evaluating and rewarding.

17 PURPOSE OF HRA HUMAN RESOURCE ACCOUNTING 6. It adds value to key transformational processes that convert the raw inputs (individuals, groups and organization) to outputs in the form of goods and services. 7. It enables not only the internal decision making but also external decision making especially the investors. 8. It helps in removing the distortion from the balance sheet. The balance sheet is distorted as it inaccurately presents the ‘total assets’ as well as the net income and HRA adds the ‘rate of return’ which is the ratio of the net income to the total assets. 9. It reflects the intent to which an organization contributes to society’s human capital (corporate social responsibility) by investing in its development.

17 HUMAN RESOURCE ACCOUNTING Figure 17.1 Classification of Intangible Resources 

17 MEASUREMENT IN HRA HUMAN RESOURCE ACCOUNTING Cost approach   2. Economic value approach . (i) Flamholtz’s Model of Value of an Individual (ii) Flamholtz’s Stochastic Rewards Valuation Model (iii) Lev and Schwartz Model (1971)   E(Vy) = ∑ py (t + 1) ∑ I (T)/(I + R)t – y T=Y Where E(Vy) = expected value of a ‘y’ year old person’s human capital. T = the person’s retirement age Py(t) = probability of the person leaving the organization I(t) = expected earnings of the person in periodI r = discount rate (iv) Hekimian and Jones Competitive Bidding Model

17 NON-MONETARY METHODS OF DETERMINING VALUE HUMAN RESOURCE ACCOUNTING (i) The skills or capability inventory is a simple listing of education, knowledge, experience and skill. (ii) Performance evaluation measures are ratings and ranking. (iii) Assessment of potential determines a person’s capacity for promotion and development. (iv) Attitude measurements are used to assess a person’s attitude towards job working conditions, etc. in order to determine his job satisfaction index. Psycho technical systems (PTS) approach – It is applied to HRA. PTS approach has two functions of measurement: (a) Process functions in the process of measurement. (b) Numerical information from the numbers themselves.

17 HUMAN RESOURCE ACCOUNTING Table 17.2 Skandia Navigator areas of focus Areas Focus Financial Captures the financial outcome of activities. Customers Gives an indication of how well the organization fulfills the need of its customers in terms of service or products. Process Captures the actual process of creating services and products the customer desires. Renewal and development Aims at reassuring long term renewal and sustainability. Human Visualizes process of knowledge creation.

17 Formula for Calculating EVA HUMAN RESOURCE ACCOUNTING Net operating profit after taxes (NOPAT) – (capital*cost of capital)

17 HUMAN RESOURCE ACCOUNTING Table 17.3 The Four Perspectives Financial Perspective How do we look to shareholders Customer Perspective How the customer see us Internal Business Perspective What we excel at Innovation and Learning Can we continue to improve Perspective and create value

17 ADVANTAGES OF BALANCE SCORE CARD HUMAN RESOURCE ACCOUNTING 1. Translates vision and strategy into action. 2. Defines strategic linkages to integrated performance across organization. 3. Communicates the objectives and measures to business units and individuals. 4. Aims at long term goals. 5. Provides a basis for compensation for performance. 6. Focuses on key things needed to create break through performance. 7. Integrates various corporate initiatives. 8. Breaks strategic measures from top to bottom to achieve excellent overall performance. 9. Provides feedback to management on strategy, changes needed and future plans.

17 DISADVANTAGES HUMAN RESOURCE ACCOUNTING 1. More complex when compared to other tools. 2. Measures need to be taken in contingent with the environment, industry and business the organizations are in. 3. Not easy to implement. 4. Difficult in making every stakeholder understand.

17 BASIC FUNCTIONS OF HR AUDIT HUMAN RESOURCE ACCOUNTING (a) Facilitates the development of managing process. Controls and evaluates the policies and established processes. HR audit leads the company to question (Warker, 1998) (a) Are there adequate HR policies? (b) Are the desired results being obtained? (c) To what extent do they add value to the company?

17 OBJECTIVE OF HR AUDIT HUMAN RESOURCE ACCOUNTING 1. To clarify desired practices of HR work and roles within the organization. 2. To establish a baseline for future improvement. 3. To evaluate current effectiveness. 4. To standardize practices across multiple locations within a division or company. 5. To assess current knowledge skills required of HR practitioners. 6. To improve performance levels to key customers within the organization.

17 APPROACHES TO HR AUDIT HUMAN RESOURCE ACCOUNTING Internal Perspective Approach  . External Perspective Approach  Legal Perspective Approach 

17 HUMAN RESOURCE ACCOUNTING Table 17.5 Main Parameters of HR Audit

17 HUMAN RESOURCE ACCOUNTING Table 17.5 Main Parameters of HR Audit

17 BENIFITS OF HR AUDIT HUMAN RESOURCE ACCOUNTING 1. Keys the HR departments’s mission and goal in sync with the organization’s needs and long term business strategy. 2. Ensures legal compliance. 3. Identifies and prioritizes opportunities for improvement, as well as area of potential risk. 4. Improves efficiency and productivity so that the department can better serve employees and customers. 5. Identifies root problem areas and fix them before they become more widespread.

17 BENIFITS OF HR AUDIT HUMAN RESOURCE ACCOUNTING 6. Finds cost – reduction opportunities. 7. Improves employee communications and morale and helps establish better credibility and perceptions of top management. 8. Implements and stays current with best practices. 9. Provides a reality check in order to identify and correct any gaps between what is intended and what is actually being delivered. 10. Increases the commitment of professionals within the HR department to seek change and focus on continuous improvement.