1. HUMAN RESOURCE ACCOUNTING

2. MEANING AND DEFINITION
Human resource Accounting is the process of identifying and reporting the Investments made in the Human Resources of an Organisation that are presently not accounted for in the conventional accounting practices. In simple terms, it is an extension of the Accounting Principles of matching the costs and revenues and of organising data to communicate relevant information in financial terms.
The Quantification of the value of Human Resources helps the management to cope up with the changes in its quantum and quality so that equilibrium can be achieved in between the required resources and the provided human resources.

3. According to The American Accounting Association Commission on HRA, Human resource accounting is: ‘the process of identifying and measuring data about human resources and communicating this information to various parties.’
In the words of Geofrrey M.N. Baker, “Human resource accounting is the term applied by the accountancy profession to quantify the cost and value of employees to their employing organization.”

4. BASIC PREMISES OF HRA
USEFULNESS
INFORMATION
VALUE

5. People are valuable resources of an organisation.
Usefulness of manpower is determined by the way it is managed.
Information on investment and value of human resource is useful for decision making.

6. NEED/SIGNIFICANCE Distinct Characteristics :- Personality Self control
Devotion
Quality
Skill
Talent
Loyalty
Initiativeness

7. Areas Formulating policies and programmes
Decisions regarding cost reduction programmes
Training and development
Recruitment and selection
Manpower planning and control
Conservation and reward of human resources
Making choices (between various types of human investment and investment in other assets)

8. OBJECTIVES Determining the ROI on human resources
Checking the proper utilization of human resources
Quantitative information
To communicate the worth of human resources

9. According To Rensis Likert
To furnish cost value information
To attain cost effective organisational objectives
Effective management of human resources
Basis for asset control
Aid in the development of management principles

10. ADVANTAGES Ascertaining cost of developing human resources.
Analysis of expenditure on human asset.
Help management in planning and executing personnel policies.
Determining the adequacy of investment in human resources.
Improving efficiency of employees.

11. METHODS OF HUMAN RESOURCE ACCOUNTING
HUMAN RESOURCE COST ACCOUNTING
HISTORICAL COST APPROACH
REPLACEMENT COST APPROACH
OPPORTUNITY COST APPROACH
HUMAN RESOURCE VALUE ACCOUNTING
METHODS OF
H.R.A

12. (A) Human Resource Cost Accounting
Measurements and reporting of the costs incurred to acquire and develop people as organisational resources.
Deals with accounting for investments made by an organization in acquisition and developing human resources.
Include:
Accounting for the costs of personnel activities and functions such as recruitment, selection, placement and training.
Accounting for costs of developing people as human assets (human asset accounting)
Approaches based upon:
Historical cost or
Replacement cost or
Opportunity cost

13. (1) Historical Cost Approach
Developed by: BRUMMET, FLAMHOLTZ and PYLE
Actual costs incurred on human resources are capitalized and written off over the expected useful life of human resources.
Procedure for capitalization and amortization remains the same for other physical assets.

14. Simple To Understand
Easy To Work Out
Traditional Concept Followed
Helps In Finding Out A Return On Human Resource Investment
MERITS
LIMITATIONS
Difficult To Estimate The Working Span Of An Employee
Extent To Which The Employee Will Utilize The Knowledge Is Subjectively Estimated
Difficultiy In Fixing The Rate Of Amortisation
Value Of Asset Decreases With Amortisation

15. (2) Replacement Cost Approach
Developed by RENSIS LIKERT and ERIC G.FLAMHOLTZ
Valuation on the basis of the cost the firm will have to undertake if existing human resources are required to be replaced with other persons of equivalent experience and talent.
Allows for changes in the cost of acquiring and developing employees.
Determination of the value of total human organization on the basis of the assumption that a similar organization is to be created from scratch.

16. Realistic Value
Present-oriented
MERITS
LIMITATIONS
Difficult To Find Out The Exact Replacement For An Employee
Does Not Focus Upon Human Traits Build Over Time

17. (3) Opportunity Cost Approach
Developed by HEKIMIAN and JONES
Values human resources on the basis of the economic concept of opportunity cost
A human resource asset has a value only when it is scarce.
i.e employment in one division is possible and not in the other division.

18. (B) Human Resource Value Accounting
Calculation of economic values
Basis: difference in present and future earnings of two similar firms is due to the difference in their human organization.
Economic value determined by obtaining the present value of future earnings.

19. (A) Lev And Schwartz Model
MODELS
(A) Lev And Schwartz Model
Developed for determining the value of human resources in the firm .
Value of human capital embodied in a person of age ( t) is the present value of his remaining future earnings from employment in the form of salaries , wages , etc.

20. The value of human capital of a person “t” years of age is :
Vτ = ∑ I (t)
t= τ (I+r)t-I
VT = the value of human capital of a person T years old.
I(t) = the annual earnings of the person up to retirement.
r= the discount rate of the cost of capital
T= the age of retirement

21. Limitations Possibility of leaving the firm
Possibility of promotion of employees
Contribution of the firm in developing the value of human capital

22. (B)Flamaholtz Model (1971)
Individual’s value to an organization is determined by the services he is expected to render to he organization during the period he is likely to remain with the organization in various positions or services states.
The present value of human resource may be derived by discounting the realizable value of expected future services at a specified rate .

23. Steps
Estimation of period for which an individual is expected to render services to the organisation .
Identification of various positions or services states that the employee might hold during his service with the organization .
Estimation of probable period for which he is expected to hold each possible position or service state
Calculation of expected service to be derived from the individual. n
E(S) = ∑ Si P(Si)
i=1

24. Determination of the monetary equivalent value of the expected future services by multiplying the quantity of services with the price and calculation of the income expected to be derived from their use.
Calculation of the present value of expected future services at a predetermined rate.

25. Limitations Estimation of service states
Group value of individual v/s sum of individual values

26. (C) Giles And Robinson’s Human Asset Multiplier Method
Value of human assets should be made in the same way as other business assets in a going on concern.
Assumptions of calculation of a human asset value
Individual’s remuneration or the remuneration of a group of persons in the same grade , may be multiplied by the factor determined on the basis of his contribution to the success of the business.
Total value of human assets employed in the business can be calculated by simply adding together all the individual values so calculated.

27. (D) Hermanson’s Unpurchased Goodwill And Adjusted Discounted Future Wage Model
Roger H. Hermanson has suggested two models :-
UNPURCHASED GOODWILL MODEL
ADJUSTED DISCOUNTED FUTURE WAGE MODEL

28. (E) Unpurchased Goodwill Model
The value of human resource of an organization may be calculated by capitalizing earnings in excess of normal earnings for the industry or the group of companies of which the firm is a part.

29. Example Capital investment of a firm = 10 lakhs
Rate of normal earnings = 15% =›Normal earnings = 10,00,000 * 10⁄ 100
= 1,00,000
Actual earnings= 15% of 10,00,000
= 1,50,000
value of human assets= 50,000 * 100⁄15
=3,33,333

30. (F) Adjusted Discounted Future Wage Model
It uses compensation to measure a person’s value to the firm
Compensation = present value of stream of wages + salaries to employees
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 of 5 years.

31. The weights are assigned in reverse order
Formula=
RF= rate of accounting income on owned assets for the firm for the period of 5 years
RE= rate of accounting income on owned assts for all the firms in a economy for the same period.

32. Limitations
Subjective; arbitrary weights and restrictive period of 5 years

33. (G) Jaggi And Lau Model Valuation of human assets is on group basis.
Group is a homogeneous group of employees who may not be necessarily working in the same department.
Assumptions;
Pattern of movement is likely to remain constant over the time
Probabilities determined for one period can be extended to future periods.

34. Computation:
TV= (N) rn (T) n (V) TV = the current value of all employees in each rank. N = number of employees in each rank n = time period r = discount rate T = probability V = economic value of an employee

35. (H) Morse Net Benefit Model (1973)
Value of human capital is determined on the basis of net benefits derived by the organization from the expected future service of the employees .

36. Steps
Determination of the gross value of future services to be rendered by the employees in their individual capacities as well as operating in groups.
Determination of the cost , i.e., the total future payments to be made to the employees.
Calculation of “net benefit” to the organization on account of human resources by subtracting (2.) from (1.).
Calculation of the present value of the net benefits by discounting at predetermined rate of discount.

37. OBJECTIONS AGAINST HUMAN RESOURCE ACCOUNTING
There is difference between other assets and human resources.
They can't be valued together.
Methods for valuation of human resources are different from each other.
Human resource asset not recognized by tax laws.

38. HUMAN RESOURCE ACCOUNTING IN INDIA
Financial statements are prepared under the provisions of companies act 1956
No provision in the act for the disclosure of human resource in final accounts
Leading sectors like BHEL, ONGC, SAIL, NTPC, OIL HMT, ETC. reports valuation of human resource in their annual reports.