accounting_human resource accounting

7/27/2019 Accounting_Human Resource Accounting

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Jamnalal Bajaj Institute of Management Studies, Mumbai.

Human Resource Accounting

Group Number : 14

Team Members:

Gaurav Jaiswal (122) Huma Sheikh (121)

Vishal Yadav (124) Sunil Waghmode (120)

Saiprasad Sale (123) Rohan Todkar (118)

Vivek Nambiar (119)


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What is Human Resource Accounting :

Human Resource Accounting (HRA) involves accounting for expenditures related tohuman resources as assets as opposed to traditional accounting which treats these

costs as expenses that reduce profit.

It is a recording of transactions related to the value of human resources.It is the measurement and reporting of the costs incurred to acquire and develop people as

organizational resourcesObjectives of HRA systems

It's basically adopted to treat human resources as assets, to generate human data about

names, to assign value to human assets in the balance sheet.

Objectives of HRA:

The objectives include:

Provide information for making management decisions about acquiring, allocating,developing and maintaining human resources in order to attain cost effective

organization objective.

To develop methods of ensuring human resources cost and value and to allowmanagement personnel to monitor effectively the use of human resources.

Provide a system of asset control i.e. whether assets are conserved, deflated, orappreciated (Boedker et al 2008).

Aid in the development of management principals by classifying the financialconsequences of various practices.

Develop a theory that will explain the nature and determinants of the value ofpeople to enterprises.

Significance of human resource accounting

A well defined human resource accounting can help the management to become more

efficient, in addition it is useful in internal reporting and to external users of financial

statement.

Usefulness in internal reporting

1. Helps in planning - Human resource cost acting provides cost information required inhuman resource planning process thereby facilitating preparation of future forecasts

and budget (booth 1998).

2. Help in decision making - human resource accounting provides data in areas wherealternative option exist e.g. whether to acquire a trained employee or develop one


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from within, or whether to retrench or retain an employee. Instead of applying non-

monetary measures of potential ability, the economic value of recruits will be better

criteria for selection and optimization of the expected value of the organization

human resource and subsequent valuation of adequacy of return on investment in

human resource.

3. Helps in capital budgeting - the present technique used in capital budgeting decisionconsider the human dimension as a qualitative factor. This is not realistic in the

present scenario where huge investment is being made in development of

employees and therefore human resource accounting system would justly assess the

impact of capital budgeting on human and non-human asset.

4. Helps in control - human resource accounting help to ensure that human resourceobjective are attained objectively and efficiently as it provide information necessary

to implement the control function. The standard cost of acquisition and

development is compared with actual cost incurred and the variance if any is

analyzed to identify the possible lapses in personnel management function(Scarpello and Theeke, 1989).

5. Helps in performance evaluation - the present convention of measurement of returnon investment ignores the changes in human resources and this encourages mangers

to use their human resource to include their short term objective. Inclusion of

human resource input would be a good performance measure as it would reveal the

return on human asset.

6. It helps in activity analysis - measurement of human resource value would providetop management with new set of financial ratio for effective organization activities

analysis e.g. ratio of human and non-human resources indicate the degree of labor

intensity. Higher labor intensity could be used as a result of outdated technologyrequiring the utilization of high proportion of labor or employment of unwarranted

existing labor (Tang, 2005).

Methods of Measuring HRA:

Human Resource Cost Accounting (HRCA) Human Resource Value Accounting (HRVA)

HRCA:

1) Historical Cost Approach

The actual cost incurred on recruiting, selecting, training, placing and developing thehuman resources of an enterprise are capitalized and written off over the expected

useful life of human resources


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2) Replacement Cost Approach

The cost of replacing employees is used as the measure of companys humanresources. The HR of a company are to be valued on the assumption as to what it will

cost he concern if existing human resources are required to be replaced with other

persons of equivalent experience and talent.

3) Opportunity Cost Approach

It is based on economic concept of opportunity cost which removes the deficiency inreplacement cost approach. Measured through a competitive bidding process within

the entity.


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HRVA:

MODELS USED IN HUMAN RESOURCE VALUE ACCOUNTING

The Lev and Schwartz Model Flamholtz Model Morse Model

1. The Lev and Schwartz Model:-This model was developed in 1971.It determines 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. Under this model:

a. All employees are classified in specific groups according to their age and skill.b. Average annual earnings are determined.c. The total earnings where each group will get up to retirement age arecalculated.

d. The total earnings calculated as above are discounted at the rate of cost ofcapital. The value thus arrived at will be the value of human resources/assets.

The following formula has suggested for calculating the value of an employee

according to this model-

V=r*l(t) / (1+R)*t-r


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V= value of an individual

l(t)= the individuals annual earnings upto the retirement

t= retirement age

r=present age of the employee

R=discount rate

2. Flamholtz Model:-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 theorganisation in various position or services states. The present value of human resource

maybe derived by discounting the realisable value of expected future services at a specified

rate.

The model suggests a five step approach for assessing the value of an individual to the

organisation:

a. Forecasting the period that is remained in the organisation i.e. his expectedservice life.

b. Identifying his roles and the tasks.c. Estimating the value derived by the organisation when a person occupies a

particular position for a specified period of time.

d. Discounting the value at a predetermined rate to get the present value ofhuman resources.

3. Morse Model:-The value of human resources is equivalent to the present value of the net benefits derived

by the enterprise from the service of its employees. The following steps are involved under

this approach:-

a. The gross value of the services to be rendered in future by employees iscalculated in their individual and collective capacity.

b. The value of direct and indirect future payments to the employees isdetermined.

c. The difference between the points (i) and (ii) represents the net benefit tothe enterprise.


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HRA in INDIA:

It is a popular phenomenon among the Indian corporate world is to disclose informationrelating to human resource in annual statements. In this context, it is necessary to conduct a

study to assess the disclosure pattern of HRA information in Indian corporate World.

It first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public enterprise, during

the financial year 1972-73. Later it was also adopted by other leading public and private

sector Organization in the subsequent years. Some of them are Hindustan Machine Tools

Ltd.(HMTL). Oil and Natural Gas Corporation Ltd.(ONGC), NTPC, Cochin Refineries Ltd. (CRL),

Madras Refineries Ltd.,(MRL), Associated Cement Company Ltd.(ACC) and Infosys

Technologies Ltd.(ITL).

However, adaptability of various model (mainly Lev and Schwartz model, Flamholtz model

and Jaggi and Lev model) and discount rate fixation and disclosure pattern i.e. either age

wise, skill wise etc in BHEL, SAIL, MMTC (Minerals & Metals Trading Corporation Of India

Ltd.) HMTL, NTP make it clear, that there has been no uniformity among Indian enterprises

regarding HRA disclosure.

Example:

BHEL

HRV Human Resources Value of the group of employees in the particular salarygrade

P

12Annual compensation per,

DA, CCA, HRA, PFcontribution by employersetc.

N Total number of employees in the grade. E Efficiency Factor. I Incremental Factor. It is 5% for five years period. F 12% per annum weighted average cost of capitalResearch paper

AN ANALYTICALSTUDY OF HUMAN RESOURCE ACCOUNTING PRACTICES AN INDIAN

EXPERIENCE .....Mamta Ratti

Integral Review - A Journal of Management

P x 12 x N x E x IHRV=

F


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Objectives:

To study the value of human resources at different levels of organization.

To study hierarchical per capita HR.

Findings :

Table indicates the value of employees vis--vis total no. of employees as per Lev and

Schwartz model. The total value of employees of sampled organizations is about

15crores.According to this table, TCS indicates the highest value of employees i.e.

87.09%and it also have highest percentage among total number of employees 53.9%(17,000

employees).The second company which have highest value is Gillette India Ltd. i.e.

4.22%value. But the table shows that there are some companies in sample that have higher

number of employees but value of their human resources is not higher like as Guru Gobind

Singh Thermal Power Plant that has employed 11.46% (3,620 employees) but their human

worth is only 2.3%that is too much less than number of employees. Thus, inspite of large

number of employees, value of human capital is not high. The lowest value of human capital

is represented by Sagar Electricals which employed 0.063% employees and their human

worth is only 0.004%.

It can be inferred that the value of human resources does not depend upon the number of

human beings employed or in other words, it can be said that if the number of employees

are higher than the value will be higher. The situation may be that value of human resources

may be higher in spite of less number of human capitals. So, another factor that increases

the value of human capital is amount paid by organizations to their employees. If companies

pay higher amount on salaries to their human resources then value will be higher, and if

companies will pay less, human capital will be low. This is why, companies have higher

Sr. No. Company NameNo of Human

emoloyees

Value of HR

( in crore)

Value per

employee

( Rs in lakh)

1 Gillette India Ltd. 1,568 (4.96) 664.6(4.22) 42.3

2 GGS, Thermal Power Plant 3,620(11.46) 373.6(2.37) 10.3

3 HNT International 53(0.167) 6.69(0.04) 12.6

4 Haryana Milk Foods Ltd. 190(0.60) 14.71(0.09) 7.7

5 Ind Chenial Health Spl(P) Ltd. 900(2.85) 90.85(0.57) 10

6 Keniforn Chemicals Pvt. Ltd. 32(0.10) 2.98(0.018) 9.3

7 Mahaan Proteins Ltd. 26.0(0.82) 41.8(0.26) 16

8 Nibson India Ltd. 60(0.190) 25.61(0.162) 42.6

9 OST Electronics Ltd. 300(0.95) 33.03(0.20) 11

10 Poorva Consultants 40(0.12) 14.27(0.090) 35.5

11 Ranbaxy 915(2.89) 31.58(0.20) 3.4

12 M/s Saint Gobain Diamat Winter Ltd. 200(0.63) 92.86(0.59) 46.4

13 Sagar Electricals 20(0.063) 0.69(0.004) 0.3

14 Tata Consultancy Services 17,000(53.9) 13,700.55(87.09) 80

15 Vedilal Chemicals Ltd. 122(0.38) 18.32(0.11) 15


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number of human resources but their value is less than the companies which employed less

number of employees. If companies paid higher salaries to their employees, human capital

worth is higher. On the other hand, the manufacturing companies are paying less amount to

their employees so their value of human resources is less inspite they employed large

number of work force. The second reason is IT Companies employed most of the workforce

at higher and middle level and salaries at both levels are higher in comparison to lower

level. The manufacturing companies paid employed larger workforce at lower level and

salaries at lower level is also less. That is why; human capital worth is less in manufacturing

than in the IT Company

Per Capita Value of Human Resources:

High performing organizations in order to keep performing on a continuous basis must treat

their human capital as the most important and valuable asset. They should treat them as

adults, as partners and with dignity and respect. As we all know that People who feel good

about themselves produce good results and People who produce good results feel good

about themselves. Such a healthy and virtuous cycle goes on and on, satisfying the

individual goals and organizational goals too at the same time, in that the individual drives

the job satisfaction, which in turn induces him to reach out for excellence, culminating in

the all round development of the performing organizations. In recent years, India has

evolved from an inward looking economy to one with a global orientation. Today, the

company exports large number of products to various destinations than ever before. Sound

human resources not only facilitate to improve a firms long run responsiveness and

flexibility also thereby competitiveness. Organizational structure strategy, technology and

physical assets cannot guarantee sustainable competitive advantage for an organization in

the era of globally competitive business environment in which not only companies but

Sr. No. Company Name

Value of

employees at

higher level

Value of

employees at

Middle level

Value of

employees at

Lower level

1 Gillette India Ltd. 143.9 79.4 2.92

2 GGS, Thermal Power Plant 27.4 19.5 8.7

3 HNT International 37.5 31.7 5.6

4 Haryana Milk Foods Ltd. 44.9 17.5 3.3

5 Ind Chenial Health Spl(P) Ltd. 25 9.74 7.8

6 Keniforn Chemicals Pvt. Ltd. 15 12.2 8.2

7 Mahaan Proteins Ltd. 43 0.23 10

8 Nibson India Ltd. 23.7 46 17.7

9 OST Electronics Ltd. 14.3 12.1 7.7

10 Poorva Consultants 94.4 30.1 9.4

11 Ranbaxy 22.2 10.1 4.5

12 M/s Saint Gobain Diamat Winter Ltd. 36.4 167 0.5

13 Sagar Electricals 5 5 2

14 Tata Consultancy Services 110.5 87.4 17

15 Vedilal Chemicals Ltd. 22.6 19.2 13.6


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Incremental earning based on age or group

Discount rate/cost of capital of 12.18% and 13.32% the previous year.

As indicated above the total value of human resource increased in 2009 compared to 2008.

However the value of human resource per employee decreased from 1.08 in 2008 to 0.97 in

2009.

Numerical:

Valuation of Employees:

50 employees in all who need to be valued The employees are grouped based on their level/grade Assume the organization structure of the company has three levels- L1,L2, L3 50 employees are occupying these levels as: 20 (Level 1), 20 (Level 2), 10 (Level 3)

Demonstrate the Valuation for Level 1 employees

Solution:

Step 1: Carry out Age level analysis of 20 employees of Level 1

Step 2:

Calculate the expected tenure of each group The mean age of each group is 23,33,43,53 Consider the retirement age as 58 Expected tenure of the groups is 35,25,15 and 5 years respectively For ease of computation let the expected tenure be 5,4,3 and 2 respectively


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Step 3 :

Salary/wage is assumed to be Rs. 100 per year This includes both direct and indirect component

Step 4 : To project the annual salary, 10% growth is considered annually

Step 5: Discount the projected salary/wage of an employee at 5%

Step 6: Total Present Value of Level 1 Employees


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Deterrents to HRA:

Human Resource Accounting (HRA) is relatively a new concept & not much followed in the

industry, reason being the objections raised against it. The main deterrents to HRA are as

follows:

HRA is based on assumptions:

The organizations which follow HRA do not have common methods of HR accounting. The

assumptions made for accounting vary from organization to organization. The methods are

based upon various assumptions.

HRA is not recognized by tax laws:

Being a new concept, it has not yet received recognition from tax laws worldwide. As there

is no rigid base for the assumptions made in the HRA, no tax law recognizes it either as an

obligatory or voluntary method of accounting. This results in HRA being considered as a

theoretical concept only.

Difference in valuation of assets & that of HR:

The traditional methods of accounting take into consideration different valuation methods

for valuation of assets. These methods cannot be applied to HR valuations as it is not a

tangible asset.

Factors included for valuing not measurable in monetary terms:

As HRA considers the intangible benefits like efficiency, quality, and intellectual properties

associated with the human resources of the organization, it cannot be measured in

monetary terms.

Use of different models makes it difficult for comparison:

The methods used for HRA vary from organization to organization which makes it difficult

for them to compare the results of the same. The parameters taken into consideration are

different for every organization. This makes it difficult for comparison.

Not credible:

As only numeric figures associated with the human resources cannot depict the true value

of the individual, we cannot only rely on HRA for the evaluation of the Human Resource of

the organization.


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Future Outlook of HRA:

Though much progress has been made in accounting for human resource in India,

comparison can only be made within the same (inter-period) firm but not between firms

because of different modification made in computation techniques and lot of objectivitywhile making estimates. All the company's that have introduced human resource accounting

have used the Lev and Schwartz economic model. The human resource accounting

presentation in India can be summarized in the table below

All the companies that furnished information about human resource value included such

report as a separate report from the main financial statement i.e. the income statement and

the balance sheet. This means that human resource accounting is not still considered as part

of financial statement but additional materials for use by users of annual report. Thus

human resource accounting is in need of further development in order for human resource

data to receive equal weight like other items in the balance sheet and income statement. Inorder for human resource accounting to have significance and to be part of financial

statement the value of human resource as computed by various company should be

incorporated in the balance sheet. This will make the balance sheet complete and lead to

better analysis than traditional balance sheet. For instance considering the case of Infosys,

return on asset before considering value of human resource is computed as follows

This illustrate that omitting the value of human resource from the balance sheet can give

misleading information about the company's performance. Before incorporating the value

of human resource the ROA in 2009 was 27% but after incorporating the value of human

asset ROA drop to 4.8% which is the actual return on asset. In addition the earliercalculation indicated a growth in return on asset by 1% while calculation incorporating

human resource value indicates a growth in ROA by 0.8% between 2009 and 2009. This

example indicates that human resource accounting can lead to better analysis of financial

performance of a company.

Investors can use human resource ratios to analyze the performance of the company over

the period and thus understanding whether the performance of the company is improving

or deteriorating. For instance in the case of Infosys total income/human resource ratio was

0.21 in 2009 compared with 0.17 in 2008. This indicates an improvement in performance of

the company. Other human resource ratios which illustrated improvement in performanceinclude value added to human resource which increased from 0.15 to 0.19 and return on

human resource value which increased from 4.7 to 5.9. Based on human resource ratios the

company performed better in 2009 compared to 2008 and investor can use this information

to make an investment decision. However other ratios of profitability, liquidity, efficiency

and leverage need to be included while analyzing the financial health of a company

otherwise the use of a single category of ratio can mislead users of accounting information.

Management can also use the information provided by human resource accounting.

Breakdown of the workforce in term of professionalism can help managers to decide

whether they have right mix of workforce to drive organization growth. Change in the mixcan be necessitated by change of business or acquisition and merger. For a technology firm


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like Infosys, a large portion of the workforce is expected to be professionals with less

unskilled workers but for a manufacturing firm the number of semi skilled worker is

expected to be higher. Comparison of the level of professionalism between firms in the

same industry can pinpoint weaknesses or competitive advantage that one firm have over

the other (Harrell and Klick, 1980). In technology industry if the managers find that the

number of semi-skilled and unskilled worker is high than technical staff and other

professionals, it is an indication that the organization has insufficient skills to sustain growth

in a highly competitive market. For instance in 2009 Infosys had 97,349 software

professionals compared to 7,501 support staff. This indicate that the firm has the right mix

of workforce and it is expected that in future the growth in both categories of workforce will

be proportional but in a situation where the number of supporting staff grow at a higher

rate than software professionals it may be a sign that the organization is not maintaining the

correct proportion of workforce.

The increased use of the balanced score card will make human resource accounting to bemore useful for making strategic decision in India. The balanced score card is a performance

measure system that consider both financial measures and non-financial measures of

performance such as business process perspective, customer perspective, and learning and

growth perspective (Kaplan and Norton, 1996). The balance score card just like human

resource accounting is more useful than traditional financial reporting system which

indicate how a company has performed in the past but offer little information on future

performance of the company. For instance a firm may reduce training cost to boost current

earnings but the future earnings might be adversely affected due to reduced productivity.

The balance score card balance between external and internal measures, subjective andobjective measures, and performance results and the drivers of future results. During the

current information age the firm value is embedded in customer relations, innovative

processes and human resource unlike in industrial age when the firm value depended on

property, plant and equipment. Though financial accounting system was good at valuing

asset in industrial age, in information age it is ineffective which calls for adoption of the

balanced score card and human resource costing and accounting. As stated earlier balanced

score card goes beyond financial measure to include internal process perspective, customer

perspective and learning and growth perspective.

1.

Financial perspective - this indicate financial measures e.g. return on asset, return onequity, value added, net profit margin etc

2. Customer - this indicate measures such as customer retention, customer satisfactionand market share.

3. Business process perspective - this indicate the following measures; quality, cost andthroughput associated with business processes e.g. production, procurement and

order fulfillment.

4. Learning and growth perspective - this indicate measure such as skill sets, employeeretention, employee satisfaction etc.

The future of human resource accounting in India and the rest of the nations may be linkedto the balanced score card. In today business application human resource accounting suffer


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due to the fact that it is not grounded in business strategy. When balance score card is

linked to human resource accounting this problem would be solved (Kaplan & Roll, 1972). In

addition the measures developed within human resource accounting will be utilized by the

balanced score card particularly in the area of learning and growth perspective which deal

with measures such as skill sets, employees satisfaction, employees retention etc.

One of the shortcomings from use of balance score card is the missing link between non-

financial indicators and financial measures such as cash flow and earnings. The use of

human resource accounting will help to transform non-financial measures to financial ones

thus linking them to financial reporting system.

To make human resource accounting more meaningful and to facilitate it inclusion in

financial statement, personnel cost should be classified into two categories namely capital

expenditure and revenue expenditure. Capital expenditure will include costs such as

acquisition, retention, development, up-gradation or update and hiring cost (recruitment

and training). Revenue expenditure will include salaries, wages, commission, bonus,

allowance, efficiency maintenance cost and short term motivation (Cascio, 1998).

Capital expenditures should be capitalized and recorded in the balance sheet as intangible

assets and amortized over the useful life of human asset. This armotisation should be

recorded as expenses in the income statement. Revenue expenditure should be charged

against revenue in the income statement. This will be the only way that human resource

cost is represented in the financial statements i.e. the income statement and the balance

sheet rather than a separate report in the annual statement.

Conclusion:

Human resource accounting provides quantitative information about the value of human

resource, which helps the top management to take decisions regarding the adequacy of

human resources. Based on these insights, further steps for recruitment and selection of

personnel are taken. Outside the organization, quantitative data on the most valuable asset

has an impact on the decision of investors, clients, and potential staff of the company.

When proper valuation and accounting of human resources is not done then management

may not be able to recognize the negative effects of certain programs, which are aimed at

improving profit in the short run. If not recognized on time this programs could lead to fall inproductivity levels, high turnover rate and low morale of existing employees.

Just as Likert and Bowes (1968) conclusion that whilst it is true that accounting has a myopic

focus on monetary data it is also this focus which is impending the flow of accounting

information, particularly to external users about economic resources and activities which

cannot effectively be expressed in monetary terms. There are several areas in which non-

monetary measurements may be evolved in accounting and human resource accounting is

probably one of these. To make valuation of human resource objective and comparable

there must be a universally acceptable method of valuation.

accounting_human resource accounting

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