HRA is an accounting process which includes:-

a. Identifying data about the human resources;

b. Measuring the costs of organizational input such as recruiting , selecting, hiring, training
and developing of human assets;

c. Measuring the economic value of people to the organization, quantifying their

experience, commitment, etc.;

d. Developing the report of costs and values , and;

e. Communicating the reports to internal as well as external users;

It is primarily an information system, which informs the management about the changes that are
taking place in the human resource of an organization.

In other words, Human Resource Accounting is the process of assigning, budgeting and reporting
the cost invested for employees towards their recruitment, training them, payment of salaries &
other benefits paid and in return valuing their contribution to organization towards its
profitability.

Human resource costs include recruitment, selection, hiring and placement, orientation, training
and development costs.

Need of HRA

The need for human asset valuation arose as a result of growing concern for human relations
management in the industry.

Behavioral scientists concerned with management of organizations pointed out the following
reasons for HRA:
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1. Under conventional accounting, no information is made available about the human

resources employed in an organization, and without people the financial and physical
resources cannot be operationally effective.

2. The expenses related to the human organization are charged to current revenue instead of
being treated as investments, to be amortized over a period of time, with the result that
 magnitude of net income is significantly distorted. This makes the assessment of firm and
inter-firm comparison difficult.

3. The productivity and profitability of a firm largely depends on the contribution of human
assets. Two firms having identical physical assets and operating in the same market may
have different returns due to differences in human assets. If the value of human assets is
ignored, the total valuation of the firm becomes difficult.

4. If the value of human resources is not duly reported in profit and loss account and
balance sheet, the important act of management on human assets cannot be perceived.

5. Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting. All expenses on human resources are to be
treated as investments, since the benefits are accrued over a period of time.

Objectives of HRA

1. Providing cost value information about acquiring, developing, allocating and maintaining
human resources.

2. Enabling management to monitor the use of human resources.

3. Finding depreciation or appreciation among human resources.

4. Increasing managerial awareness of the value of human resources.

5. For better decisions about people, based on improved information system.

6. Assisting in effective utilization of manpower.

Assumptions of HRA

Six main Assumptions of Human Resource Accounting are:

1. Human resources provide benefits to an organization in a fashion similar to the manner in

which financial and physical resources provide benefits.

2. The benefits associated with both conventional assets and human resources have value to
the organization because these benefits contribute in some way to the accomplishment of
the organizational goals.
 3. The acquisition of human resources typically involves an economic cost and the benefits
associated with such resources can personally be expected to contribute to the economic
effectiveness. It follows, therefore, that these benefits are essentially economic in nature
and are subject to measurement in financial terms.

4. Since the usual accounting definition of an asset involves the right to receive economic
benefits in the future, human assets are appropriately classified as accounting assets.

5. It is theoretically possible to identify and measure human resource cost and benefits
within an organization.

6. Information with respect to human resource costs and benefits should be useful in the
process of planning, controlling, evaluating and predicting organizational performance.

Advantages of HRA

1. The system of HRA discloses the value of human resources, which helps in proper
interpretation of return on capital employed.

2. It facilitates human resource planning by highlighting the strength and weakness in the
workforce.

3. Managerial decision-making can be improved with the help of HRA.

4. The implementation of human resource accounting clearly identifies human resources as

valuable assets, which helps in preventing misuse of human resources by the superiors as
well as the management.

5. It helps in efficient utilization of human resources and understanding the evil effects of
labor unrest on the quality of human resources.

6. This system can increase productivity because the human talent, devotion, and skills are
considered valuable assets, which can boost the morale of the employees.

7. It can assist the management for implementing best methods of wages and salary
administration.

8. HRA provides valuable information for present and potential investors. Investors and
other users of financial statements want to know the value of firms human assets. HRA
provides a more accurate accounting of return on the total resources employed in a firm.
Limitations of HRA

1. There are no specific and clear cut guidelines for 'cost' and 'value' of human resources of
an organization. The present valuation systems have many limitations.

2. The life of a human being is uncertain. So its value is also uncertain.

3. The human resource accounting may lead to the dehumanization in the organization.

4. The valuation methods have certain disadvantages as well as advantages; therefore, there
is always a bone of contention among the firms that which method is an ideal one.

5. There is no sufficient empirical evidence to support the hypothesis that HRA as a

managerial tool facilitates better and effective management of human resources.

6. There is a constant fear of opposition from the trade unions as placing a value on
employees would make them claim rewards and compensations based on such valuations.

7. In spite of all its significance and necessity, the Tax Laws dont recognize human beings
as assets.

8. There is no universally accepted method of the valuation of human resources.

Methods of valuation of human resources- Part-1

There are different methods available for valuation of human resources. They have their own
advantages and limitations. There are two approaches toward HRA cost based approach and
value based or economic based approach.

The cost approach which involves methods based on the costs incurred by the company, with
regard to an employee.

The economic value approach which includes methods based on the economic value of the
human resources and their contribution to the companys gains. This approach looks at human
resources as assets and tries to identify the stream of benefits flowing from the asset.

Different methods of valuation are as follows-:

Historical method/capitalization costs model/acquisition cost model/actual cost method

 Replacement cost method

Standard cost method

Current purchasing power method

Opportunity cost method/Competitive bidding model/Value to the organization

Present value of future earnings method/Lev and Schwartz model/Present value

method/economic cost method/ Capitalization of salary method

Economic valuation method

Reward valuation model/Flamholtz model

Discounted future wage model/Adjusted discounted future wages method

Asset multiplier model

Expense model

Return on efforts employed method

Model on Human Resource Accounting

Historical method/Capitalization costs model/Acquisition cost model/Actual cost

method

This method measures the organizations investment in employees using the five parameters:
recruiting, acquisition, formal training and familiarization, informal training and informal
familiarization, and experience and development. This model suggests that instead of charging
the costs to profit and loss statement (p&l) accounting, it should be capitalized in the balance
sheet. The process of giving a status of asset to the expenditure item is called capitalization.

In this approach, actual cost incurred on recruiting, hiring, training and development the human
resources of the organization are capitalized and amortized over the expected useful life of the
human resources. Thus a proper recording of the expenditure made on hiring, selecting, training
and developing the employees is maintained and a proportion of it is written off to the income of
the next few years during which human resources will provide service. If the human assets are
liquidated prematurely the whole of the amount not written off is charged to the income of the
year in which such liquidation takes place. If the useful life is recognized to be longer than
originally expected, revisions are effected in the amortization schedule.
The historical cost of human resources is very similar to the book value of the other physical
assets. When an employee is recruited by a firm, he is employed with the obvious expectation
that the returns from him will far exceed the cost involved in selecting, developing and training
in the same manner as the value of fixed assets is increased by making additions to them. Such
additional costs incurred in training and developing is also capitalized and are amortized over the
remaining life. The unexpired value is investment in human assets.

Advantages

This method is simple to understand and easy to work out.

It meets the traditional accounting concept of matching cost with revenue.

It can provide a basis of evaluating a companys return on its investment in human

resources.

Limitation

It is very difficult to estimate the number of years an employee will be with the firm.

It is difficult to determine the number of years over which the effect of investment on
employees will be realized.

The extent to which the employee will utilize the knowledge acquired is also subjectively
estimated.

Replacement cost method

This approach measures the cost of replacing an employee. Human resources of an organization
are to be valued on the assumption that a new similar organization has to be created from scratch
and what would be the cost to the firm if the existing resources were required to be replaced with
other persons of equivalent talents and experience. It takes into consideration all cost involved in
recruiting, hiring, training and developing the replacement to the present level of proficiency and
familiarity with the organization.

Advantages

This approach is more realistic as it incorporates the current value of companys human
resources in its financial statements prepared at the end of the year.

This method has the advantage of adjusting the human value of price trends in the
economy and thereby provides more realistic value in inflationary times.
 It has the advantage of present-oriented.

Limitation

It is not always possible to find out the exact replacement of an employee.

The determination of a replacement value is affected by the subjective considerations to a

marked extent and therefore, the value is likely to differ from person to person.

This method does not reflect the knowledge, competence and loyalties concerning an
organization that an individual can build over time.

This method is inconsistent with the historical cost of valuing assets.

Standard cost method

This method envisages establishment of a standard cost per grade of employee, updated every
year. Variances produced should be analyzed and would form a useful basis for control.
Replacement costs can be used to develop standard costs of recruitment, training and developing
individuals, such standards can be used to compare actual results with those planned.

Current purchasing power method

Under it, instead of taking their replacement cost to capitalized, the capitalized historic cost of
investment in human resources is converted into current purchasing power of money with help of
index numbers. Its great advantage is its simplicity even though it might produce only
approximate answers and approximately correct data.

Opportunity cost method/Competitive bidding model/Value to the organization

In order to overcome the limitations of replacement cost method, Hekimian and Jones suggested
the use of opportunity cost method which determines the value of human resource on the basis of
an employees value in alternative uses. Accordingly the value of an employee is based on his
opportunity cost-the price other divisions are willing to pay for the services of an employee
working in another division of an organization. Thus, the value of an employee would be high if
he has several alternative uses for employment in the various division of an enterprise. This
brings to light an important fact that the opportunity cost is linked with scarcity. This method
determines the value of human resources by establishing competitive bidding within an
organization.

The soundness of the valuation depends wholly on the information, judgement, and impartiality
of the bidder.

Advantages

This method ensures optional allocation of human resources.

It provides a quantitative base for planning, evaluating and developing human resources
of an organization. Development in human resource can easily be made on the basis of
the information of this method.

Limitations

This method fails to accommodate the possibility of hiring of employees of similar efficiency,
experience and skill.

It excludes from its purview those members of the firms human resources who are not
scarce and, therefore, are not being bid by other divisions of the organization.

The application of this method is doubtful unless the alternative uses of an employees
service available in an organization are traced out.

Methods of valuation of human resources- Part-2

Present value of future earnings method/Lev and Schwartz model/Present value

method/economic cost method/ Capitalization of salary method

Lev and Schwartz (1971) proposed an economic valuation of employees based on the present
value of future earnings, adjusted for the probability of employees death/separation/retirement.
This method helps in determining what an employees future contribution is worth today.
According to this model the salaries payable to employees during their stay with the organization
may be used as a replacement for the value of human resources, in view of the close co-relation
between employees compensation and their value to the organization. Thus the value of human
resources is the present value of future earnings of homogeneous group of employees.

The application of this method involves the following steps:

a. Division of employees into homogeneous groups. The basis of employees division

include their age, designation, skill and task;
 b. Determination of the average annual earnings for each group of employees;

c. Calculation of the present value of the total earnings of each class of employees with the
help of an appropriate discount rate.

The authors of the model recommend the following formula to :-

Vr={T E(t)}/{t-r(i-r)}

Where, V = the human capital value of a person r years old,

T = the persons retirement age,
E (t) = the persons annual earnings up to retirement,
r = A discount rate specific to the person.

Values are arrived at on the basis of average earnings for each category of employees. This
model has introduced economic value concept of HRA.

Advantages

Human capital calculated in this manner is useful since comparison with non-human
capital will give an idea about the degree of labor intensiveness.

Depending on the rate of growth in human capital, it can be determine that whether
organization has an ageing labor force or a younger labor force.

Limitations

The change in employees behavior as a result of promotion, transfer etc. is not

considered true.

The discount rate to be used cannot be calculated with a high degree of objectivity.

The basic assumption of the model that an employee will stay with an organization until
he retires does not generally hold true.

Therefore there is another improvement introduce known as economic valuation method.

Economic valuation method

According to this model, the value of human capital embodied in a person who is y years old, is
the present value of his/her future earnings from employment and can be calculated by using the
following formula:
 E(Vy) = Py(t+1) I(T)/(I+R)t-y
T=Y Y

Where E (Vy) = expected value of a y year old persons human capital,

T = the persons retirement age,
Py (t) = probability of the person leaving the organization,
I(t) = expected earnings of the person in period I,
and R = discount rate.

Advantages

This model takes into consideration the employees career movements.

If employees leave enterprise on account of the reasons other than death and retirement,
then such possibilities are also considered in this model.

This model is regarded better, than Lev and Schwartz model due to above two types of
inclusion in this model.

Limitation

Estimation of the probabilities for each employees occupying various positions and
valuation of contribution of services from all these positions is not an easy task.

To estimate exit probabilities and changes from one position to another is an expensive
process.

It is difficult to estimate an employees expected tenure of service.

It is also difficult to find out valid data about the value of expected to be rendered service
by an employee.

The measure is an objective one because it uses widely based statistics such as census
income return and mortality tables.

The measure assigns more weight to averages than to the value of any specific group or
individual.

Reward valuation model/Flamholtz model

As an improvement over the capitalization of salary method Flamholtz developed a model

commonly known as Stochastic Rewards Valuation Method. The method seeks to measure the
value of human resources on the basis of an employees value to an organization at various
services states (roles) that he is expected to occupy during the span of his working life with the
organization. The movement or progress of people through organizational states or roles is
called a stochastic process. The author has identified the major variables which determine the
value of an individual to a firm.

In the context of his model the assessment of employees value involves the following steps:

a. Estimation of employees expected service life;

b. Identification of set of service states (roles) that an employee may occupy during his
service life;

c. Estimation of the value derived by the organization at a particular service state of a

person for the specified time period;

d. Estimating the probability that a person will occupy at possible mutually exclusive
service state at specified future times;

e. Determining the total value of the services derived by the organization from its all
employees;

f. Discounting the total value to its present value at a pre-determined rate.

Advantages

It is the most scientific model as it demonstrates the impact of the concept of human asset
upon the management of human resources.

It is matured model as it takes into consideration the employees withdrawal from the
organization earlier than death or retirement.

Limitations

This method does not indicate the method of estimating the future compensation flows of
the employees.

It is practically difficult to determine the probability of employees career movement

within the organization and of his exit from the organization.

Methods of valuation of human resources- Part-3

Discounted future wage model/Adjusted discounted future wages method

Roger H. Hermanson developed this model wherein he recommends measuring the value of
human resources on the basis of relative efficiency of an organization in the industry. This model
relates the value of human resources with the extra profit the firm earns over and above the
industry expectations. In fact, this model attributes the difference in profitability rates between
firms of an industry to the varying efficiency of their human resources. It is with this argument
Hermanson suggested to measure the value of the human resources on the capitalized value of
the excess future profits realized by the firm.

Accordingly, the valuation of a firms human-resources involves the following step:

a. Estimation of wages and salaries to different levels of employees for succeeding five
years.

b. Calculation of the present value of the wage and salary payments at the rate of return
which is considered normal in the industry.

c. Determination of an average efficiency ratio for a specific period, usually the previous
five years.

d. Calculation of the present value of future services of the firms human resources. This is
worked out by the firms multiplying efficiency ratio.

The calculation of efficiency ratio is as follows:

Efficiency Ratio= Actual Average Earnings of the firm/ Normal Earnings of all firms

1. If Efficiency Ratio = 1: The firm's average rate of return equals the rate of return of the
economy. It means that the value of human resource is at par with the industry.

2. If Efficiency Ratio > 1: The firm's return is higher than the normal earnings. The value of
the human resource is more than the industrial average.

3. If Efficiency Ratio < 1: The firm's return is lower than the normal earnings. The value of
the human resource is less than the industrial average.

Advantages

It considers the relative efficiency of the firm.

It recognizes the time value of money.

Limitations

It considers every employee a like in terms of efficiency which is not true.

The discounting factor is subjective in nature.

Asset multiplier model

This method is based on the assumption that there is no direct relationship between costs
incurred on an individual and his value to the organization at any particular point of time. This is
because motivation, attitude and working environment affect the value of an individual. Under
this method, organizational employees are divided into four categories: top management, middle
management, supervisory management and operative or clerical employees. Wages and salary
bill for each category is multiplied is multiplied with an appropriate multiplier to calculate the
total value for each. Multiplier is a means for relating the personal values of the employees to the
total assets value of the organization. Higher multiplier should be checked for consistency with
the total value of the business as a whole. if the value of human assets is greater or less than the
goodwill, multiplier is inaccurate and should be adjusted.

Expense model

According to Mirvis and Mac (1976), this model focuses on attaching dollar estimates to the
behavioral outcomes produced by working in an organization. Criteria such as absenteeism,
turnover, and job performance are measured using traditional organizational tools, and then costs
are estimated for each criterion. For example, in costing labor turnover, dollar figures are
attached to separation costs, replacement costs, and training costs.

Return on efforts employed method

This method measures the value of the firms human resources on the basis of efforts made by
the individual for the organizational benefits. These efforts are evaluated in the light of the
following factors:

Positions an employee holds;

Degree of excellence employee achieves;

Experience profile of the employee.

Advantages

It makes possible inter-divisional comparison which ensures effective competition.

 It helps the management in human resources allocation among various divisions of the
organization.

It assists the management in regulating the various functions of an organization.

Limitation

It is more an index of efficiency rather than a valuation method.

Management finds it difficult to measure and express the individual efforts in monetary
value.

The measurement procedure of individual efforts differs from firm to firm and, therefore,
there is no uniform and widely accepted procedure for it.

Model on Human Resource Accounting

This model prescribes the Human Resource Accounting approach for two categories of
employees:

Employees, who are at strategic, key decision-making positions such as MD, CEO (Top
Executives)

Employees, who execute the decision taken by Top Executives

Model arrives at the value of human resources as sum of below-mentioned three parts:

a. Real capital cost part

b. Present value of future salary/wages payments

c. Performance evaluation part

Limitations

Calculation process is lengthy and cumbersome.

Lev and Schwartz valuation principles have been used at one point of time, so this model
contains a weakness from the Lev and Schwartz model.

Ravindra Tiwari has prescribed another approach to value human resources at the time of annual
appraisal exercise, which suggests valuation of human resources on different appraisal
parameters.
Abstract

Human is the core factor and which is required to be recognized prior to any other 'M's But
till now an urgent need based modification is required while identifying and measuring data
about human resources. In this paper my objective is to identify the extensive use of Lev &
Schwartz model of Human resource accounting, in spite of several criticized from various
sides regarding its applicability. Further more, it also portrays the applicability in wide
variety of organization of such model (some pubic sector units and IT based sector).

Human is the buzzword in the modern knowledge based society. It is the most vital input on
which the success & failure of the organization very much depend upon. Starting from the
classical economist to modern human capital economist such development in considered to
be a continuous process.

It is one of the most important 'M' associated, which is considered while taken care of 4M's
associated with any organization and they are money machines, materials and men. But the
most interesting thing is that the first three are recognized and find a place in the assets
side of the Balance sheet of the organization. But in case of fourth one ambiguity prevails
among the accountant. In spite of its usefulness has been acclaimed is various literature
over the decades but its application still remain a suspectable issue, the IASB and the ASB
in different countries have not been able to formulate any specific accounting standard for
measurement & reporting of such valuable elements.

It is a popular phenomenon among the Indian corporate world is to disclose information

relating 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 ie. 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.
Meaning Of Human Resource Accounting:

HRA has been defined by American Accounting Association's committee "HRA is the
process of identifying & measuring data about human resources & communicating this
information to interested parties". Stephen knauf defined HRA as "The measurement &
quantification of human organizational inputs such as recruiting, training,
experience & commitment."

According to Eric. G flamholtz HRA represents-"Accounting for people as an

organizational resource. It is the measurement of the cost & value of people for
the organization".

Hence, it can be said that, it is the process of developing financial assessment for people
within organization & society & monitoring of these assessment through time, it deals with.

Although HR valuation has important implication for external financial reporting, in the
contemporary economic scenario valuing HR has been greater significance for internal HRM
decision.

Problem Statement:

Understanding the way of valuation of human resources by using Lev & Schwartz model
and how valuation of such asset are related with the other financial variables for financial
reporting purpose.

Research Objectives:

The main objectives of the study are:

i) To asses the way of presenting HRA information in the financial statement by selected
companies

ii) To identify HRA methods and models (mainly the extensive use of Lev & Schwartz
model) which are used to arrive at human resource value.

iii) How human resource are related with the other accounting variables for the purpose of
human financial reporting in selected companies.

The ways of presentation of HRA information disclosed

by some of the companies

Name of the HRA introduce

Model Discount
organization in the
year rate (in%)

BHEL 1973 74 Lev & Schwartz model 12

SAIL 1983 84 Lev & Schwartz model with 14

Some refinements as suggested by Eric.G.
Flamholtz& Jaggi and Lev
MMTC 1982 83 Lev & Schwartz model 12

ONGC 1981 82 Lev & Schwartz model

12.25

NTPC 1984 85 Lev & Schwartz model 12

INFOSYS 1999 Lev & Schwartz model

12.96

2006-07 Lev & Schwartz model

14.97

Source: Secondary

PRODUCTIVITY & PERFORMANCE INDICATORS

Source: Secondary

Terminology used:

1) PBT-Profit Before Tax

2) HR- Human Resource
3) TA-Total Assets
4) Turn-Turnover ( or Sales)
5) FA-Fixed Assets
6) VA- Value Added

Models of Human Capital Valuation

Many models have been created to value human capital. Some are based on historic costs
while some are based on future earnings. But each has its own limitations and one model
has proved to be more valid than other. Although the Lev and Schwartz model has been
the most widely use model for its ease of use & convenience.

The Lev & Schwortz Model

The Lev and Schwartz model states that the human resource of a co is the summation of
value of all the Net present value (NPV) of expenditure on employees. The human capital
embodied in a person of age r is the present value of his earning from employment

Under this model, the following steps are adopted to determine HR Value.

i) Classification of the entire labour force into certain homogeneous groups like skilled,
unskilled, semiskilled etc. and in accordance with different classed and age wise.eg. In
Infosys the classification is based on software professionals & support staff etc.

ii) Construction of average earning stream for each group.eg. At Infosys Incremental
earnings based on group/ age have been considered.

iii) Discounting the average earnings at a predetermined rate in order to get present value
of human resource's of each group.

iv) Aggregation of the present value of different groups which represent the capitalized
future earnings of the concern as a whole,

Where, Vr = the value of an Individual r years old

I (t) = the individual's annual earnings up to retirement
t = retirement age
r = a discount rate specific to the cost of capital to the company.

Critical appraisal of the Lev & Schwartz model:

1] It is essentially an input measure .It ignores the output i.e. productivity of employees.

2] Service state of each individual employee is not considered.

3] The training expenses incurred by the company on its employees are not considered.

4] The attrition rate in organization is also ignored.

5] Factors responsible for higher earning potentiality of each individual employees

like seniority, bargaining capacity, skill, experience etc. which may cause
differential salary structure are also ignore.

Conclusion

The conceptual thinking about valuation human resources is still in a developing stage. No
model of HR accounting is accepted by the accounting bodies all over the world. However,
still we find some application of Lev & Schwartz model is most public sector units and IT
based sectors. In knowledge based sectors where human resources are considered to be the
key elements for monitoring the business activities to attend their goals successfully, may
not overlooked this side. Hence, considering the great significance of HRA proper initiation
should be taken by the government along with that other professional & accounting bodies
both at the national & international levels for the measurement & reporting of such valuable
assets.