Human Resource Accounting (HRA) Practices in National Thermal Power

Corporation Limited (NTPC)

National Thermal Power Corporation Limited is an Indian based public sector undertaking under the Ministry
of Power, Government of India, was formed for carrying out business in generation of electricity and allied
activities. NTPC became a Maharatna company in May, 2010, one of the only four companies to be awarded
this status. The headquarters of the company is situated at New Delhi. NTPC’s Core business is to generate
electricity and to sell it to various state electricity boards. From fossil fuels it has forayed into generating
electricity via hydro, nuclear and renewable energy sources.

In NTPC, People before Plant Load Factor is the mantra that guides all HR related policies.

Human Resource Accounting is the process of performing a comprehensive system including all employees
related data in addition to his performance appraisal, so it can be merged within a special system to calculate
and value his monetary value as a human resource to the organization, and then to be use its results in
financial and administrative decision making.

HRA is the growing aspect and it is useful for taking managerial decisions as company incurs huge portion of
their capital on HR but it is not yet a popular practice and so a few companies undertake the task of HRA and
disclose it in annual reports.

NTPC has been disclosing HRA reports since 2005-06 till date. NTPC divides total employees into three groups
as under (a) Executives (b) Supervisors (C) and Workmen. It also presents some ratios similar to Human
Resource Value/ Total Resource Value, Value added / Human Resource Value, Turn over / Human Resource
Value.

In NTPC, the historical method of human resource accounting has been practiced since 2006. Human resource
accounting in the company is very much useful in taking major Human Resource Management decisions as
human resource is the asset of any organisation and it is the human resource from which economic benefits
can be derived directly or indirectly. According to the General Manager of Accounts and Finance of NTPC
Company, human resource requires a huge costs of the company so human resource accounting is a very
useful tool in taking various finance related decisions like salary revision, bonus, and other compensations. The
management feel that the new Enterprise Resource Planning (ERP) and Software Accounting Professional
(SAP) system of maintaining accounts and administering will help the accounts and finance department for
better and new way of maintaining human resource accounting system.

Historical cost method in HRA has been maintained till now NTPC because it is very easy to use and very easy
to understand. Historical cost method calculates actual cost incurred on recruiting, selecting, hiring and
training and development of human resource (HR) which is equal to the value of workforce. The economic
value of HR increases overtime and they gain experience. However, according to this model, the capital cost of
HR decreases through amortization.

Sooner or later Lev and Schwartz model needs to be adopted (already being used by SAIL and BHEL), which is
the basic model employed by Indian organizations. It is based future earnings of an employee till his
retirement. According to the model value of human assets is estimated for a person at a given age which is the
present value of his remaining future earning from his employment and this represented by the following.

Reference- AN ASSESSMENT OF HUMAN RESOURCE ACCOUNTING (HRA) PRACTICES IN NATIONAL THERMAL

POWER CORPORATION LIMITED- (A Dissertation for Master of Philosophy Programme submitted to the
Department of Commerce, Assam University Diphu Campus for partial fulfillment of the Course)
Comparison between Lev and Schwartz model and Historical model of human
resource accounting
1. Historical Cost Approach

Brumnet, Flamholtz and Pyle have developed this method. It is on the basis of actual cost incurred on
humanresources. Such a cost may be of two types- acquisition cost and learning cost. Acquisition cost is the
expense incurred on recruitment, selection; entire cost is taken into consideration including those who are not
selected. Learning cost involves expenses incurred on training and development. This method is very simple in
its application but it does not reflect the true value of human assets. For example, an experienced employee
may not require much training and therefore, his value may appear to be low though his real value is much more
than what is suggested by historical cost method.Under this approach actual cost incurred towards recruitment,
hiring, training and developing human resources of the organization are capitalized and amortized over the
future expected useful life of the human resources. Certain part of costs will be written off in proportion to the
income of the future years on which those human resources will provide service. When these human assets are
prematurely liquidated, the amount not written off is charged to income of the year in which such liquidation
takes place. When the useful life of the human resource is considered to be longer than originally expected,
revisions are to be effected in the amortization schedule. The historical cost of human resource is almost similar
to the book value of the other physical assets. The additional costs incurred in training and developing is
capitalized and is amortized over the remaining working life of the employee. The unexpired value is investment
in human assets.

ADVANTAGES

1. Simple to understand and easily worked out.

2. Cost is related to revenue.

3. It enables to provide a basis for evaluating the company’s returns on its investment in human resources.

DISADVANTAGES

1. It takes into account only acquisition costs and does not take into account his potentiality.

2. It is not clear when or up to how many years the amount should be amortized.

3. Amount to be amortized is not fixed.

4. Capital cost decreases with amortization.

The Lev and Schwartz Model (Present Value of Future Earnings Method):

Lev and Schwartz Model aims to determine the value of human capital with a particular age associated with an
organization. This model was developed in 1971. The drawback of this model is that it failed to give the correct
value of human capital and also does not measure their contributions to achieving the organizational
effectiveness.

According to this model, the value of human resources is ascertained as follows –

1. All employees are classified in specific groups according to their age and skill.

2. Average annual earnings are determined for various ranges of age.

3. The total earnings which each group will get up to retirement age are calculated.

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

The Lev and Schwartz model is the basic model employed by Indian organizations 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 his formula.

DISADVANTAGES

1. This model implies that the future work condition of the employee will not change over the span of his
working life, but will remain the same as at present.

2. The approach does not take into account the possibility that the employee will withdraw from the
organization prior to his death or retirement. It is therefore not realistic.

3. It ignores the variable of the career movement of the employee within the organization. An engineer will be
an engineer throughout his career in the organization.

4. It does not take into account the role changes of employees. A Personnel Manager may become Chief Legal
Officer.

However, this method does not give correct value of human assets as it does not

measure their contributions to achieving organizational effectiveness.