Human Resource Accounting

Human Resource Accounting

Human resource Accounting is the process of identifying and
measuring data about human resources and communicating this
information to interested parties.”
-American Accounting Association Committee
In simple terms, it is an extension of the Accounting Principles of
matching the costs and revenues and of organizing data to
communicate relevant information in financial terms.

HRA means accounting for people as the organizational resource. It is

the measurement of the cost and value of people to the organization
and involves measuring the costs incurred by the firm in recruiting,
selecting, hiring, training and developing employees and judging their
economic value to the organization.

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Human Resource Accounting…

Investment in Value of
Human Human
Resource Resource

Expenditure incurred Yield Generated in form

on creating, increasing of higher productivity
and updating human and higher income/
resources profit in the
organization

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Objectives of HRA
1. To facilitate management decision
2. To develop human resources
3. To allocate human resources
4. To conserve human resources
5. To utilize human resources
6. To evaluate & reward human resource

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Approaches of Human Resource Accounting or
Measurement of Human Resource
HRA focused on two basic issues:
1. How human resources assets should be valued?
2. How should human resources be amortized(repaid)?
Methods:
➢ Cost-based Method

➢ Valuation Methods or the Economic Value Approaches

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Cost-based Method
This method emphasizes that the costs incurred by an
organization on hiring and developing the employees should be
capitalized and shown as investment in human resources in
balance sheet. The following methods are included in this
category:
1) Historical Cost Method
2) Replacement Cost Method
3) Opportunity Cost Method
4) Standard Cost Method

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Cost-based Method…
1) Historical Cost Method
In this method, all the costs associated with recruiting, selecting,
hiring, training, placing and developing an employee are
capitalized and then amortized over the expected useful life of the
asset like fixes asset.
2) Replacement Cost Method
The cost of replacing employees is used as the measure of
company’s human resources. The human resources of a company
are to be valued on the assumption as to what it will cost the
concern if existing human resources are required to be replaced
with other persons of equivalent experience and talent. In this the
cost of recruiting, selecting, training, etc. of new employees to
reach the level of competence of existing employees are
measured.
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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Cost-based Method…
3) Opportunity Cost Method
It is based on economic concept of opportunity cost which
removes the deficiency in replacement cost approach. Measured
through a competitive bidding process within the entity.
STEPS-:
1. The entity is divided into investment centers.
2. The investment center managers bid for scarce employees
they need within the entity.
3. The maximum bid price may be obtained by the capitalization
of the excess profits generated by the employee.

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Cost-based Method…
3) Standard Cost Method
The standard costs associated with the recruitment, hiring, training
and developing per grade of employees are determined annually.

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Valuation Methods or the Economic Value Approaches

❑ Lev & Schwarts’s Present Value of Future Earnings Models

They stated that the human resource of a company is the summation of the value
of all the net present value of expenditure on employees.

❑The Adjusted Discounted-Future-Waxes Methods : Hermanson

They proposed a method of human resources accounting using an adjusted
compensation value to approximate the value of an individual to a firm.
Discounted future wages are adjusted by an efficiency factor intended to
measure the relative effectiveness of the human capital of a given firm.

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Valuation Methods or the Economic Value Approaches
❑ Flamholtz Stochastic Rewards Valuation Model
The movements of individuals through different roles of positions in the
organization as a stochastic process depending on prior roles or service states
held by them in the system. The model is a direct way of measuring a person’s
expected conditional value and expected realizable value. It presupposes
that a person will move from one state in the organization to another during
a specified period of time.
The following information is necessary under this model.
➢ The set of mutually exclusive states that an individual may occupy in the

system during his/her career.

➢ The value of each state to the organisation.

➢ Estimates of a person’s expected tenure in the organisation.

➢ The probability that in future the person will occupy each state for the specified

time.
➢ The discount rate to be applied to the future cash flows.

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Valuation Methods or the Economic Value Approaches…
❑ Flamholtz Stochastic Rewards Valuation Model…
A person’s expected conditional value and expected realization value will be
equal if the person is certain to remain in the organization in the predetermined
set of states, throughout his expected service life.

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Approaches of Human Resource Accounting
or Measurement of Human Resource…
◼ Valuation Methods or the Economic Value Approaches

❑ Flamholtz Model of Determinants of Individual Value to Formal

Organization
According to this model, the value of an individual is the present worth of the
service that he is likely to render to the organization in future.
Flamholtz has tried to identify the key variables that an individual’s value to an
organization and interrelationships of such variables.
The present cumulative value of all possible services that may be rendered by
him during his/her association with the organization, is the value of the individual.
The value consists of three factors:
➢ Productivity or Performance

➢ Transferability

➢ Promotability

These three factors depend on individual determinants like activation level of the
individual and organization determinates like opportunity to use these skills or
roles and the reward system.
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