ARBA MINCH UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

Department of Accounting & Finance (MSc)

Group Assignment for advanced financial Accounting

Human resource accounting

Group Name
Kedir Mohammed ID No PRBE/066/13
Berisha Gelsimo ID No PRBE/011/13
Wara Gobe ID No PRBE/075/13
Submitted to: Wondwossen J. (PHD)

January 15, 2021

Arba Minch University
 Human resource accounting
INTRODUCTION
• To ensure growth and development of any organization, the efficiency of people must be
augmented in the right perspective. Without human resources the other resources cannot
be operationally effective Therefore, the efficient and effective utilization of inanimate
resources depends largely on the quality, caliber, skills, perception and character of the
people, that is, the human resources working in it. The term Human resource at macro
level indicates the sum of all the components such as skills, creative abilities, innovative
thinking, intuition, imagination, knowledge and experience possessed by all the people.
Development of the concept of Human Resource Accounting
 Human Resource Accounting” is the offshoot of various research studies conducted in the areas of accounting and
finance. It is an asset whose value gets appreciated over the period of time provided placed, applied and developed
in the right direction.
 Behavioral scientists initiated efforts to develop appropriate methodology for finding out the value of human
resource to the organization. They were against the conventional accounting practice for its failure to value the
human resource of an organization along with physical resources.
 The traditional concept suggested that expenditure on human resource is treated as a charge against revenue as it
does not create any physical asset.
 Cont’d...
“At present expenses incurred on any asset (as human resources) should be treated as capital expenditure as it
yields benefits which can be derived for a long period of time and could be measured in monetary terms.
The reasons why Human Resources Accounting has been receiving so much attention in the recent years.

• Firstly, there is genuine need for reliable and complete management of human resources.
• Secondly, a traditional framework of Accounting is in the process to include a much broader set of measurement than was possible in the past.

Historical Score Card of Human Resource Accounting:

• Sir William Petty was the pioneer in this direction. The first attempt to value the human beings in monetary terms
was made by him in 1691. Petty considered that labor was “the father of wealth‟ and it must be included in any
estimate of national wealth without fail. Further efforts were made by William Far in 1853, Earnest Engle in 1883.
The real work started only when behavioral scientists vehemently criticized the conventional accounting practice of
not valuing the human resources along with other resources.
• As a result, accountants and economists realized the fact that an appropriate methodology has to be
developed for finding the cost and value of the people to the organization. For a long period of time, a
number of experts have worked omit and produced certain models for evaluating human resources.
The important among them are Shultz, Flamholtz, Lav and Schwartz, and Kennath Sinclare. Human
Resource Accounting was first started with simple measures of trying to convert output data into
contributions.
 Cont’d...

According to Likert's model, human variables can be divided into three categories:
o 1. Causal variables; 2) Intervening variables 3) End-result variables.
Historically , in 1967 HRA procedures developed by RG Batty Corporation of Columbus their annual report
detailed the inauguration of the company to enable them to report accurate estimates of the worth of the
organization's human assets. Accumulated costs under the categories namely recruiting and acquisition; formal
training and familiarization; informal training and familiarization; experience; and development were accounted.

Costs for the expected working lives of individuals (or sometimes shorter periods) were amortized,
and unamortized costs (for example, when an individual left the company) were written off. That is,
today, known as the Historical Cost Approach to employee valuation. Improvement over the years
has helped evolve other bases of valuation, which have been providing supplemental information .
 Meaning and Definition of Human Resource Accounting

The American Accounting Society Committee on Human Resource Accounting

defines it as follows
“Human Resource Accounting is the process of identifying and measuring data about
human resources and communicating this information to interested parties.”
In simple terms, it is an extension of the accounting principles of matching costs and
revenues and of organizing data to communicate relevant information in financial terms.
Mr. Woodruff Jr. Vice President of R. G. Batty Corporation defines it as follows:
“Human Resource Accounting is an attempt to identify and report investments made in
human resources of an organization that are presently not accounted for in conventional
accounting practice.
M.N. Baker defines Human Resource Accounting as follows: “Human resource
accounting is the term applied by the accountancy profession to quantify the cost and
value of employees to their employing organization“
 Cont’d...

• Another management consultant Stephen Knauf has defined HRA as:

"The measurement of quantification of human organization inputs such as
recruitment, training, experience and commitment “Thus, HAR may be defined
as, “a process of accounting which identifies, quantifies and measures human
resources for the use of management to cope up with the changes in its
quantum and quality so that equilibrium could be achieved in between the
required resources and the provided human resources”
Generally Human Resource Accounting is the measurement of the cost and
value of people to the organization. It involves measuring costs incurred by the
organizations to recruit, select, hire, train and develop employees and judge their
economic value to the organization.
 This definition brings out the following important characteristic features
of human resource accounting:

This definition brings out the following important characteristic features of human resource accounting:
• Valuation of human resources
• Recording the valuation in the books of account
• Disclosure of the information in the financial statements of the business

Objectives of Human Resources Accounting

• The aim of HRA is to depict the potential of HR in monetary terms, while casting the organization's financial
statements. The concept can be examined from two dimensions:
I. The investment in HR;
II. The value of HR. Putting in a capsule the main objectives of HRA are to
• Improve management by analyzing investment in HR
• Consider people as its asset
• Attract and retain qualified people
• Profile the organization in financial terms.
 There following summarize the most important objectives and purposes
of HRA:

• It provides companies with information about the cost and value of its human resources.
• It provides companies with a guide for human resource decisions about acquiring,
allocating, developing, and maintaining human resources to attain cost-effectiveness.
• It motivates managers and decision makers to look at decisions through a human
resource point of view (Toulson & Dewe, 2004).
• It allows management personnel to monitor effectively the use of human resources.
• It provides a sound and effective basis of human asset control, that is, whether the asset
is appreciated, depleted or conserved.
• It helps in the development of management principles by classifying the financial
consequences of various practices (Sharma & Shukla, 2010).
 Why Human Resource Accounting?

Human Resource Accounting helps the management in the Employment, locating and utilization of human

resources.
It provides a basis for planning of physical assets vis-à-vis human resources.

It assists in evaluating the expenditure incurred for imparting further education and training in employees in

terms of the benefits derived by the firm.

It helps to identify the causes of high labour turnover at various levels and taking preventive measures to

contain it.
• It helps in understanding and assessing the inner strength of an organization and helps the
management to steer the company well through most adverse and unfavorable circumstances.
• It provides valuable information for persons interested in making long term investment in the
firm.
• It helps employees in improving their performance and bargaining power.
 Limitations of Human Resource Accounting:

 No proper clear-cut and specific procedure or guidelines for finding cost and

value of HR.
 The period of existence of human resource is uncertain.

 There is a fear that HRA may dehumanize and manipulate employees.

Tax laws do not recognize human beings as assets.

There is no universally accepted method of human asset valuation

 It is still know at the developmental stage

 Cont’d
 It lacks empirical evidence.
• As human resources are not capable of being owned, retained and utilized, unlike the physical
assets, there is problem for the management to treat them as assets in the strict sense.
 Another question is, on value being placed on human resources how should it be amortized. Is

the rate of amortization to be decreasing, constant or increasing? Should it be the same or

different for different categories of personnel?\

Investment in Human Resources

HRA system consists of two aspects namely:
• a) The investment made in human resources and
• b) The value of human resources
 Methods of Human Resource Accounting

 There are different approaches used as a basis for determining the monetary value of

human resources (Dawson, 1994):

 Present value of future earnings model;-, developed by Lev and Schwartz

in 1971, is used popularly by both public and private sector companies in

assessing the value of their human resources. This model is represented
by an equation
 Cont’d...

• 
1. Where , vT = T∑
VT=The value of an individual employee at T years old,
I(t)=The individual’s annul all earnings up to the retirement
T=Present age of the individual employee
R=discount rate
t = retirement age
Or alternatively, the value of human resources can be computed with the help of
annuity tables:
VT= Annual average earnings of an employee X present value of 1Re for n years
 Example:let assume that It can be best understood with the given details of an
employee in the organization; annual average earnings of an employee till the
retirement age birr.20,000, Age of retirement 60 year, cost of capital 10%, and
number of employees in the group 10 with Present age of the individual
employee fifty eight year .What is present value of future earning of employees?
Solution for the value of an individual employee at T years old
no of group =10

Br
Therefore, the value of human resources in the group of 10 employees is bir.347107.5 which
is derived by multiplying the present value of an employee with the group of employees.
 
 Original Cost model

• Brumment suggests that costs of training and development which are parts of

original costs should be capitalized. His argument is that training and

development are expected to have ongoing benefits to the employee and to the
organization and as such would provide future benefits over years. On the
other hand, he suggests that other costs associated with recruitment should be
expensed as the period costs. The original cost method has been
implemented by few companies like R. G. Batty. Others include Atlanta Braves, Flying
Tigers Corp., Upjohn Co., and Touche Ross & Co. (Paperman, 1977).
 Historic cost model
This method is one of the more popular methods because of its similarities to
normal accounting procedures, it calculates an employee‘s worth using the
total historic costs associated with obtaining an employee. This method
requires accruing the cost of the investment in the employee. One of the
problems with this method is that decisions must be made about what costs to
expense and what costs to capitalize. One way of deciding what to expense or
capitalize is to classify human resource costs as either training or educational.
With this approach, training cost would include anything associated with the
current job, and it would be expensed. Educational costs would be anything
associated to the preparation or advancement, and these costs would be
capitalized.
Replacement Cost model
Likert suggests that the cost of employee should be valued based on what the organization
would have to sacrifice to replace an employee if he/she leaves the organization. This
includes the cost attributable to the turnover of a present employee, as well as the costs of
acquiring and developing a replacement. It calculates an employee worth using the
replacement costs associated with obtaining an employee. It replace hiring new employees for
existing jobs, the cost of training new employees to the proper level, and the cost of moving employees to
new positions or out of the company.

Total Organizational model

 Dawson suggests that the total organizational model takes the value of the company and divides it
between the different inputs to the company, and then it divides the amount associated with labour
between the different clusters of employees in the company (Dawson, 1994).
 Bidding model: The managers in an organization determine the value by bidding for the human resources
that are in the organization. This approach suggests competitive bidding for scarce employees in an
organization i.e. opportunity cost of employees linked to scarcity.
 Economic Cost model And Stochastic Reward Valuation
model
• Economic Cost model: The economic cost model comes from the human capital theories. Economic
value refers to the appropriately discounted amount of net cash inflows generated by the human
resources of a firm over their economic service lives. Some authors refer to the economic value method
as the present value measuring technique or use the term in conjunction with the opportunity cost
approach (Dawson, 1994).

• Stochastic Reward Valuation model: The last approach is the most complex. It is the stochastic

rewards valuation models. This approach focuses on HRA value rather than HRA cost,
it calculates the value of an employee as the discounted sum of the values of the service
states that the individual will occupy during his/her career with the organization. The
stochastic rewards valuation model requires five different pieces of information
(Dawson, 1994):
 Chakra borty Model (1976)

Gross Profit per Employee

= Gross Profit
This model divided the employees
No. of Employees  II. Ratio Analysis of Human Resource
Net Profit per Employee = Cost of Fringe Benefits per Employee Accounting:
= Net Profit = Total cost of Fringe Benefits
Asset per Employee = Total Asset
No. of Employees No. of Employees
No. of Employees
Cost of Employment per Employee
Sales per Employee = Total Sales
Working Expenditure per Employee
= TCE process
No. of Employees
No. of Employees Employed in that particular
= Total Working Expenditure batch
No. of Employees Cost of Development per Employee Employee Productivity = Total
Average Salary per Employee
= Cost of Training and Development Production
= Total Cost of Salaries
No. of employees No. of Employees Trained No. of
Employees
 Advantages of Human Resource Accounting

• Better Manpower Planning

• Proper Utilization of Human Resources

• Designs Training and Development Programmers

• Formulates Better Personal Policies

• Motivates Employees

• Attracts Best Manpower

• Communicates Information to Investors

 Conclusion

• The traditional accounting practices simply ignored the value of human factors in the
organization and preferred to treat it as an expense and expendable factors. This
fundamentally lopsided attitude towards human resources goes against the interest of
the employees decisively. For instance, the cost of training incurred to update the skills
and knowledge of the employees were treated only as expenses and not as an investment.
Although human resource accounting is still in its infancy as far as its development is
concerned, there are a few approaches available to the study of human resource
accounting. However, none of these approaches has so far found universal acceptance,
because they have inbuilt contradictions, incompleteness or inability.

THANK YOU!!!