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Human Resource Accounting

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Contents
Introduction. Why HRA? Today HRA. Human Resource valuation models.

Cost approach.
Capitalization of historical cost model. Replacement cost model.

Economic value approach.

Lev and Schwartz model. Hekimian and Jones model. Flamholtz model.
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Introduction

In past few decades there has been a global transition from manufacturing to service based economics.

In

former

physical

assets

are

of

utmost

importance. Eg: plant, machinery, material etc.

In

latter knowledge and attitude of employees are total worth depends mainly on skill of its

of greater significance. Eg.: IT industry.

The

employees and services they render.

It

4/14/12 is imperative that the humans be recognized as

 HRA

is defined as a process of identifying

and measuring data about human resources and communicating this information to interested parties.
Companies

Act 1956 doesn't demand

furnishing of HRA related information in the financial statements of the company.

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WHY HRA?

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Today HRA

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MEASUREMENTS IN HRA

The biggest challenge in HRA is that of assigning monetary values to different

dimensions of HR costs, investments and the worth of employees.

The

two main approaches usually employed

for this are:

o

The cost approach which involves methods based on the costs incurred by the company, 4/14/12

THE COST APPROACH

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Types of cost models

Historical

cost model. cost model.

Replacement

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Historical cost of human resources

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Limitations
It

fails to provide reasonable value to human assets. It fails to estimate the number of years over which the capitalized expenditure is to be amortized is likely to be largely subjected. It is difficult to calculate the rate at which the total expenditure on human assets is to be amortized. Unlike fixed assets, the economic value of the human resource increases overtime with training and experience.
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Replacement Cost Model

The price that will have to be paid to replace an existing asset with a similar asset.

Eg: If any employee were to leave today, several cost of recruiting selection, hiring, placement, orientation and on job training
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Limitation
The

major drawback of this model is that it may not be always possible to find identical replacement of the existing human resource in actual practice.

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Economic Approach
The

economic value of human resources is

the present worth of the services that they are likely to render in future.
There

are four

methods

for calculating

economic value:
Lev and Schwartz model. Hekimian and Jones model. Flamholtz model. Jaggi and Lau model.
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Lev and Schwartz Model

This involves determining the value of human resources as the present value of estimated future earnings of the employees in the form of salaries and wages discounted by the rate of return in investment, which is actually cost of capital.

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Formula: Vx= I(t)/(1+r)^(t-r) Vx = human capital value of a person x years old. I(t)= persons annual earnings up to retirement. r = a discount rate specific to person.

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Limitations
expression calculate human capital value only after retirement. --So, they replaced I(t) with I*(t) {estimated future annual earnings}. Probability of death of an employee was ignored. --So, they introduced a death factor at the end.
This

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Hekimian and Jones model.

This

is also known as opportunity cost model. This uses opportunity cost that is the value of an employee in his alternative use as a basis for estimating the value of human resource. Opportunity cost is established by competitive bidding within the firm so that in effect, managers must bid for any scarce employee.
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Limitations
Situations

in which an employee bid for another employee is rarely found in real life. Does not take into account the employees who are not bid upon. Inclusion of scarce personnel in the asset base appears to be discriminatory to others and may lower the morale.

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Flamholtz Model
Flamholtz expressed his view that an individuals value to an organization is ascertained by the services he or she is expected to render to a firm. Formula:

E(S)= Si P(Si)
Si = quantity of services expected to be generated. P(Si) = probability that they will be available.

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Limitations:
It

is difficult to estimate probabilities of likely service roles of each employee. Determining the monetary equivalent of services is also difficult. It only works for individual service roles.

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Jaggi and Lau model

It

takes in to account the contributions of the individuals when they are taken as a group. model aims at calculating the present value of all existing employees in each grade and rank.

This

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Methodology
1. 2.

3.

4.

Ascertain the number of employees in each rank. Estimate the probability that an employee will be in his grade within the organization or terminated/promoted in the next period. Ascertain the economic value of an employee in a specified grade during each period of time. The present value of existing employees in each grade is obtained by multiplying the above three factors and applying an appropriate discount rate.
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Limitations
1.

This method ignores certain exceptional qualities of skilled employees. Performance of group may be affected by exit of an individual.

1.

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HRA in Infosys.
HRA in Infosys uses the Lev and Schwartz method to value Human Resource. According to this model the present value of future earning capacity of an employee, from the time of joining the organization till retirement was estimated. Infosys used this model based on the following assumption. An employees salary package included all benefits, whether direct or otherwise, earned both in India and in a foreign Nation. The additional earnings on the basis of age group were also taken into account.
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Method
1.

2.

3.

4.

All the employees of Infosys were divided into five groups, based on their average age .Each groups average compensation was calculated. Infosys also calculated the compensation of each employee at retirement by using an average rate of increment. The increments were based on industry standards, and the employees performance and productivity. Finally the total compensation of each group was calculated. This value was 4/14/12

Conclusion
It is still extremely difficult to determine the actual value of the human resource of the organization though the different methods and accounting techniques have already proposed for the human resource accounting. And the proposed have some limitations too. There is no standard proposed by any accounting standard committee for this regard. So there is no certain guideline for HRA. As a result any organization has the chance of manipulation the financial statement for the negligence of the accounting standard committees. But this concept is gaining importance day by day as 4/14/12

Thank You
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