Human Resource Accounting

1. HUMAN RESOURCE ACCOUNTING
Course: MBA SEM 2
Subject: Human Resource Management
Unit: 4

2. DEFINITION OF HRA
 Human Resource Accounting is, “ The process of identifying
and measuring data about human resource and identifying
and measuring data about human resource and
communicating this information to interested parties”
-- AMERICAN ACCOUNTING ASSOCIATION COMMITTEE

3. HISTORICAL DEVELOPMENT OF H.R.ACCOUNTING
According to Eric G Falmholtz
• FIRST STAGE (1960-1966)– –
Beginning of academic interest in the area of HRA
• SECOND STAGE (1966-1971)SECOND STAGE (1966-1971)– –
The focus here was more on developing and validating different models
of HRA
• THIRD STAGE (1971-1976) –
This period was marked by a widespread interest in the field of HRA.
R.G.Barry experiments contributed substantially during this stage.
• FOURTH STAGE (1976-1980) – FOURTH STAGE (1976-1980) –
This was the period of decline in the area of HRA
• FIFTH STAGE (1980 onwards ) –
There was a sudden renewal of interest in the field of HRA

4. OBJECTIVES OF HRA
• Provide cost value information about acquiring,
developing , allocating and maintaining HR.
• Enable management to effectively monitor the use of HR.
• Find whether human asset is appreciating
or depreciating over a period of time.
• Assist in the development of effective
management practices. practices.
• To motivate individual persons in the organization to
increase their worth by training .
• HR by giving valuable information.

5. USES OF HRA
According to Grojer and Johansson-
• As a political tool, used to demonstrate mismanagement
of human resource.
• As a pedagogical instrument for analyzing and structuring .
• As a decision making aid to ensure that decision on HR are
more rational from the management point of view.

6. METHODS OF HRA
 Historical cost method
 Replacement cost method
 Opportunity cost method
 Capitalization of salary method
 Economic valuation method
 Return on efforts employed method
 Adjusted discounted future wages method
 Reward valuation method
 Standard Cost Method
 Currant Purchasing Power Method
6

7. 1. HISTORICAL COST METHOD:-
 This method developed by Brummet,
Flamholtz and Pyle. According to this
method, the actual cost incurred on
recruiting, selecting, training, placing and
developing the human resources of an
enterprise are capitalized and written off
over the expected useful life of human
resources.
 The procedure followed for human resource
asset is the same as that of other physical
asset. 7

8. 2. REPLACEMENT COST METHOD:-
 This method was developed by Rensis
Likert and Eric G. Flamholtz.
 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 assumptions as to
what it will cost the concern if existing
human resources are required to be
replaced with other persons of equivalent
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9. 3. OPPORTUNITY COST METHOD:-
 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
employee’s value in alternative uses.
 Accordingly the value of an employee is
based on his opportunity cost-the rice other
divisions are willing to pay for the services
of an employee working in another division
of an organization.
9

10. 4. CAPITALIZATION OF SALARY METHOD:-
 The advocates of this method Baruch Lev and
Aba Schwartz have used the concept of human
resources in terms of economic value in this
model.
 According to them 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 the10

11. 5. ECONOMIC VALUATION METHOD:-
 Economic valuation method considers the
present worth of the employee’s future
service expected to be derived during their
stay with the organization as the value of
firm’s human resource.
 Although there are some resemblances
between earlier model i.e., capitalization of
salary method and this model, yet they differ
with each other.
 The economic valuation model recommends
the capitalization. 11

12. 6. RETURN ON EFFORTS EMPLOYED METHOD:-
 This method measures the value of the
firm’s 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. 12

13.  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.
13
7. ADJUSTED DISCOUNTED FUTURE WAGES METHOD:-

14.  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
employee’s 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 author has identified the major variables
which determine the value of an individual to
a firm.
14
8. REWARD VALUATION METHOD:-

15. 9. 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.
15

16. 10. CURRENT PURCHASING POWER METHOD :-
 Under it, instead of taking the
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.
16

17. ADVANTAGES OF HRA
• Foresee the changes.
• Provides different methods of testing.
• Increase productivity.
• Brings high return.
• Helps individual employee to aspire.
• Provides scope for advancement.
• Throws light on the strength and weaknesses of the existing
workforce.
• Helps potential investor judge a company.

18. LIMITATIONS OF HR ACCOUNTING
• Not easy to value human asset.
• Results in dehumanizing human resource.
• No evidence.
• HR is full of measurement problem.
• Employees and Unions may not like the ideas .
• Unrealistic.
• Lack of Empirical evidence.

19.  Though Human Resources Accounting was introduced way back in the
1980s, it started gaining popularity in India after it was adopted and
popularized by NLC.
 Even though the situation prevails, yet, a growing trend towards the
measurement and reporting of human resources particularly in public
sector is noticeable during the past few years.
 BHEL, Cement Corporation of India, ONGC, Engineers India Ltd.,
National Thermal Corporation, Minerals and Metals Trading Corporation,
Madras Refineries, Oil India Ltd., Associated Cement Companies, SPIC,
Metallurgical and Engineering consultants India Limited, Cochin
Refineries Ltd. Etc. are some of the organizations, which have started
disclosing some valuable information regarding human resources in their
financial statements.
 It is needless to mention here that, the importance of human resources
in business organization as productive resources was by and large
ignored by the accountants until two decades ago.

20. Bibliography
• http://www.whatishumanresource.com
• http://www.mbaofficial.com
• Human Resource and Personnel
Management- K. Aswathappa, Tata
McGraw Hill