HUMAN
RESOURCE
ACCOUNTING
Kamalpreet kaur
Assistant professor
GCCBA-42, Chandigarh
HRA: CONCEPT
• “The process of identifying and
measuring data about human resources
and communicating this information to
interested parties”.
• “Human Resource Accounting is basically
an information system that tells
management what changes are
occurring over time to the human
resources of the business. HRA also
involves accounting for investment in
people and their replacement costs, and
also the economic value of people in an
organization,”
Meaning of human resource
accounting
• Human Resources accounting, also known as
Human Asset Accounting, involved identifying,
measuring, capturing, tracking and analyzing the
potential of the human resources of a company
and communicating the resultant information to
the stakeholders of the company. It was a method
by which a cost was assigned to every employee
when recruited, and the value that the employee
would generate in the future. Human Resource
accounting reflected the potential of the human
resources of an organization in monetary terms, in
its financial statements.
Definitions of Human Resource
Accounting
AAA Definition:
“ The process of identifying and measuring data about human
resources and communicating this information to the interested
parties ”
Stephen Knauf (1983):
“ The measurement and quantification of human organizational
inputs such as recruiting, training, experience and commitment
”
Eric Flamholtz
“ Accounting for people as organizational resources. It is the
measurement of the cost and value of people for the
organization
”
Why HRA?
• It furnishes cost/value information for making
management decisions about acquiring, allocating,
developing, and maintaining human resources in order
to attain cost-effectiveness;
• 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.
Need for hra
HR Accounting is very much needed to provide effective & efficient
management within the organization.
* If there is any change in the structure of manpower, it is HRA which
provides information on it to the management.
* HRA provides qualitative information & also assess the cost incurred in
personnel.
* It gives a platform to the management by providing factors for better
decision-making for future investment.
* The return on Investment on human capital is best evaluated through
HRA.
* HRA communicates to the organization & public about the worth of
human resources & also its proper allocation within the organization.
* HR helps the management in developing principles by classifying the
financial consequences of the various practices.
Valuation Approaches of
Human Resource
Measurement is arbitrary and there are mainly 2
approaches;
• Cost based approaches
• Present Value of Future Earning
• Cost Based Approaches
1. Historical Cost Approach
2. Replacement Cost Approach
3. Opportunity Cost Approach
MEASUREMENTS IN HRA
APPROACH
COST
ECONOMIC
VALUE
MONETARY
MEASURES
NONMONETARY
MEASURES
COST APPROACH IN HRA
• The historical cost of human resources is the sacrifice
HISTORIC
that was made to acquire and develop the resource.
AL COST
OPPORTUNITY
COST
REPLACEM
ENT COST
• a calculation of what would have been the returns if
the money spent on HR was spent on something else
• the cost that would have to be incurred if present
employees are to be replaced.
Historical Cost Approach
• The cost of recruitment, selection, development
are all capitalized and amortized over the useful
life time of the employee. This amortization may
be dealt according to the situation.
• Benefits: Easy to operate, Conforms with the
matching principle, Similar to the treatment of
other fixed assets
• Shortcomings: Estimation of the useful life time
may not be easy, The value of humans are
generally increasing over time - but this method
gives a declining picture, This method doesn’t
actually measure the value but undermines it
Replacement Cost Approach
• The cost to replace the existing human resources
are estimated. All costs incurred to attain the
current level of competence of an existing
employee. Created from scratch
• Benefits: Is present/ future oriented
• Disadvantage: Not always possible to obtain such
a measure (identical replacement), It is hence
subjective
Opportunity Cost Approach
Is based on economic concept which overcomes the
deficiency in replacement cost app. Measured
through a competitive bidding process within the
entity.
Steps:
1. The entity is divided in to investment centers
2. The investment centre managers bid for scarce
employees they need within the entity
3. The maximum bid price may obtained by the
capitalization of the excess profits generated by
employee
ECONOMIC VALUE APPROACH
value of an individual is the present worth of the
services that he is likely to render to the
organization in future
PRESENT VALUE
OF FUTURE
EARNINGS
COMPETITIVE
BIDDING
MODEL

an internal market for labor is developed and
the value of the employees is determined by
the managers. Managers bid against each
other for human resources already available
within the organization. The highest bidder
‘wins’ the resource.
IND.VALUE TO
ORGANIZAT
ION

This method helps in determining what an
employee’s future contribution is worth today.
Monetary value based
approaches:
• i) The Lev and Schwartz Model
• ii) The Eric Flamholtz Model
• iii) Morse Model
The Lev and Schwartz
Model(1971)
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 upto 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.
5. The following formula has been suggested for calculating the value of an
employee according to this model –
CONT..
Vr = ÓTt= I(t)/(1+R)t-r,
Where, V = the value of an individual “r“years
old.
I(t) = the individual’s annual earnings upto the
retirement
t = retirement age
r = present age of the employee
R = discount rate
Flamholtz Model (Reward
Valuation method) (1971).
This is an improvement on ‘present value of future earnings
model’ since it takes into consideration the possibility or
probability of an employee’s movement from one role to
another in his career and also of his leaving the firm earlier,
that his death or retirement.
Cont..
The model suggests a five steps approach for assessing the value of an individual to the
organisation :
1. Forecasting the period will remain in the organisation, i.e.,
his expected service life;
2. Identifying the services states, i.e., the roles that the might
occupy including, of course, the time at which he will leave
organisation;
3. Estimating the value derived by the organisation when a
person occupies a particular position for a specified time
period;
4. Estimation of the probability of occupying each possible
mutually exclusive state at specified future times; and
5. Discounting the value at a predetermined rate to get the
present value of human resources.
MORSE MODEL (1973)
Under it the value of human resources is equivalent to the present
value of the net benefits derived by the enterprise from the service
of its employees. The following steps are involved under this
approach:
1. The gross value of the services to be rendered in future by
the employees in their individual and collective capacity.
2. The value of direct and indirect future payments to the
employees is determined.
3. The excess of the value of future human resources (as per
(1) above) over the value of future payments (as per (2)
above) is ascertained. This represents the net benefit to the
enterprise because of human resources.
Non- monetary value based approaches:
i) Likert Model
ii) Ogan Model
LIKERT’S MODEL (1960)
Rensis Likert in the 1960s was the first to research in HR and emphasized
the importance of strong pressures on the HR's qualitative variables and
on its benefits in the long-run. According to Likert's model, human variable
scan be divided into three categories:
• (i) causal variables;
• (ii) intervening variables; and
• (iii) end-result variables.
The interaction between the causal and intervening
variables affect the end-result variables by way of job satisfaction,costs,
productivity and earnings
OGAN’S MODEL
Pekin Ogan (1976) has given Net benefit model. This, as a matter of fact, is
an extension of “net benefit approach” as suggested by Morse.
According to this approach, the certainty with which the net benefits in future
will accrue should also be taken into account, while determining the value of
human resources. The approach requires determination of the following:
• Net benefit from each employee.
• Certainty factor at which the benefits will be available.
• The net benefits from all employees multiplied by their certainty
factor will give certainty-equivalent net benefits. This will be the
value of human resources of the organization.
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
Limitations
 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
Hra in india
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.