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b. Measuring the costs of organizational input such as recruiting , selecting, hiring, training
and developing of human assets;
It is primarily an information system, which informs the management about the changes that are
taking place in the human resource of an organization.
In other words, Human Resource Accounting is the process of assigning, budgeting and reporting
the cost invested for employees towards their recruitment, training them, payment of salaries &
other benefits paid and in return valuing their contribution to organization towards its
profitability.
Human resource costs include recruitment, selection, hiring and placement, orientation, training
and development costs.
Need of HRA
The need for human asset valuation arose as a result of growing concern for human relations
management in the industry.
Behavioral scientists concerned with management of organizations pointed out the following
reasons for HRA:
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2. The expenses related to the human organization are charged to current revenue instead of
being treated as investments, to be amortized over a period of time, with the result that
magnitude of net income is significantly distorted. This makes the assessment of firm and
inter-firm comparison difficult.
3. The productivity and profitability of a firm largely depends on the contribution of human
assets. Two firms having identical physical assets and operating in the same market may
have different returns due to differences in human assets. If the value of human assets is
ignored, the total valuation of the firm becomes difficult.
4. If the value of human resources is not duly reported in profit and loss account and
balance sheet, the important act of management on human assets cannot be perceived.
5. Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting. All expenses on human resources are to be
treated as investments, since the benefits are accrued over a period of time.
Objectives of HRA
1. Providing cost value information about acquiring, developing, allocating and maintaining
human resources.
Assumptions of HRA
2. The benefits associated with both conventional assets and human resources have value to
the organization because these benefits contribute in some way to the accomplishment of
the organizational goals.
3. The acquisition of human resources typically involves an economic cost and the benefits
associated with such resources can personally be expected to contribute to the economic
effectiveness. It follows, therefore, that these benefits are essentially economic in nature
and are subject to measurement in financial terms.
4. Since the usual accounting definition of an asset involves the right to receive economic
benefits in the future, human assets are appropriately classified as accounting assets.
5. It is theoretically possible to identify and measure human resource cost and benefits
within an organization.
6. Information with respect to human resource costs and benefits should be useful in the
process of planning, controlling, evaluating and predicting organizational performance.
Advantages of HRA
1. The system of HRA discloses the value of human resources, which helps in proper
interpretation of return on capital employed.
2. It facilitates human resource planning by highlighting the strength and weakness in the
workforce.
5. It helps in efficient utilization of human resources and understanding the evil effects of
labor unrest on the quality of human resources.
6. This system can increase productivity because the human talent, devotion, and skills are
considered valuable assets, which can boost the morale of the employees.
7. It can assist the management for implementing best methods of wages and salary
administration.
8. HRA provides valuable information for present and potential investors. Investors and
other users of financial statements want to know the value of firms human assets. HRA
provides a more accurate accounting of return on the total resources employed in a firm.
Limitations of HRA
1. There are no specific and clear cut guidelines for 'cost' and 'value' of human resources of
an organization. The present valuation systems have many limitations.
3. The human resource accounting may lead to the dehumanization in the organization.
4. The valuation methods have certain disadvantages as well as advantages; therefore, there
is always a bone of contention among the firms that which method is an ideal one.
6. There is a constant fear of opposition from the trade unions as placing a value on
employees would make them claim rewards and compensations based on such valuations.
7. In spite of all its significance and necessity, the Tax Laws dont recognize human beings
as assets.
The cost approach which involves methods based on the costs incurred by the company, with
regard to an employee.
The economic value approach which includes methods based on the economic value of the
human resources and their contribution to the companys gains. This approach looks at human
resources as assets and tries to identify the stream of benefits flowing from the asset.
Expense model
This method measures the organizations investment in employees using the five parameters:
recruiting, acquisition, formal training and familiarization, informal training and informal
familiarization, and experience and development. This model suggests that instead of charging
the costs to profit and loss statement (p&l) accounting, it should be capitalized in the balance
sheet. The process of giving a status of asset to the expenditure item is called capitalization.
In this approach, actual cost incurred on recruiting, hiring, training and development the human
resources of the organization are capitalized and amortized over the expected useful life of the
human resources. Thus a proper recording of the expenditure made on hiring, selecting, training
and developing the employees is maintained and a proportion of it is written off to the income of
the next few years during which human resources will provide service. If the human assets are
liquidated prematurely the whole of the amount not written off is charged to the income of the
year in which such liquidation takes place. If the useful life is recognized to be longer than
originally expected, revisions are effected in the amortization schedule.
The historical cost of human resources is very similar to the book value of the other physical
assets. When an employee is recruited by a firm, he is employed with the obvious expectation
that the returns from him will far exceed the cost involved in selecting, developing and training
in the same manner as the value of fixed assets is increased by making additions to them. Such
additional costs incurred in training and developing is also capitalized and are amortized over the
remaining life. The unexpired value is investment in human assets.
Advantages
Limitation
It is very difficult to estimate the number of years an employee will be with the firm.
It is difficult to determine the number of years over which the effect of investment on
employees will be realized.
The extent to which the employee will utilize the knowledge acquired is also subjectively
estimated.
This approach measures the cost of replacing an employee. Human resources of an organization
are to be valued on the assumption that a new similar organization has to be created from scratch
and what would be the cost to the firm if the existing resources were required to be replaced with
other persons of equivalent talents and experience. It takes into consideration all cost involved in
recruiting, hiring, training and developing the replacement to the present level of proficiency and
familiarity with the organization.
Advantages
This approach is more realistic as it incorporates the current value of companys human
resources in its financial statements prepared at the end of the year.
This method has the advantage of adjusting the human value of price trends in the
economy and thereby provides more realistic value in inflationary times.
It has the advantage of present-oriented.
Limitation
This method does not reflect the knowledge, competence and loyalties concerning an
organization that an individual can build over time.
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.
Under it, instead of taking their 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.
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 employees value in alternative uses. Accordingly the value of an employee is based on his
opportunity cost-the price other divisions are willing to pay for the services of an employee
working in another division of an organization. Thus, the value of an employee would be high if
he has several alternative uses for employment in the various division of an enterprise. This
brings to light an important fact that the opportunity cost is linked with scarcity. This method
determines the value of human resources by establishing competitive bidding within an
organization.
The soundness of the valuation depends wholly on the information, judgement, and impartiality
of the bidder.
Advantages
It provides a quantitative base for planning, evaluating and developing human resources
of an organization. Development in human resource can easily be made on the basis of
the information of this method.
Limitations
This method fails to accommodate the possibility of hiring of employees of similar efficiency,
experience and skill.
It excludes from its purview those members of the firms human resources who are not
scarce and, therefore, are not being bid by other divisions of the organization.
The application of this method is doubtful unless the alternative uses of an employees
service available in an organization are traced out.
Lev and Schwartz (1971) proposed an economic valuation of employees based on the present
value of future earnings, adjusted for the probability of employees death/separation/retirement.
This method helps in determining what an employees future contribution is worth today.
According to this model 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 the present value of future earnings of homogeneous group of employees.
c. Calculation of the present value of the total earnings of each class of employees with the
help of an appropriate discount rate.
Vr={T E(t)}/{t-r(i-r)}
Values are arrived at on the basis of average earnings for each category of employees. This
model has introduced economic value concept of HRA.
Advantages
Human capital calculated in this manner is useful since comparison with non-human
capital will give an idea about the degree of labor intensiveness.
Depending on the rate of growth in human capital, it can be determine that whether
organization has an ageing labor force or a younger labor force.
Limitations
The discount rate to be used cannot be calculated with a high degree of objectivity.
The basic assumption of the model that an employee will stay with an organization until
he retires does not generally hold true.
According to this model, the value of human capital embodied in a person who is y years old, is
the present value of his/her future earnings from employment and can be calculated by using the
following formula:
E(Vy) = Py(t+1) I(T)/(I+R)t-y
T=Y Y
Advantages
If employees leave enterprise on account of the reasons other than death and retirement,
then such possibilities are also considered in this model.
This model is regarded better, than Lev and Schwartz model due to above two types of
inclusion in this model.
Limitation
Estimation of the probabilities for each employees occupying various positions and
valuation of contribution of services from all these positions is not an easy task.
To estimate exit probabilities and changes from one position to another is an expensive
process.
It is also difficult to find out valid data about the value of expected to be rendered service
by an employee.
The measure is an objective one because it uses widely based statistics such as census
income return and mortality tables.
The measure assigns more weight to averages than to the value of any specific group or
individual.
In the context of his model the assessment of employees value involves the following steps:
b. Identification of set of service states (roles) that an employee may occupy during his
service life;
d. Estimating the probability that a person will occupy at possible mutually exclusive
service state at specified future times;
e. Determining the total value of the services derived by the organization from its all
employees;
Advantages
It is the most scientific model as it demonstrates the impact of the concept of human asset
upon the management of human resources.
It is matured model as it takes into consideration the employees withdrawal from the
organization earlier than death or retirement.
Limitations
This method does not indicate the method of estimating the future compensation flows of
the employees.
a. Estimation of wages and salaries to different levels of employees for succeeding five
years.
b. Calculation of the present value of the wage and salary payments at the rate of return
which is considered normal in the industry.
c. Determination of an average efficiency ratio for a specific period, usually the previous
five years.
d. Calculation of the present value of future services of the firms human resources. This is
worked out by the firms multiplying efficiency ratio.
1. If Efficiency Ratio = 1: The firm's average rate of return equals the rate of return of the
economy. It means that the value of human resource is at par with the industry.
2. If Efficiency Ratio > 1: The firm's return is higher than the normal earnings. The value of
the human resource is more than the industrial average.
3. If Efficiency Ratio < 1: The firm's return is lower than the normal earnings. The value of
the human resource is less than the industrial average.
Advantages
Limitations
This method is based on the assumption that there is no direct relationship between costs
incurred on an individual and his value to the organization at any particular point of time. This is
because motivation, attitude and working environment affect the value of an individual. Under
this method, organizational employees are divided into four categories: top management, middle
management, supervisory management and operative or clerical employees. Wages and salary
bill for each category is multiplied is multiplied with an appropriate multiplier to calculate the
total value for each. Multiplier is a means for relating the personal values of the employees to the
total assets value of the organization. Higher multiplier should be checked for consistency with
the total value of the business as a whole. if the value of human assets is greater or less than the
goodwill, multiplier is inaccurate and should be adjusted.
Expense model
According to Mirvis and Mac (1976), this model focuses on attaching dollar estimates to the
behavioral outcomes produced by working in an organization. Criteria such as absenteeism,
turnover, and job performance are measured using traditional organizational tools, and then costs
are estimated for each criterion. For example, in costing labor turnover, dollar figures are
attached to separation costs, replacement costs, and training costs.
This method measures the value of the firms 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:
Advantages
Limitation
Management finds it difficult to measure and express the individual efforts in monetary
value.
The measurement procedure of individual efforts differs from firm to firm and, therefore,
there is no uniform and widely accepted procedure for it.
This model prescribes the Human Resource Accounting approach for two categories of
employees:
Employees, who are at strategic, key decision-making positions such as MD, CEO (Top
Executives)
Model arrives at the value of human resources as sum of below-mentioned three parts:
Limitations
Lev and Schwartz valuation principles have been used at one point of time, so this model
contains a weakness from the Lev and Schwartz model.
Ravindra Tiwari has prescribed another approach to value human resources at the time of annual
appraisal exercise, which suggests valuation of human resources on different appraisal
parameters.
Abstract
Human is the core factor and which is required to be recognized prior to any other 'M's But
till now an urgent need based modification is required while identifying and measuring data
about human resources. In this paper my objective is to identify the extensive use of Lev &
Schwartz model of Human resource accounting, in spite of several criticized from various
sides regarding its applicability. Further more, it also portrays the applicability in wide
variety of organization of such model (some pubic sector units and IT based sector).
Human is the buzzword in the modern knowledge based society. It is the most vital input on
which the success & failure of the organization very much depend upon. Starting from the
classical economist to modern human capital economist such development in considered to
be a continuous process.
It is one of the most important 'M' associated, which is considered while taken care of 4M's
associated with any organization and they are money machines, materials and men. But the
most interesting thing is that the first three are recognized and find a place in the assets
side of the Balance sheet of the organization. But in case of fourth one ambiguity prevails
among the accountant. In spite of its usefulness has been acclaimed is various literature
over the decades but its application still remain a suspectable issue, the IASB and the ASB
in different countries have not been able to formulate any specific accounting standard for
measurement & reporting of such valuable elements.
It first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public enterprise,
during the financial year 1972-73. Later it was also adopted by other leading public and
private sector Organization in the subsequent years. Some of them are Hindustan Machine
Tools Ltd.(HMTL). Oil and Natural Gas Corporation Ltd.(ONGC), NTPC, Cochin Refineries Ltd.
(CRL), Madras Refineries Ltd.,(MRL), Associated Cement Company Ltd.(ACC) and Infosys
Technologies Ltd.(ITL).
However, adaptability of various model (mainly Lev and Schwartz model, Flamholtz model
and Jaggi and Lev model) and discount rate fixation and disclosure pattern ie. either age
wise, skill wise etc in BHEL, SAIL, MMTC (Minerals & Metals Trading Corporation Of India
Ltd.) HMTL, NTP make it clear, that there has been no uniformity among Indian enterprises
regarding HRA disclosure.
Meaning Of Human Resource Accounting:
HRA has been defined by American Accounting Association's committee "HRA is the
process of identifying & measuring data about human resources & communicating this
information to interested parties". Stephen knauf defined HRA as "The measurement &
quantification of human organizational inputs such as recruiting, training,
experience & commitment."
Hence, it can be said that, it is the process of developing financial assessment for people
within organization & society & monitoring of these assessment through time, it deals with.
Although HR valuation has important implication for external financial reporting, in the
contemporary economic scenario valuing HR has been greater significance for internal HRM
decision.
Problem Statement:
Understanding the way of valuation of human resources by using Lev & Schwartz model
and how valuation of such asset are related with the other financial variables for financial
reporting purpose.
Research Objectives:
i) To asses the way of presenting HRA information in the financial statement by selected
companies
ii) To identify HRA methods and models (mainly the extensive use of Lev & Schwartz
model) which are used to arrive at human resource value.
iii) How human resource are related with the other accounting variables for the purpose of
human financial reporting in selected companies.
Source: Secondary
Source: Secondary
Terminology used:
Many models have been created to value human capital. Some are based on historic costs
while some are based on future earnings. But each has its own limitations and one model
has proved to be more valid than other. Although the Lev and Schwartz model has been
the most widely use model for its ease of use & convenience.
Under this model, the following steps are adopted to determine HR Value.
i) Classification of the entire labour force into certain homogeneous groups like skilled,
unskilled, semiskilled etc. and in accordance with different classed and age wise.eg. In
Infosys the classification is based on software professionals & support staff etc.
ii) Construction of average earning stream for each group.eg. At Infosys Incremental
earnings based on group/ age have been considered.
iii) Discounting the average earnings at a predetermined rate in order to get present value
of human resource's of each group.
iv) Aggregation of the present value of different groups which represent the capitalized
future earnings of the concern as a whole,
1] It is essentially an input measure .It ignores the output i.e. productivity of employees.
3] The training expenses incurred by the company on its employees are not considered.
Conclusion
The conceptual thinking about valuation human resources is still in a developing stage. No
model of HR accounting is accepted by the accounting bodies all over the world. However,
still we find some application of Lev & Schwartz model is most public sector units and IT
based sectors. In knowledge based sectors where human resources are considered to be the
key elements for monitoring the business activities to attend their goals successfully, may
not overlooked this side. Hence, considering the great significance of HRA proper initiation
should be taken by the government along with that other professional & accounting bodies
both at the national & international levels for the measurement & reporting of such valuable
assets.