HR Accounting Models

1. Valuation of
Human Assets
By Abhinanda Bhattacharya

2. Human Resource Accounting
Models
• #1 – The Lev and Schwartz Model.
• #2 – The Eric Flamholtz Model.
• #3 – Morse Model.
• #4 – Likert Model.
• #5 – Organ's Model.

3. The Lev
and
Schwartz
Model

4. Assumptions and Process
• All employees are classified into
specific groups according to age,
experience, and skill.
• Average annual earnings are
determined for various ranges of age.
• The total earnings each group will get
up to retirement age are calculated.
• The total earnings calculated as above
are discounted at the rate of the cost of
capital.
• The value thus arrived at will be the
value of human resources/assets.

5. Limitations
1. This method does not indicate the accounting
treatment of human resources.
2. This method only considers wages and
salaries, but wages and salaries are not only
the costs associated with the employees. Other
costs are associated with the employees.
3. The model ignores the possibility and
probability that an individual may leave an
organization for reasons other than death or
retirement. The model’s expected value of
human capital measures a person’s human
capital’s expected ‘conditional value.’ The
implicit condition is that the person will remain
in an organization until death or retirement.
This assumption is not practical.

6. Eric Flamholtz
Model –
Reward
Valuation
Method
• Flamholtz (1996) developed this
model.
• This is an improvement on the
present value of the future earnings
model since it considers the
possibility or probability of an
employee’s movement from one
role to another in his career and of
leaving the firm earlier, that is,
death or retirement.
• The model suggests a five-step
approach for assessing the value
of an individual to the organization

7. The 5 steps
Forecasting the period will
remain in the organization,
i.e., his expected service life;
1
Identifying the services
states, i.e., the roles that
they might occupy,
including, of course, the
time at which he will leave
the organization;
2
Estimating the value derived
by the organization when a
person occupies a particular
position for a specified
period;
3
Estimating the probability of
occupying each possible
mutually exclusive state at
specified future times; and
4
Discounting the value at a
predetermined rate to get
the present value of human
resources.
5

8. Limitations
The model suffers from nearly all the drawbacks from which the present value
of future earnings models suffers.
Moreover, It is difficult to obtain reliable data for determining the value
derived by an organization during the period a person occupies a particular
position.
The model also ignores the fact that individuals operating in a group may have
a higher value for the organization as compared to individuals working
independently.

9. Morse Model – Net Benefit Model
Under this model, the value of human resources is equivalent to the present value of the
enterprise’s net benefits from its employees’ service. The following steps are involved in this
approach:
The gross value of the services to be rendered by the employees in their individual and
collective capacity.
The value of direct and indirect future payments to the employees is determined.
The excess of the value of future human resources over the value of future payments is
ascertained. This represents the net benefit to the enterprise because of human resources.

10. Likert’s Model
• Rensis Likert, in the 1960s, was the first to research HRA(Human Resource
Accounting) and emphasized the importance of strong pressures on HR’s qualitative
variables and its benefits in the long run.
• The Likert Model is a non-monetary value-based model. According to Likert’s model, the
human variable can be divided into three categories:
• Causal variables; a change in one variable (known as the independent variable)
causes a change in the other (the dependent variable).
• Intervening variables; explains the process through which two variables are related
• End-result variables. dependent variables that reflect achievements of an
organization
• The interaction between the causal and intervening variables affects the end-result
variables through job satisfaction, costs, productivity, and earnings.

11. Ogan’s Model - (Certainity
Equivalent Net Benefit Model)
• Pekin Ogan (1976) was the pioneer of the Net benefit
model. This is an extension of the “net benefit
approach,” as suggested by Morse.
• According to this approach, the certainty with which the
net benefits in the future will accrue should also be
considered while determining the value of human
resources.
• The approach requires the determination of the
following:
• Net benefit from each employee.
• Certain factors at which the benefits will be
available.
• The net benefits from all employees multiplied by
their certainty factor will give certainty-equivalent net