Unit- 2 Human resource Accounting.pptx

Mr. Vishwanath Bhanuse
Teaching Assistant,
Dept. of Studies in Commerce,
Rani Channamma University P.G Center,
Jamkhandi

Human: refers to the skilled workforce in an organization.
Resource: refers to limited availability or scarce.
Human resources is the set of people who make up
the workforce of an organization, business sector, industry,
or economy. A narrower concept is human capital, the
knowledge and skills which the individuals command.
Similar terms include manpower, labor, personnel,
associates or simply people.

Accounting is the processor keeping the accounting
books of the financial transactions of the company. The
accountants summarize the transactions in the form of
journal entries. These entries are used in bookkeeping.
The books of accounts are prepared by the accountants
as per the regulation of the auditors and various
regulating bodies. The accountants might follow the
Generally Accepted Accounting Principles (GAAP) or
the IFRS (International Financial Reporting Standards)
principles

Human Resource Accounting (HRA) is a new branch of accounting. It is based on the
traditional concept that all expenditure on human capital formation is treated as a charge
against the revenue of the period as it does not create any physical asset. But now a days
this concept has changed and the cost incurred on any asset (as human resources) should
be capitalized as it yields benefits measurable in monetary terms.
Human resource accounting means accounting for people as the organizational
resources. It is the measurement of the cost and value of people to organizations. It
involves measuring costs incurred by private firm and public sectors to recruit, select,
hire, train and develop employees and judge their economic value to the organization.

“Human Resource Accounting is the process of identifying and measuring data about human
resources and communicating this information to interested parties.” - American Accounting
Society Committee on HRA
“Human Resource Accounting is an attempt to identify and report investments made in human
resources of an organisation that are presently not accounted for in conventional accounting practice.
Basically it is an information system that tells the management what changes over time are occurring
to the human resource in the business.” - Woodruff
“A term used to describe a variety of proposals that seek to report and emphasize the importance of
human resources – knowledgeable, trained and loyal employees in a company earning process and
total assets.” - Davidson and Roman L Weel
“Human resource accounting is the measurement of the cost and value of the people for the
organisation.” - Eric Flamholtz of university of California, Los Angeles

 Formulating Policies and plans for human resources;
 Decisions regarding cost and benefits from human resources;
 Determining the training and development cost;
 Determine or ensure proper utilization of resources.
 Determine the value of human resources and benefits from it.
 Aid to top management regarding cost reduction and planning
programs.
 Determining the value of critical employees and benefit from it.

The concept of recognizing human being as an asset is an old one. The Indian history has evidences for this
as Emperor Akbar gave importance to the nine jewels (courtiers). The names of freedom fighters like Shri
Moti Lal Nehru, Mahatma Gandhi, Sardar Vallabh Bhai Patel, Pandit Jawahar Lal Nehru, Subash Chander
Bose etc. cannot be forgotten in the history of freedom movement of India. But no one made efforts to
assign any monetary value to such individuals in the Balance Sheet of the nation.
William Petty (in 1991) made the first attempt to value the human beings in monetary terms. He was of the
opinion that labour was the father of wealth and it must be taken into consideration while making an
estimate of wealth. Efforts were further made by William Far (1853) and Earnest Engel (1883) in this
connection.
The real work was started by behavioural scientists from 1960 onward. The notable experts were Shultz
(1960), William Pyle (1967), Flam Holtz (1971, 1972, 1975), Morese (1973), Jaggi and Lav (1974),
Kenneth Sinclare (1978), N. Dasgupta (1978) and Dr. Rao (1983), etc. who developed appropriate
methodology and procedures for finding out the cost and value of the people to the organisation.

 Information of manpower planning- It provides useful information about the cost and value of the
human resource. Which helps in manpower planning.
 Information for making personnel policies- Human resource accounting provides useful
information that helps to create and implement personnel policies. personnel are the people who are
working in the organization.
 Utilization of human resources– The efficient and effective utilization of human resources is
necessary for the success of the business. Human resource accounting gives the data for proper
Utilization of human resources.
 Proper placement– Human resource accounting provides data that helps to select the right person
for the right job. Previous experience of the personnel and their behavior are responsible for
there placement
 Increase Morale and motivation- It helps the management for the beneficiary policies of workers
and employees.
 Attract best human resource – Human resource accounting helps to attract for the recruitment of
the best quality of skilled personnel for the organization.
 Helps management in employment and utilization of human resources in a cost-effective manner;
 Helps management in deciding promotion, demotion, transfers, retrenchment, and VRS schemes.
 Provide a basis for planning about human resources.
 Helps in identifying key employees and their cost and benefits.
 Aid in making budgets or forecasts.
 Help management in directing employees in improving their performance.

• Measuring the expertise of the employees and management of the organization.
• Find out the true value of the assets and liabilities hold by the organization. As the expertise
of the employees is considered as assets and value to be provided to the employees are
considered as liabilities.
• Applying a strong monitoring process on the human resources of the organization.
• It provides the management a sound basis for controlling the human resource.
• Provide a better basis of determining organizational goal and ways of achieving these goals.
• Provide the investors of the organization, shareholders and debt holders, accurate information
for better decision making.
• Find out the true picture of the future prospects of the organization, as the utilization of other
resources are fully depending on the human resources.
• Giving the stakeholders information about, how much value addition is done by the
organization to country's human resource as part of the corporate social responsibility.

Following are the main objectives of an HRA system :
1. To furnish cost value information for making management decisions about acquiring,
allocating, developing and maintaining human resources in order to attain cost effective
organization objectives.
2. To allow management personnel to monitor effectively the use of human resources.
3. To provide a determination of asset control i.e., whether human assets are conserved, depleted
or appreciated.
4. To aid in the development of management principles by classifying the financial consequences
of various practices.
5. To recognize the nature of all resources used or cultivated by a firm and improvement of the
management of human resources so that the quality and quantity of goods and services are
increased.
6. To facilitate the effective and efficient management of human resources.

7. To evaluate the return on investment in human resources.
8. Measuring cost related to the human resource of the organization
9. Enabling management to properly plan and budget for training and other services
for the human resource.
10. To ensure proper utilization of resources is done or not.
11. Increasing awareness and value about human resources.
12. To proper accounting of retiring benefits and other benefits over the service period
13. For efficient and better human resource planning.
14. For determining actual cost incurred by the organization on human resources.
15. To determine whether an organization has gained from inputs put on human
resources, training, recruitment, and other facilities.
16. To aid top management on human resource analysis.

A. Cost Based Models
1. Historical Cost Model
2. Replacement Cost Model
3. Opportunity Cost Model
4. Standard Cost Mode
B. Value Based Models
1. Present Value of Future Earnings
Model or Lev and Schwartz Model
2. Rewards Valuation Model or
Flamholtz Model
3. Certainty Equivalent Net Benefit
Model
4. Chakraborty Model
5. Dasgupta Model
Methods

1. Historical Cost Model:
This approach is also called an acquisition cost model. This approach was developed by Brummet,
Flamholtz and Pyle. But the first attempt towards employee valuation was made by a with the help
of Michigan footwear manufacturing company, R. G. Barry Corporation of Columbus, Ohio
University in 1967.
This method measures the organization’s 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, it should be capitalized in the balance sheet. The process of giving a
status of asset to the expenditure item is called capitalization. In human resource accounting, it is
necessary to amortize the capitalized amount over a period of time. The unamortized cost is shown as
investments in the human assets. If an employee leaves the firm (i.e. human assets expire) before the
expected service life period, then the net value to that extent is charged to the current revenue.

i. This model is very simple to understand and easy to
work out.
ii. It meets the traditional accounting concept of
matching cost with revenue.
iii. It provides a basis for evaluating a company’s return
on its investments in human resources.

i. The valuation method is based on the false
assumption that the rupee is stable.
ii. This method measures only the costs to the
organization, but ignores completely any measure of
the value of the employee to the organization.
iii. It takes only the cost of acquisition of employees and
thus ignores the aggregate value of their potential
services.
iv. It is too tedious(boring) to gather the related
information regarding the human values.
v. It is difficult to determine the number of years over
which the capitalized expenditure is to be amortized.

The historical cost model was highly criticized as it only considers the
sunk costs which are irrelevant for decision making. Thus a new model for
HRA was conceptualized which took into the account, the costs that would
be incurred to replace its existing human resources by an identical one.
In other words this model considers the costs of replacing its human
resources from scratch. Suppose the business were to lose a key player (or
any player). In that case, the costs a replacement cost model considers are
those required to find another suitable, equally qualified, and proficient
team member.
This model measures the cost of replacing an employee. According to
Rensis Likert, replacement cost includes recruitment, selection,
compensation, and training cost (including the income foregone during
the training period). The data derived from this method could be useful in
deciding whether to dismiss or replace the staff.
 Replacement cost considers the notional cost that may be required to
acquire a new employee to replace the present one.
 In calculating the replacement cost, different types of expenses are taken
into account which may be in the form of acquisition and learning cost.
 Replacement cost is generally much higher than the historical cost.

i. This model is more realistic as it considers the current value of human
resources in a company. Thus, the financial statements prepared according
to this approach are more realistic as compared to those prepared under
historical cost approach.
ii. It is more representative and logical.
iii. It is almost impossible to ascertain correct replacement cost of existing
human resources, since there can be no complete replacement for them.
1. This method may also lead to an upwardly biased estimate because an
inefficient firm may incur a greater cost to replace an employee
2. There may be no similar replacement for a similar certain existing asset.
3. No two people will have exactly the same qualities and performance levels,
showing the model can't truly value people as physical assets as
conventional accounting methods would
Limitations of Replacement Cost Model

This model was advocated by Hekiman and Jones in 1967. This model is
also called as Market Value Model.
This model of measuring human resources is based on the concept of
opportunity cost (i.e. the value of an employee in its alternative best use, as
a basis of estimating the value of human resources). The opportunity cost
value may be established by competitive bidding within the firm, so that in
effect, managers bid for any scarce employee. A human asset therefore will
have a value, only if it is a scarce resource.
the bid price is arrived at calculating actual or expected rate for
capitalization of the supposed earnings to be earned by such employees.
Limitations of Opportunity Cost Model
i. This model excludes the employees who are not scarce.
ii. Under this model, valuation on the basis of opportunity cost is restricted
to alternative use within the organization.

This model was developed by David Watson. This model
envisages establishment of a standard cost per grade of
employee updated every year. Replacement costs can be used
to develop standard costs of recruitment, selection, training
and developing individuals. Such standards can be used to
compare result with those planned. Variance should be
analysed and would form a suitable basis for control. But
under this model, determination of standard cost for each grade
of employee is a difficult process.

 Improved cost control.
 More useful information for managerial planning and decision making.
 More reasonable and easier inventory measurements.
 Cost savings in record-keeping.
 Possible reductions in production costs.
 Standard cost is fixed for each category of employees and their value is calculated
 Controversial materiality limits for variances.
 Non reporting of certain variances.
 Low morale for some workers.
 This method is simple but does not consider difference s in employees put in the same
group
 In many cases, these differences may be quite large.
Disadvantages of Standard Costing

 This method is based on the assumption that there is no direct
relationship between cost incurred on an employee and his value
for the organization.
 This is because the value of an employee depends on factors like
motivations, working conditions and their attitude towards work and
organization.
 In this method, all employees working in an organisation are broadly
classified into four categories; viz., top management, middle
management, supervisory management and operative and clerical
staff.
 The salary bill of each category is multiplied with appropriate
multiplier to ascertain the total value of each category for the
organization at a given point of time.
 Here, multiplier is an instrument that relates the personal worth of
employees with the total asset values of the organization.
 As per principal, the value of human asset should match with the
value of goodwill.

1. Present Value of Future Earnings Model or Lev and Schwartz Model:
In 1971, Lev and Schwartz proposed an economic valuation of employees, based on the present
value of future earnings, adjusted for the probability of employees’ death, separation or retirement. This
method helps in determining what an employee’s future contribution is worth today.
Present value of future earnings Method In this method, the future earnings of various groups of
employees are estimated up to the age of their retirement and are discounted at a predetermined rate of
return to obtain the present value of such earnings. This method is similar to the present value of future
earnings used in the case of financial assets.
According to this model, the value of human capital embodied in a person who is ‘r’ years old, is the
present value of his or her future earnings from employment and can be calculated by using the
following formula:
Where,
Vr = expected value of a ‘r’ year old person’s human capital
I(t) = expected annual earnings of the person up to the retirement
t = the person’s retirement age
r = present age of the employee
R = discount rate.

This model doesn’t suggest how value of human resource should be recorded in
Books of Accounts
This model takes wages & salary as a basis of value of human resource but value of
human resource is not limited only to the extent of cost incurred on them.
It ignores the probability that people may make role changes during the career. For
example Assistant Manager will not remain in the same position throughout his
expected service life in an organization.
The Model ignores the possibility and probability that individual may leave an
organization for reasons other than death or retirement. The model’s expected
value of human capital is actually a measure of expected ‘conditional value’ of a
person’s human capital-The implicit condition is that the person will remain in
organization until death or retirement. This assumption is not practical.

The model is an objective one because it is widely based on
statistics such as census income return and mortality
tables.
A person’s value to organization is determined not only by
the characteristics of the person himself (as suggested by
Lev and Schwartz) but also by the organizational role in
which the individual is utilized. An individual’s
knowledge and skill is valuable only if these are expected
to serve as a means to given organizational ends.
The measure assigns more weight to averages than to the
value of any specific group or individual.

FLAMHOLTZ’S STOCHASTIC REWARD VALUATION
MODEL
• Stochastic means- having random probability
• This model is also known as stochastic model and
introduced in 1971
• This model was published in an article ‘ A MODEL FOR
HUMAN RESOURCE VALUATION’
• This model is improvement on LEV & SCHWARTZ’s present
value of future earnings model.
• It takes into account the possibility of an EMPLOYEE
MOVEMENT FROM ONE ORGANISATION TO
ANOTHER ORGANISATION.
• And his leaving the organisation DUE To DEATH or
RETIREMENT

• FLAMHOLTZ was of the view that human being
CANNOT BE PURCHASED or OWNED by the
organisation like other physical assets.
• They are FREE TO EITHER SERVE or TURNOVER
He emphasized on dual aspect of an individual value
1. The amount that organization Could potentially
realize from his services if he stays in the
organization.
2. The other aspect refers to the amount actually
expected to be derived taking into account the
personal likelihood of leaving.

Basically expected
Realizable value
His conditional value
• Promotability
• Productivity
• Transferability
X
Probability of maintaining
organization membership
• Satisfaction with
organization

2. Identify various services states that an individual may
occupy during his stay in the organization
3. Measure the Value derived by the organization if an
Individual occupies the various services states for
specified time periods
4. Estimate the Probability that the individual will in
fact occupy each service state at the specified future
time.

This model was developed by Flamholtz. He advocated that an individual’s value to an organisation
is determined by the services he is expected to render. This model is an improvement to the Present Value
of Future Earnings Model. The model is based on the presumption that a person’s value to an organisation
depends upon the positions to be occupied by him in the organisation. The movement of people from one
organisational role to another is a stochastic process with rewards. As people move and occupy different
organisational roles, they render services (i.e. rewards) to the organisation. However, the roles they will
occupy in future will have to be determined probabilistically for each individual.
This model suggests a five steps approach for assessing the value of an individual to the
organisation.
1. Forecasting the period a person will remain in the organisation, i.e. his expected service life.
2. Identifying the service states, i.e. the roles that he might occupy, 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.
5. Discounting the value at a predetermined rate to get the present value of human resources.

1. It is difficult to estimate the probabilities of likely service
states of each employee.
2. Determining the monetary equivalent of service states is also
very difficult and costly affair.
3. Since the analysis is restricted to individuals, it ignores the
value added element of individuals working as groups.
4. the value of a service state,
5. the individual’s expected tenure, and
6. the probabilities of occupying each defined state at specified
times – although Flamholtz continues to explore the various
possibilities of measuring these dimensions.

 Roger H. Hermanson has given this model in Michigan
1964 in his paper “Accounting for Human Assets”.
 This model is based on the assumption that it is possible
to establish a relationship between the “Employee’s
Salary” and his “Value to the Organization” .
 The present value (PV) of Discounted Salaries of future is
calculated for each year for the upcoming five years.
 The PV calculated is further adjusted by an Efficiency
Ratio.
-------------------------------------------------------------------------
15

Where,
RF0=Rate of accounting income on owned assets for the FIRM
for current year
RE0=Rate of accounting income on owned assets for the
ECONOMY for the current year.
Steps involved in process of evaluation:
a) First of all estimation is to be done about annual salaries and
wages for the next 5 year
b) Secondly discount factor is applied to the annual wages.
c) Present value of wages and salaries is calculated by
multiplying wages with discount factor
d) Calculate efficiency ratio by using formula discussed above.
e) Present value of wages and salaries are multiplied with
efficiency ratio.
f) Hence value of human resource is calculated

 Illustrated Example 1:
The estimated annual salaries and wages for next 5 years
of NIPPON CHEMICAL COMPANY are 3,4,5,6 and 7
lakhs respectively. The ARR (Average rate of return) of
the company for the current year and preceding 4 years is
20,15,12,12 and 10 Lakhs respectively. The ARR for all
the firms in the chemical industry for the current year and
preceding 4 years is 15,10,8,6 and 5 respectively. Assume
the discount rate to be 10%. Calculate the adjusted present
value (Value of Human Resources).All the values are in
Lakhs and currency in INR.

 Solution:
 Advantages:
◦ This method uses information from published financial statements.
◦ Very easy to understand.
Disadvantages:
o model only uses the actual earnings of the most recent year as the
basis for calculating human assets.

 Morse ( 1973 ) suggested this approach . 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.
Following steps are involved under this approach :
(a) The gross value of the services to be rendered in future by the
employees in their individual and collective capacity .
(b) The value of direct and indirect future payments to the employees is
determined.
(c) The excess of the value of future human resources (as per (a) above)
over the value of future payments (as per (b) above) is ascertained.
This represents the net benefit to the enterprise because of human
resources.
(d) By applying a predetermined discount rate (usually the cost of
capital) to the net benefit , the present value is determined. This
amount represents the value of human resources to the enterprise.

This model was suggested by Pekin Ogan in 1976. is, in fact, an extension of net
benefit approach of Morse. Under this model, the value of human resources is
determined by taking into consideration the certainty with which the net benefits in
future will accrue to the enterprise. The model involves the following steps:
1. Net benefit from each employee.
2. Certainty factor at which the benefits will be available in future.
3. The certainty equivalent benefits will be calculated by multiplying the certainty
factor with the net benefits from all employees. This will be the value of human
resources of the enterprise.

 Certainty equivalent approach is one of the risk
analysis techniques under which risk is incorporated by
discounting the riskless cash flows at risk free rate.
 It incorporated the risk by converting the risky (or
uncertain) cash flows into riskless (or certain) cash
flows.
◦ Riskless cash flows = Risky Cash Flow X Certainty equivalent coefficient

This model was suggested by Prof. S.K. Chakraborty in 1976. He was the first
Indian to suggest a model on human resources of an enterprise. Under this model the
value of human resources can be calculated by dividing the employees into two groups
– Managerial and non-managerial, and then multiplying average tenure of group of
employees with their average salary. The value thus obtained is discounted at the
expected average after tax return on investment (ROI) over the average tenure period,
so that value of human asset does not fluctuate frequently.
He has further suggested that the recruitment , hiring , selection , development
and training cost of each employee can be recorded separately . These could be
treated as deferred revenue expenditure to be written off over the expected
average stay of the employee in the organisation . The deferred portion should
be shown in the position statement of the organisation . If there is a permanent
exist on account of death , retrenchment etc. then the balance on deferred
revenue expenditure for that year attributable to that person should be written
off against the income in the year of exist itself .

Prof. N. Dasgupta suggested this model in 1978.
According to this model the total cost incurred by the
individual up to that position in the organisation should
be taken as the value of a person which is further
adjusted by his intelligence level. The value thus
calculated is revised time to time on the basis of age,
performance, experience and other capabilities.

The various approaches take into account only those persons who are employed and
ignore those who are unemployed . According to him both employed and unemployed
persons should be brought in its purview for determination of the value of human
resources of the nation . Thus , for the preparation of the balance sheet of the nation , the
system should be such so that it fits and shows the human resources not only a firm but
also of the whole nation.
According to him , the total cost incurred by an individual , the state and the
organisation to bring that individual upto the present position should be taken as the
value of a person on the day when he starts serving the organisation or becomes fit for
appropriate employment . It will include not only all expenses incurred by the individual
for his education and training but also by the organisation on recruitment training ,
familiarizing and development human beings employed in the organisation . The
valuation can be done group wise , if the number of employees is large . The value thus ,
determined should be further adjusted at the end of each year by organisation on the
basis of his age , seniority , status , performance , experience leadership , managerial
capabilities etc. The psychologists and other concerned experts will be helpful for such
measurement . The revised value would be the value of the employee at the end of the
year .
Human resources valued according to this model should be shown both on the assets and
liabilities sides of the balance sheet . On the assets side it should be shown after the
fixed assets as Human Assets classified into two parts : ( i ) value of individual ( ii )
value of firm's investment . On the liabilities side , it should be shown after the capital as
Human Assets by the amount at which it has been shown on the assets side against the
value of individuals.

Name of the Model Author Effect
1. Historical Cost Approach • Brumnut,
• Flamholtz,
• Pyle
Expenses on T/D/S/R are
considered
2. Replacement Cost
Approach
• Rennis Likert
• Eric. G.Flamholtz
Present exp. On T/D/S/R on
another are considered.
3. Standard Cost Approach David Watson Std. cost of employee of each
grade is determined.
4. Present Value of future
earnings model
Lev & Schwartz. Total earnings of employee is
determined & Discount with
present value factor.
5. Reward Valuation Model Flamholtz. Employee movement from
one role to another role is
considered. ( earning to org.
would be taken)
6. Net benefit model Morse. Net benefit (i.e., earning for
firm-paid to employee)
would be taken.

S.L
No
Basis Historical
cost method
Replacement
Cost Method
Opportunity
Cost Method
Standard Cost
Method
01 Base It is based on
the cost
already
incurred.
Only a
prediction is
made on the cost
to be incurred if
the existing
employees are to
be replaced.
Only a
prediction is
made on the
benefits to be
derived if the
scarce
employees are
put to alternate
use.
Under this method,
employees of an
organization are
categorized into
different groups
based on their
hierarchical
positions and then
costs on each groups
are collectively
calculated

S.L
No
Basis Historical cost
method
Replacement Cost
Method
Opportunity
Cost
Method
Standard Cost
Method
02 Parame
ters
Cost of recruitment,
Training, Salaries,
Wages, Employee
benefits etc. are
considered only on
cost already incurred
basis.
Training, Salaries,
Wages and Employee
benefits etc. are
considered but only
on replacement basis.
Only value
of benefits
derived out
of scarce
employees
are
considered.
Training, Salaries,
Wages Employee
benefits etc. are
considered only on cost
already incurred basis
but only on group
basis.
03 Type of
calculat
ion
Original cost basis Prediction basis Prediction
basis
Original cost basis
04 Individ
ual/
Group
Wise
Individual basis Individual basis Individual
basis
Group basis
05 Level
of
efficien
cy
Level of efficiency
is not considered.
Level of efficiency is
considered.
Level of
efficiency is
not
considered.
Level of efficiency is
considered.

S.L
No
Basis Lev and Schwartz
Model
Flamholtz Model Mors Model / Net
benefit model
01 Role changes
of the
employees
Role changes of
employees is not taken
into account.
Role changes of
employees is taken
into account.
Role changes of
employees is taken
into account.
02 Death/Retire
ment of the
employees
It does not take into
account the probability
of death or retirement
of the employees.
It takes into account
the probability of
death or retirement
factor of the
employees.
It does not take into
account the
probability of death
or retirement of the
employees.
03 Group/Individ
ual basis
It calculates the cost on
group basis
It calculates the cost
on individual basis.
It calculates the cost
on the basis of
individual as well as
collective basis.

S.L
No
Basis Ogan Mode/Certainty
Equivalent Net Benefit
Model
Chakraborty Model/Aggregate
Payment Model
01 Group/Indi
vidual basis
It calculates the cost on
individual basis.
It calculates the cost on the basis of
managerial and non-managerial
groups.
02 Variables Net benefit from each
employee and certainty
variables.
Managerial and Non managerial man
power are evaluated separately
03 Accounting
Treatment
Net Benefit from each
employee Under ‘Net Benefit
Approach’ is multiplied by
Certainty factor
The recruitment, including selection,
development and training costs of
each employee should be recorded
separately and considered as deferred
revenue expenditure to be written off
over the expected average tenure of
the employee in the organization. The
deferred portion should be shown in
the financial statement of the
organization.

1. The “present value of future earning” model, as suggested
by Lav and Schwartz (1971), has been found to be most
popular model on account of convenience and objectivity.
The exponent of human resources valuation models in
most cases have not dealt with the mode of recording and
disclosure of the accounting information relating to
human resources in the books of account or financial
statements of the organization.
a. This has been left to the discretion of the accounting bodies who
are yet to develop a generally accepted basis for valuation,
recording and disclosure of human resources accounting
information in the financial statements of an organization.
b. In most cases, the human resource accounting information is given
in the form of supplementary information attached to the financial
statements.

2. Dasgupta (1978) has suggested in his total cost approach
the following mode for disclosure of human resources in the
balance sheet of an organization.
According to him, the human resources valued as per
his model should be shown both in the “asset” as well as
“liabilities” sides of the balance sheet. On the assets side, it
should be shown after the fixed assets as Human Assets
classified into two parts.
i) Value of individuals,
ii) Value of firm’s investment
According to him, if human resources are accepted as assets they
should be taken out of expenses items from the profit and loss
account and brought to the balance sheet.
It should be shown after the capital as Human Assets Capital by that
amount at which it has been shown on the asset side against
“value of individuals”.

 Despite, many favors have contributed by HRA, yet its development and
application in different industries have not been encouraging. Because
Indian companies act 1956, does not provide any scope for showing any
information about human resources in a financial statement. Due to the
development of business and industries, some of the Indian companies,
both public and private, value their human resources and report this
information in their annual report. The companies, who are presently
reporting human assets valuation, include:
 (A) The popular public sector companies
Bharat Heavy Electricals Limited (BHEL)
Cochin Refineries Limited (CRL)
Cement Corporation of India Limited (CCI)
Electrical India Limited (EIL)
Engineers India Limited (EIL)
Hindustan Petroleum Corporation Limited (HPCL)
Hindustan Shipyard Limited (HSL)
Hindustan Machines Tool Limited (HMT)

Madras Refineries Limited (MRL)
Maruti Udyog Limited (MUL)
Minerals and Metals Trading Corporation of India Limited
(MMTC)
National Thermal Power Corporation Limited (NTPC)
Oil and Natural Gas Corporation Limited (ONGC)
Oil India Limited (OIL)
Project and Equipment Corporation of India (PEC)
Steel Authority of India Limited (SAIL)
(B) The popular private sector companies
Associated Cement Companies Limited (ACC)
Southern Petro-Chemical Industries Corporation (SPIC)
Infosys Technologies Limited (ITL)
Tata Engineering and Locomotive Works (TELCO)
Satyam Computer Services Ltd.
Reliance Industries Ltd.
D.S.Q Software Ltd.

1. None of the methods fulfills the overall requirements of an acceptable model.
2. The service tenure of the existence of an employee is uncertain and hence valuation of
them in such circumstances in the future seems to be unreal.
3. There is no appropriate method which insists on the division of human resource as to the
value of them.
4. As human resources are not capable of being owned, retained, and utilized unlike other
assets there may be the problem of effective cost.
5. The concept of human resource accounting is not yet accepted by tax authorities and laws
6. Inappropriate HRA information in financial statements distorts the financial picture and
also computation of rate of return on capital employed.
7. Methods for the valuation of HRA based on certain assumptions may prove wrong any
time in the future.
8. HRA leads to dehumanization manipulation of human resources in the organization.
9. Yet discussions are going on the topic like human resource is an organization’s liability,
not an asset.
10. Measurement of human resources is subjective as different firms use different a method
for this purpose till is no method widely accepted model for HRA.
11. Rate at which prospective stream of contribution is to be discontinued and compounded to
calculate present value and future value.
12. The charge of the amortization rate is not solved.
13. Trade union may bargain their value.
14. Lack of initiative from the private sector.

1. There are no specific and clear-cut guidelines for finding cost and 'value' of
human resources of an organization. The existing valuation system suffers from
many drawbacks.
2. The life of human resources is uncertain and, therefore, valuing them under
uncertainty seems unrealistic.
3. There is a possibility that HRA may lead to dehumanizing and manipulations in
employees. For example, a person having a low value may feel discouraged and
thus, in itself, may affect his competency in work.
4. The much needed empirical evidence is yet to be found to support the hypothesis
that HRA, as a managerial tool, facilitates better and effective management of
human resources.
5. Human resources, unlike physical assets, are not capable of being owned,
retained and utilized at the pleasure of the organization. Hence, treating them as
'asset' in the strict sense of the term, could not be appropriate.
6. There is a constant fear of opposition from the trade unions. Placing the value on
employees would prompt them to seek rewards and compensation based on such
valuation.

1. In what form and manner, should their value be
included in the financial statements ? Is another
question on which there is no consensus in the
accounting profession.
2. If a valuation has to be placed on human resources how
should it be amortized ? Should the rate of amortization
be decreasing, constant or increasing ? Should it be the
same or different for different categories of personnel ?
3. Tax laws do not recognize human beings as assets. So
human resource accounting has been reduced to a
merely theoretical concept.
4. Accountants have been severely criticized by the
Behavioral Scientists for their failure to value human
resource as this has come out as a handicap for effective
management

Unit- 2 Human resource Accounting.pptx

Unit- 2 Human resource Accounting.pptx

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