Human Resource Accounting Content

1. HRA
1.HRA & the reason for emergence of HRA.
• HRA: HRA is the process of assigning, budgeting and the reporting the cost
of human resources incurred in an organization, including wages and
salaries and training expenses.
• The reason for emergence of HRA.
The following are the reasons why Human Resources Accounting has been
receiving so much attention in the recent years.
 Firstly, there is genuine need for reliable and complete management
of human resources.
 Secondly, a traditional framework of Accounting is in the process to
include a much broader set of measurement than was possible in the
past.
Human Resource Accounting is the measurement of the cost and value of
people to the organization. It involves measuring costs incurred by the
organizations to recruit, select, hire, train and develop employees and
judge their economic value to the organization
2.Historical cost ,Replacement cost& opportunity cost.
 Historical cost:
 Assets are placed on the books at acquisition cost.
 Assets are depreciated of their anticipated useful life.
 Maintenance costs for the assets are expensed during each
operating period.
Replacement cost:
 A reasonable substitute for market value.
 Confounded by cost of acquisition (inefficient hiring).
 Often, turnover is low enough to make replacement cost.
opportunity cost: Opportunity cost is the value of an asset when there is an
alternative use of it.

2. 3.Lev & Schwartz ,particular & limitation.
Ans: Lev & Schwartz :This model has been developed by Lav and Schwartz (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 up to retirement age are calculated.
4.The total earnings calculated as above are discounted at the rate of cost of capital.
Limitations:
1.This model implies that the future work condition of the employee will not
change over the span of his working life, but will remain the same as at present.
2.The approach does not take into account the possibility that the employee will
withdraw from the organization prior to his death or retirement. It is therefore not
realistic.
3. It ignores the variable of the career movement of the employee within the
organization.
4.It does not take into account the role changes of employees. However, this
method does not give correct value of human assets as it does not measure their
contributions to achieving organizational effectiveness.
4.Eric Flamholtz Model & limitation
Ans: Eric Flamholtz Model: This model involves the following steps.
1.Estimation of period for which an individual is expected to render service.
2.Identification of various positions or service states that the employee might
hold.
3.Estimation of probable period for which he is expected to hold each
position.
4.Calculation of expected service to be derived from the individual by
Where Si represents the quantity of services expected to be delivered in
each state and P (Si) is the probability that the same will be obtained.

3. 5.Determination of the monetary equivalent value of the future service by
multiplying the quantity of service with the price and calculation of the
income expected to be derived from their use.
6.Calculation of present value of expected future services at predetermined
rate.
Limitations :
1.It is very difficult to estimate the likely service states and positions of each
employee.
2. Individuals working in a group have higher value for the organisation as
compared to the sum or their individual values.
5.Goodwill methods & limitations.
Ans: Goodwill Method:
 Extra profits earned by organization as compared to industry average rate.
i.e, HR value = goodwill* investment in HR / total investments.
 Under the first model it is argued that super normal profits in a firm are
the indicators of presence of human resources.
 The rate of earnings may be influenced by other external factors also and
cannot be purely linked to HR.
Limitation:
 Goodwill may not be attributable to investment in suppliers, the customers,
the public image, etc.
 This model cannot be implemented if the rate of earnings of the company is
less than the industry average.
 This model is more subjective and unless relationship of various factors to
the company’s goodwill is established, this model is debatable.

4. 6.Cascio’s Approach
Cascio’s Approach:
 Effective measurement must include the value of employee output, as well as cost.
 Effective measurement must include variability of output and cost by individual
and group.
 Many organizations do not want to measure and be accountable for how well they
manage people.
 Focus on dollar/monetary value of behavioral outcomes in organizations.
 Do not focus on the value of the individual, but on the economic consequences of
behavior.
 This is an expense model, not an asset model.
7.Jaggi Lau Model
Ans: Jaggi Lau Model”
• Valuation of assets on group basis.
• A group implies homogeneous employees who may or may not belong to the same department
or division.
• Easy evaluation on group basis.
TV = (N) rn (T)n(V)
Assumptions Of
Jaggi and Lau
Model
Movement of
employee is
constant
Probabilities can be
extended to other
period

5. Problems solution:
1.Determination of turnover cost,absenteeism.
Turnover cost:
Turnover =
(Separations/Average Work Force Size) X 100
Importance
 Realistic Job Preview
 Performance Testing
 Training Payback Plans: Airlines
 Pre-Employment Training Program
 Job Enrichment
Cost of Turnover =
Separation Costs
+
Replacement Costs
+
Training Costs

6. Absenteeism:
Cost of Absence =
Hours X (Sick Pay + Benefits)
Hours X Replacement Wage
Staff Costs
Difference in Performance
Example:
2.Total cost concept
Ans:
Developed by N Dasgupta in 1988
 fundamentals
 Not only an organization but also a nation can use HRA
 Not only the employed persons but also unemployed persons are
included in HRA.
 Valuation would be group wise, age wise, job wise etc.
 The value of Employee will disclose in both side of Balance sheet.
 In Asset side it will be “Human Asset” and in liability & OE side
it will be “Human Capital”.
Cost ofAbsence = @2%$708/employee
40 Hours X ($0 Sick Pay + $7 Benefits)
40 Hours X .5 X $17 Replacement Wage
5 X .2 X $20 Staff Costs
40 X .1 X $17 Difference in Performance

7. 1.A firm has started its business with a capital of TK 5,00,000. It has purchased
fixed assets worth TK 2,50,000 in cash. It has kept TK 1,30,000 as working capital
and incurred TK 1,20,000 on recruitment, training and developing the officials
and a few workers. The value of the officials and worker is assessed as TK
4,00,000. Please show these items in the balance sheet.
Balance Sheet
(Including Human Resources)
Liabilities TK Assets TK
Capital 5,00,000 Fixed Assets 2,50,000
Human Capital 4,00,000 Human Assets:
I. Individual Value 4,00,000
II. Value of firm’s Investment 1,20,000
Working Capital (Current assets less current
liabilities)
1,30,000
9,00,000 9,00,000
3.Capitalization of salary methods and rewards valuation model.
 Ans: Suppose there are 10 persons in a group, each aged 50 years. They are
to serve the firm for 5 years more. Salary is payable at the end of each year
as follows: Cost of Capital is 10% p.a.
Year Salary/Amount PV Factor PV (TK)
Year 1 10,000 0.91 9,100
Year 2 11,000 0.82 9,020
Year 3 12,000 0.75 9,000
Year 4 13,000 0.68 8,840
Year 5 14,000 0.62 8,680
Total 44,640
Present Discounted value of one man = TK 44,640
Present Discounted value of Ten man = 44,640 X 10 = TK 4,46,400
Liabilities TK Assets TK
Human Capital (Capital in
form of HR)
4,46,400 Human Assets (Value of HR) 4,46,400
4,46,400 4,46,400

8. Reward valuation Model:
 The model, developed by Eric G. Flamholtz, in 1971,
 It considers the possibility of each employee, working in different positions
at different levels. The movement of employees, from one role to another,
within the organization, is the process that is linked to rewards.
 Under this approach, the human resource value is considered equal to the
total of present value of future rewards, adjusted with the probability of
mobility and separation of each employee.
 The present value may be determined on the basis of expected
services in each service level or state that the employee may occupy
during the service tenure with the organization.
End of Each Year Amount (TK)
Year 1 10,000
Year 2 11,000
Year 3 12,000
Year 4 13,000
Year 5 14,000
PV
Individual = Incremented Salary X Present Value Factor
 Present Value Factor ( Individual) =
 HR value will be the aggregate of all Present value (PV).
 Suppose there are 10 persons in a group, each aged 50 years. They are to serve the
firm for 5 years more. After 2 years, each will be incremented by 12% each year.
Salary is payable at the end of each year as follows: Cost of Capital is 10% p.a.
 What will be the HR Value?


9. Present Discounted value of one man = TK 47,822
Present Discounted value of Ten man = 47,822 X 10 = TK 4,78,220
Liabilities TK Assets TK
Human Capital (Capital
in form of HR)
4,78,220 Human Assets (Value of HR) 4,78,220
4,78,220 4,78,220
4.HR selection methods.
Ans: This method may result
 more optimal allocation of personal
 Quantitative basis for planning, evaluating and developing human assets of any
firm.
Limitations:
 Willingly exclude the value of employees of the type who can be hired ; where
the question still there that other employees are worthless?
 May lead to behavioral issue through lowering the morale and productivity as it
fetch the lower price in the bid.
Year Salary Amount Increment
Rate
Incremental
Salary
PV Factor PV (TK)
Year 1 10,000 0% 10,000 0.91 9,100
Year 2 11,000 0% 11,000 0.82 9,020
Year 3 12,000 12% 13,440 0.75 10,080
Year 4 13,000 12% 14,560 0.68 9,901
Year 5 14,000 12% 15,680 0.62 9,722
Total 47,822

10.  There are two division A & B. There are 10 engineers who are in great demand.
Competitive bidding takes place. The Division A has a capital base of TK 10,00,000
and the division B of 5,00,000. The required rate of return on physical and human
assets is 15%. The anticipated profit with 10 engineers, in case of division A is
estimated at TK 3,00,000 and in case of division B, TK 2,50,000.
 Find out their value?
For Division A
If expected profit is TK 15 then the Capitalized Value will be TK100
,, ,, ,, ,, TK 01 ,, ,, ,, ,, ,, TK(100/15)
,, ,, ,, ,,TK 3,00,000 ,, ,, TK(100 X 3,00,000/ 15)
= 20,00,000
Human Capital Value = 20,00,000 – Physical Assets
= 20,00,000 – 10,00,000
= 10,00,000 TK
For Division B
If expected profit is TK 15 then the Capitalized Value will be TK100
,, ,, ,, ,, TK 01 ,, ,, ,, ,, ,, TK(100/15)
,, ,, ,, ,,TK 2,50,000 ,, ,, TK(100 X 2,50,000/ 15)
= 16,66,667
Human Capital Value = 16,66,667 – Physical Assets
= 16,66,667 – 5,00,000
= 11,66,667 TK
According to above calculation it has been observed that Division B can bid/offer
more (11,66,667TK) to get the engineers.
For Division A (Salary Fixing)
It can offer up to the salary of TK (10,00,000 X 15%) = TK 1,50,000
So per engineer will earn TK1,250 per month (1,50,000 /(10 X 12))
For Division B (Salary Fixing)
It can offer up to the salary of TK (11,66,667 X 15%) = TK 1,75,000
So per engineer will earn TK1,485 per month (1,75,000 /(10 X 12))
Division B will get the Engineers and the Engineers will also accept this because
they are getting more.
So that was one of the methods for fixing salaries. It is estimated what the firm will
earn by employing them.