This document discusses human resource accounting (HRA). It defines HRA and provides different perspectives on defining it. Several methods for valuing human resources are described, including historical cost, standard cost, present value of future earnings, etc. The uses and benefits of HRA for management decision making, planning, and other functions are outlined. HR auditing is also discussed as a tool to evaluate HR performance and effectiveness. Different approaches to conducting an HR audit are presented.

1. MANPREET SINGH
(ASST. PROFESSOR)
GNA BUSINESS SCHOOL

2.  Human resources are considered as
important assets and are different from the
physical assets. Physical assets do not have
feelings and emotions, whereas human assets
are subjected to various types of feelings and
emotions. In the same way, unlike physical
assets human assets never gets depreciated.

3.  1. The American Association of Accountants
(AAA) defines HRA as follows: ‘HRA is a
process of identifying and measuring data
about human resources and communicating
this information to interested parties’.
 2. According to Stephen Knauf, ‘ HRA is the
measurement and quantification of human
organizational inputs such as recruiting,
training, experience and commitment’.

4.  1. Providing cost value information about
acquiring, developing, allocating and maintaining
human resources.
 2. Enabling management to monitor the use of
human resources.
 3. Finding depreciation or appreciation among
human resources.
 4. Assisting in developing effective management
practices.

5.  5. Increasing managerial awareness of the
value of human resources.
 6. For better human resource planning.
 7. For better decisions about people, based
on improved information system.
 8. Assisting in effective utilization of
manpower.

6.  Historical Cost
 Standard Cost
 Present value of future earnings
 Acquisition Cost Method
 Replacement Cost Method
 Expected realizable value
 Competitive Bidding Method
 Economic Value Method

7.  Historical Cost:
 Historical cost is based on actual cost incurred
on human resources. Such a cost may be of two
types – acquisition cost and learning cost.
Acquisition cost is the expense incurred on
training and development. This method is very
simple in its application but it does not reflect
the true value of human assets. For example, an
experienced employee may not require much
training and, therefore, his value may appear to
below though his real value is much more than
what is suggested by historical cost method.

8.  Standard Cost:
 Instead of using historical or replacement cost, many
companies use standard cost for the valuation of human
assets just as its used for physical and financial assets. For
using standard cost, employees of an organization are
categorized into different groups based on their
hierarchical positions.
 Present value of future earnings:
 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 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. However, this method does not give
correct value of human assets as it does not measure their
contributions to achieving organizational effectiveness.

9.  Acquisition Cost Method:
 Under this method the costs of acquisition, namely, the costs
incurred in recruitment. Hiring and induction of employees are
taken into account. The process involves capitalization of historic
costs. The cost so capitalized has to be written off over a period
of time for which the employee remains with the firm.
 Replacement Cost Method:
 While in the case of acquisition cost past costs are considered,
under this approach one takes in to account how much it costs
to replace a firm’s existing resources and thus represents a
current value approach. So this is a method resource and thus
represents a current market conditions. This exercise may be
redundant unless the management desires to replace its present
resources. It is also difficult exercise as in many cases the
replacement may not be exactly similar.

10.  Expected realizable value:
 The above methods discussed so far are based on cost
consideration. Therefore these methods may provide
information for record purpose but do not reflect the true
value of human assets. As against these methods.
 Competitive Bidding Method:
 This is also known as the opportunity cost method.
Opportunity cost is defined as the measurable value of
benefits that could be obtained by choosing an alternative
course of action. In the case of HRA. Opportunity costs are
determined by a process of competitive bidding in which
various divisions and departments bid for the services of
various officers. The amount of bid is added to the capital
employed of the successful bidder for determining the
return on investment.
 S

11.  Economic Value Method:
 The economist’s concept of the value of an
asset is equal to the present worth of its
estimated future economic benefits. This
approach has a strong theoretical appeal.
 But this method involves the following steps:
(a) Estimation of the future benefits, and
(b) Ascertaining the present value of such
benefits by using an appropriate interest
(discount) rate.

12.  1. Information for manpower planning
2. Information for making personnel policies
3. Utilization of human resources
4. Proper placements
5. Increases morale and motivation
6. Attracts best human resources
7. Designing training and development programs
8. Valuable information to investors

13.  1. Information for manpower planning

HRA provides useful information about the cost and value of human resources. It
shows the strengths and weakness of the human resources. All this information
helps the managers in planning and making the right decisions about human
resources. Thus, it provides useful information for Manpower Planning
and Decision Making.

2. Information for making personnel policies

HRA provides useful information for making suitable personnel policies about
promotion, favorable working environment, job satisfaction of employees, etc.

3. Utilization of human resources

HRA helps the organization to make the best utilization of human resources.

4. Proper placements

HRA helps the organization to place the right man in the right post depending on
his skills and abilities.

14.  5. Increases morale and motivation

HRA shows that the organisation cares about the employees and their welfare.
This increases their morale and it motivates them to work hard and achieve the
objectives of the organisation.

6. Attracts best human resources

Only reputed organisations conduct HRA. So, competent and capable people want
to join these organisations. Therefore, it attracts the best employees and
managers to the organisation.

7. Designing training and development programs

HRA helps the organisation to design (make) a suitable training and development
program for its employees and managers.

8. Valuable information to investors

HRA provides valuable information to present and future investors. They can use
this information to select the best company for investing their money.

15.  HR audit is an important management control device. It is a tool
to judge organizations performance and effectiveness of HR
management. According to Dale Yoder, “Personnel audit refers to
an examination and evaluation of policies, procedures and
practices to determine the effectiveness of personnel
management.”
 It is an analytical, investigative and comparative process. It gives
feedback about HR functions to operating managers and HR
specialists. It enables to know about the effectiveness of
personnel programs. It further provides feedback about how well
managers are meeting their HR duties. It provides quality control
check on HR activities. It refers to determine the effectiveness
and efficiency of HRM.

16.  (1) To review every aspect of management of HR to
determine the effectiveness of each programs in an
organization.
 (2) To seek explanation and information in respect of
failure and success of HR.
 (3) To evaluate implementation of policies.
 (4) To evaluate the performance of personnel staff and
employees.
 (5) To seek priorities, values and goals of management
philosophy.

17.  Benefits on strategic Level
 Identifies HR department contributions in the company;
 Makes the HR function business-driven and reveals
ways to strengthen its impact on achieving Company
results;
 Ensures objective data and information needed for the
Company strategic planning.

18.  Benefits on operational level
 Helps align HR goals to corporate strategy and goals;
 Develops and improves professional image of the HR
department;
 Clarifies the HR department’s roles, duties and
responsibilities, finds critical HR problems and reasons for low
productivity;
 Encourages for greater responsibility and professionalism among
members of HR department, and for more self-confidence in HR
function realization;
 Stimulates identity and alignment of HR policies and
practices within the company;
 Reduces HR costs, through encouraging function for more
effective forecasting and planning.

19.  Benefits on administrative level
 Provides specific, measurable and verifiable data of the
current state of the function;
 Ensures timely compliance with legal requirements,
company and mandated regulations, and professional
standards;
 Reviews employees files, records, registers and
information;
 Reviews HR information system.

20.  (1) Comparative Approach:
 Under this approach auditors identify one model company
and the results obtained of the organization under audit are
compared with it.
 (2) Outside Authority Approach:
 In outside authority approach a benchmark is set to compare
own results. A standard for audit set by outside consultant is
used as benchmark.
 (3) Statistical Approach:
 Under statistical approach the statistical information
maintained by the company in respect of absenteeism,
employee turnover etc. is used as the measures for
evaluating performance.

21.  (4) Compliance Approach:
 Under compliance approach the auditors make a review
of past actions to determine to see whether those
activities are in compliance with the legal provisions
and in accordance with the policies and procedures of
the company.
 (5) MBO Approach:
 Under MBO approach specific targets are fixed. The
performance is measured against these targets. The
auditors conduct the survey of actual performance and
compare with the goals set.

22.  Audit of Corporate Strategy: The organization is going
to gain competitive advantage.
 Audit of the Human Resource Function: Human
Resource Information System, Staffing and Development, and
Organization Control and Evaluation.
 Audit of Managerial Compliance: Human resource
policies and procedures.
 Audit of Employee Satisfaction: To learn how well
employee needs are met.