Notes of Human Resource Accounting

1. HR accounting
The American Accounting Society Committee on Human
Resource Accounting defines it as follows
“Human Resource Accounting is the process of identifying
and measuring data about human resources and
communicating this information to interested parties.” In
simple terms, it is an extension of the accounting principles
of matching costs and revenues and of organizing data to
communicate relevant information in financial terms.
Stephen Knauf has defined HRA as "The measurement of
quantification of human organization inputs such as
recruitment, training, experience and commitment“
human resource accounting is the art of valuing, recording
and presenting systematically the worth of human resources
in the books of account of an organization.

2. Importance of Human Resource Accounting:
 Human Resource Accounting helps the management in the Employment, locating
and utilization of human resources.
 It helps in deciding the transfers, promotion, training and retrenchment of human
resources.
 It provides a basis for planning of physical assets vis-à-vis human resources.
 It assists in evaluating the expenditure incurred for imparting further education and
training in employees in terms of the benefits derived by the firm.
 It helps to identify the causes of high labour turnover at various levels and taking
preventive measures to contain it.
 It helps in locating the real cause for low return on investment, like improper or
under-utilization of physical assets or human resource or both.
 It helps in understanding and assessing the inner strength of an organization and
helps the management to steer the company well through most adverse and
unfavourable circumstances.
 It provides valuable information for persons interested in making long term
investment in the firm.
 It helps employees in improving their performance and bargaining power. It makes
each of them to understand his contribution towards the betterment of the firm visà-
vis the expenditure incurred by the firm on him

3. Hunan Resources Accounting
(i) The investment in HR
(ii) The value of HR.
This leads to -
 Improve management by analyzing
investment in HR
 Consider people as its asset
 Attract and retain qualified people
 Profile the organization in financial terms.

4. Objectives
To furnish cost value information for making proper and effective
management decisions about acquiring, allocating, developing and
maintaining human resources in order to achieve cost effective
organizational objectives.
To monitor effectively the use of human resources by the management.
To have an analysis of the human asset i.e. , whether such assets are
conserved, depleted or appreciated.
To aid in the development of management principles, and proper
decision making for the future by classifying financial
consequences, of various practices.
In all, it facilitates valuation of human resources, recording the
valuation in the books of account and disclosure of the information
in the financial statement.
Further, it is to help the organization in decision making in the
following areas: a) Direct Recruitment Vs promotion. b) Transfer
Vs. Retention(c) Retrenchment Vs. Retention d) Impact on
budgetary controls of human relations and organizational behaviour.
e) Decision on reallocation of plants, closing down existing units
and developing overseas subsidiaries etc.

5. Limitations of Human Resource Accounting
1. There is no proper clear-cut and specific procedure or guidelines for finding cost and value
of human resources of an organization.
2. The period of existence of human resource is uncertain and hence valuing them under
uncertainty in future seems to be unrealistic.
3. There is a fear that HRA may dehumanize and manipulate employees.
4. The much needed empirical evidence is yet to be found to support the that HRA leads to
efficiency.
5. In what form and manner, their value to be included in the financial statement is the
question yet to be classified on which there is no consensus in the accounting profession.
6. As human resources are not capable of being owned, retained and utilized, unlike the
physical assets, there is problem for the management to treat them as assets in the strict
sense.
7. There is constant fear of opposition from the trade unions as placing a value on employees
would make them claim rewards and compensations based on such valuation.
8. Another question is, on value being placed on human resources how should it be amortized.
Is the rate of amortization to be decreasing, constant or increasing? Should it be the same or
different for different categories of personnel?
9. In spite of all its significance and necessity, tax laws do not recognize human beings as
assets.
10. There is no universally accepted method of human asset valuation.

6. Cost of Hunan Resources
• Acquisition Cost
(i)Recruitment Cost (ii) Selection Cost (iii) Placement Cost (iv)
Campus Interview Cost
• Training (Development) Cost
(i)Formal Training Cost (ii) On the Job Training Cost (iii) Special
Training (iv) Development Programmes
• Welfare Cost and
(i)Medical Expenditure (ii) Canteen Expenditure (iii) Specific and
General Allowances (iv) Children Welfare Expenses (v) Other
Welfare Expenditure
• Other costs
(i) Health of workers (II) Safety of the workers (iii) Welfare
of the workers

7. Methods of valuation of human assets
a) Cost based approaches: i) Historical Cost ii)
Replacement Cost iii) Opportunity Cost iv)
Standard Cost
b) Monetary value based approaches: i) The Lev
and Schwartz Model ii) The Eric Flamholtz
Model iii) Morse Model
c) Non- monetary value -based approaches: i)
Likert Model ii) The Flamholtz Model iii) Ogan
Model

8. Historical Cost
Acquisition cost is the expense incurred on
recruitment, selection; entire cost is taken into
consideration including those who are not
selected
Learning cost involves expenses incurred on
training and development.

9. Replacement cost
Human Resources are to be valued on the
assumption that a new similar organization
has to be created from scratch and the cost to
the firm is calculated if the existing resources
were required to be replaced with other
persons of equivalent talents and experience.

10. Opportunity cost method
• In this method there is no opportunity cost for
those employees who are not scarce.
• only scarce people should form part of the
value of human resources.

11. Standard cost method
• Employees of an organization are categorized
into different groups based on their
hierarchical positions.
• Standard cost is fixed for each category of
employees and their value is calculated.
• This method is simple but does not take into
account differences in employees put in the
same group. In many cases, these differences
may be quite vital.

12. Monetary value based approaches
The Lev and Schwartz Model- (Present value of future
earnings method)
This model has been developed by Lav and Schwartz
(1971).
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 upto
retirement age are calculated.
4. The total earnings calculated as above are discounted
at the rate of cost of capital. The value thus arrived at
will be the value of human resources/assets.

13. • Flamholtz Model- (Reward Valuation method)
it takes into consideration the possibility or
probability or an employee‟s movement from
one role to another in his career and also of
his leaving the firm earlier than his death or
retirement
Flamholtz has given the variables affecting an
individual‟s expected value {IERV} depends on
(i) individual conditional values (abilities) (ii)
likelihood of remaining in the organization(job
satisfaction, commitment, motivation and
other factors)

14. • The model suggests a five-step approach for this purpose –
1. Determination of the period for which a person is
expected to serve the organization.
2. Identification of „service states‟ (i.e. roles or posts) that
the employee might occupy during his service career
including the possibility of his quitting the organization.
3. Estimation of the value derived by the organization when
a person occupies a particular position. Such value can be
determined either by multiplying the price of the services
with the quantity of the services to be rendered or the
income expected to be derived from the services to be
rendered.
4. The total value of the services derived by the organization
by different employees or group of employees is
determined.
5. The value thus arrived is discounted at a predetermined
rate to get the present value of human resources.

15. • Morse Model (Net Benefit Model)
This approach has been suggested by Morse (1973)
1. The gross value of services to be rendered in future by
the employees in their individual as well as their collective
capacity is determined.
2. The value of future payments (both direct and indirect) to
the employees is determined.
3. The excess of the value of future human resources (as per
1 above) over the value of future payments (as per 2
above) is ascertained. This, as a matter of fact, represents
the net benefit to the organization on account of human
resources.
4. The present value of the net benefit is determined by
applying a predetermined discount rate (generally the
cost of capital). This amount represents the value of
human resources to the organization

16. Non- monetary value -based
approaches
Pekin Ogan (Certainity Equivalent Net Benefit Model)
This approach has been suggested by Pekin Ogan(1976)
An extension of “net benefit approach” as suggested by
Morse
1. Net benefit from each employee as explained under
„net benefit approach‟.
2. Certainty factor at which the benefits will be available
3. The net benefits from all employees multiplied by
their certainty factor will give certainty equivalent net
benefits. This will be the value of human resources of
the organization.

17. S.K. Chakraborthy Model (Aggregate payment
approach)