Human resource accounting aims to value and account for human resources as organizational assets. There are two main approaches: human resource cost accounting, which deals with accounting for investment in developing employee skills; and human resource value accounting, which attempts to place a monetary value on employees. Several models have been developed for human resource value accounting, including the Lev and Schwartz model, Flamholtz model, Giles and Robinson's human asset multiplier method, and Hermanson's unpurchased goodwill and adjusted discounted future wage models. Implementing human resource accounting provides quantitative information to support decision making around areas like training, recruitment, and resource allocation. However, limitations include uncertainty around employee tenure and difficulty measuring individual contributions to organizational effectiveness.

1. What is Human Resource?
The total knowledge, skills, creative abilities, talent,
altitudes and belief of an organization workforces as
well as values, altitude and belief of the individuals
involved.
Meaning of Human Resource Management:
A process consisting of the acquisition, development,
motivation, and maintenance of human resources.

2. Meaning Of Human Resource Accounting
Human resource accounting is defined as:
 The art of valuing,
 recording and
 presenting systematically
 the worth of human resources in the books of
account of an organization.

3. Characteristics Of HRA
The following characteristics of HRA are:
• Its a system of accounting in which identification
of human resources is made.
• Investment made in human resources is
recorded.
• Measurement of costs and values are made.
• Changes occurring in human resources over a
period of time are also recorded.
• Communicates information through financial
statements to interested parties.

4. Basic Premises Of HRA
• People are valuable resources of an
enterprise.
• The usefulness of manpower as an
organizational resources is determined by the
way in which it is managed.
• Information on investment and value of the
human resources is useful in the enterprise

5. Reasons 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

6. Need and significance of HRA
The human resource accounting is more
concerned with decision making area of
accounting.

7. The information generated through HRA can help for
making decisions in following areas:-
• Formulating policies and programmes for the development of
human resources.
• Decisions regarding cost reduction programmes.
• Training and development.
• Recruitment and selection.
• Manpower planning and control.
• Conservation and reward of human resources.
• Making a choice between various type of human investment
and investment in other assets.

8. Necessity of HR:
Realizing this, many companies world-over are making HRA as a necessary element
on their
balance sheets. One of the best examples is of the Denmark Government. The Danish
Ministry of
Business and Industry has issued a directive that with effect from the trading year
2005, all
companies registered in Denmark will be required to include in their annual reports
information
on customers, processes and human capital. A minimum of five measures for each is
required,
and comparison with the previous two years must be shown. Figures for investment
in
intellectual capital must be shown and compared with the previous two years. A
narrative should
accompany each set of figures.
HR as an asset:
In India, there are very few companies like BHEL, Infosys and Reliance Industries,
which
have implemented HRA and some are working on it.

9. Case study
Hindustan Copper Limited (HCL), a public sectorenterprise of the
Government of India, incorporated
on 9th November 1967. It has the distinction of being
India's only vertically integrated copper producing
company encompassing mining, beneficiation,
smelting, refining and casting of refined copper metal.
The company deals in copper wire rod, copper
cathodes, continuous copper rod and the byproducts
such as copper sulphate and sulphuric acid.
HCL is spread across four operative units;
1. Indian Copper Complex, Jharkhand
2. Malanjkhand Copper Project, Madhya
Pradesh
3. Khetri Copper Complex, Rajasthan
4. Taloja Copper Project, Maharashtra

10. Year Value of
produc tion
(Rs.)
Manpower
(in
Numbers)
Value per
employe e
(Rs.)
2001-02 586.66 9502 0.062
2002-03 501.53 7865 0.064
2003-04 534.43 5995 0.089
2004-05 631.24 5665 0.111
2005-06 1053.34 5583 0.189
2006-07 1909.18 5451 0.350
2007-08 1991.24 5405 0.368
2008-09 1344.28 5440 0.247
2009-10 1506.04 5300 0.284
THE HINDUSTAN COPPER LTD.

11. CONCLUSION
However until now, the efforts are to be made in
gaining popularity in the application of human resource
accounting. The concept of human resource
accounting is yet to gain momentum in India. For the
betterment of the organizations, it is necessary to
evaluate the worth of Human Resources in a
systematic manner and record the information related
to them in the financial statement of the organization
to communicate their worth time to time to the users
of the financial statement. The HRA concept itself
represents a new way of thinking about people as
assets. It has a great potential for future organization
to understand the value of human forces and the same

12. Objectives of HRA
EXAMINING
EXPENDITURE ON
PERSONNEL
COMMUNICATE
THE WORTH OF
HUMAN RESOURCE
PROVIDES
QUANTITATIVE
INFORMATION
PROVIDES SOUND
AND EFFECTIVE
BASIS FOR QUALITY
CONTROL
HELPS IN CREATING
GOODWILL

13. Advantages of HRA
Information for manpower planning
Information for making personnel policie
Utilisation of human resources
Proper placements
Increases morale and motivation
Attracts best human resources
Valuable information to investors

14. Limitations of HRA
Life of a human being is uncertain
No specific and clear cut guidelines
No standards for HRA
Can lead to dehumanisation
Assumption regarding employee is wrong

15. ASPECTS/METHODS OF HUMAN RESOURCE ACCOUNTING
HUMAN
RESOURCE
ACCOUNTING
Human
resource cost
accounting
1.Historical
cost
approach
2.Replacemen
t cost
approach
3. Opportunity
cost approach
Human
resource value
accounting
 The lev and schwartz model
 Flamholtz model (1971)
 Giles and robinson’s human asset
multiplier method
 Hermanson’s unpurchased goodwill and
adjusted discounted future wage model
 Jaggi and lau model
 Morse net benefits model (1973)

16. Human resource cost accounting
• Measurement and reporting of costs incurred to
acquire and develop people as organizational resources
• Deals with accounting for investment made by
organization
• HRCA includes :
1. accounting for the cost of personnel activities and
function
2. accounting for costs of developing people as human
assets
• Approaches to Human resource accounting was first
developed 1691

17. Historical cost approach
• This approach is developed by Brummet, Flamholtz
and Pyle
• This method measures the organization’s investment
in employees using the five parameters: recruiting,
selecting, training, placing and developing.
• Any procedure followed for human resource asset is
the same as that of other physical assets.
• This model suggest instead of charging the costs to
p&l accounting it should be capitalized in balance
sheet.

18. MERITS
1. Simple to understand and easy to work.
2. Traditional accounting concept of matching cost with
revenue is followed
3. Helping a firm in finding out a return on HR
investment
LIMITATIONS
1. Difficult to estimate the number of years an
employee will be with the firm
2. Difficult to fix a rate of amortisation
3. Value of an asset decreases with amortisation

19. Replacement cost approach
This method is developed by Rensis Likert & Eric G. flamholtz.
The price that will have to pay to replace an existing asset
with new asset i.e, employee is called replacement cost. All
costs incurred to attain the current level of competence of an
existing employee.
In replacement cost approach the cost of recruitment, selection,
training, development etc of new employees to reach the
level of competence of existing employees are measured.

20. The concept of the replacement cost of human resource is
defined as the sacrifice that should have to be incurred today to
replace human resource presently employed.
There are three basic components of positional replacement
cost
Separation
cost
Learning
cost
Acquisition
cost

21. Merits
More realistic
Representative and logical
Adjusting of human value of
price trends in economy
Present oriented
Demerits
difficult to find the identical
replacement
Not possible to obtain
measure of a particular
employee
Does not reflect the
knowledge, competence

22. Opportunity Cost Approach
This approach is suggested by Hekimian and Jones.
This approach values human resources on the basis
of the economic concept of Opportunity cost. The
human resource values are measured through a
competitive bidding process within the firm, based
on the concept of Opportunity Cost. They bid for an
employee and the bid price is included in investment
cost.
Opportunity cost is the value of an asset when there is
an alternative use of it.

23. There are two ways to measure cost
through human resource accounting:
1.Original or
historical cost of
human resources 2.Replacement cost
of human resources

24. Merits
 Promising approach
 Quantitative base
 Evaluating and developing
 Strong theoretical approach
 Useful in decentralized set-
up
Demerits
Discrimination among
employees
Lower morale of employee
May be misleading
Difficult to quantify future
economic benefits

25. CASE STUDY
This report is based on human resource practices in life insurance at
Reliance Life Insurance New Delhi. Reliance Life Insurance is an
associate company of Reliance Capital Ltd., a part of Reliance - Anil
Dhirubhai Ambani Group. Reliance Capital is one of India’s leading
private sector financial services companies, and ranks amongthe top 3
private sector financial services and banking companies, in terms
of net worth.
Organizations have now started realizing that the systematic attention t
ohuman resources is the only way to increase organizational efficiency
in terms productivity, quality, profits and better customer orientation.
HR can help deliver organizational excellence by focusing on learning,q
uality, teamwork, and through various employee friendly strategies

26. They studied in their research:
punctuality
marketing
Inter
personal
relationship
s
Handling
customers
Building
trust

27. Human Resource Value Accounting
The concept is based on views that difference in
present and future earning of two similar firms is due
to the difference in their human organization.
The economic value of the firm can be determined by
obtaining the present value of future earnings.

28. The Lev and Schwartz model
Lev and Schwartz developed an economic model in 1971 for determining the
value of human resources. According to them the value of human capital
emboided in a person of age t is the present value of his remaining future
earning from employment.
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. The value thus arrived at will be the value of human resources/assets.

29. INFOSYS
In the financial year 1995-96, Infosys Technologies (Infosys) became the first software
company to value its human resources in India. The company used the Lev& Schwartz
Model and valued its human resources assets at Rs 1.86 billion. Narayana Murthy
(Murthy), the then chairman and managing director of Infosys, said: "Comparing this
figure over the years will tell us whether the value of our human resources is
appreciating or not.
Infosys used the Lev and Schwartz method to value Human Resource
According to this model the present value of future earning capacity of an employee,
from the time of joining the organization till retirement was estimated . An employee’s
salary package included all benefits, whether direct or otherwise, earned both in India
and in a foreign Nation. The additional earnings on the basis of age group were also
taken into account.

30. The method is as follows
.
1. All the employees of Infosys were divided into five groups, based on
their average age .
2. Each group’s average compensation was calculated. Infosys also
calculated the compensation of each employee at retirement by using
an average rate of increment .
3.The increments were based on industry standards, and the
employee’s performance and productivity.
4. Finally the total compensation of each group was calculated.
This value was discounted at the rate percent per annum which was the
cost of capital at Infosys to arrive at the total human resources of
Infosys.

31. Disadvantages
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.

32. FLAMHOLZ MODEL (1971)
According to this model, an individual’s value to an organization is determined by the
services he is expected to render to the organization during the period he is likely to
remain with the organization in various positions or service states.
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.

33. 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.
DISADVANTAGES
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.

34. GILES AND ROBINSON’S HUMAN ASSET MUTIPLIER
METHOD
They suggested a human asset measurement method known as human asset
multiplier. According to this method, the valuation of human resources should
be made in the same way as other business assets on a going concern basis.
The calculation of human asset value under this method is based on the notion
that an individual’s remuneration or the remuneration of a group of persons in
the same grade may be multiplied by a factor determined on the basis of his
contribution of the success of business.
The total value of human assets employed in the business can be calculated
simply by adding together all the individual values so calculated.

35. EXAMPLE
TOTAL VALUE = 20 + 21 + 20 + 30
= RS 91 LAKHS
GRADES REMUNERATION
(IN LAKH)
FACTORS VALUE OF
HUMAN
ASSET
A 5 4 20
B 7 3 21
C 10 2 20
D 30 1 30

36. Hermanson’s Model
Hermanson has
suggested two
models:
Unpurchased
Goodwill
Method
Adjusted
Discounted
Future Wage
Model

37. Goodwill Method
Model in brief:
 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.

38. Disadvantages
o Goodwill may not be attributable to investment
in suppliers, the customers, the public image, etc.
o This model cannot be implemented if the rate of
earnings of the company is less than the industry
average.
o This model is more subjective and unless
relationship of various factors to the company’s
goodwill is established, this model is debatable.

39. Adjusted Discounted Future Wage
Model
Model in brief:
HR value is the PV(person’s value) of
future wages payable for next 5
years discounted at the adjusted
rate of return.
The adjustment rate of return refers
to average rate of return on owned
assets of all firms in the economy
multiplied by the efficiency ratio of
the organization during the last five
years on weighted average basis.

40. The following formula is used:
Efficiency Ratio =
RF (0) RF(1) RF(2) RF(3) RF(4 )
5 ---------+4 -------+3 -------+2 --------+ -------
RE(0) RE(1) RE(2) RE(3) RE(4)
Where:
 RF(0) is the rate of accounting income on owned assets for
the firm for the current year.
 RE (0) is the rate of accounting income on owned assets for
all the firms in the economy for the current year.
 RF(4) is the rate of accounting income on owned assets for
the firm for the fourth previous year.
 RE(4) is the rate of accounting income on owned assets for
all the firms in the economy for the fourth previous year.

41. Appraisal:
Rate of return of a specific organization may not
be comparable with other firms in the economy.
Remarks:
The model is subjective with respect to PV being
restricted for five years, efficiency ratio calculated
in past five years, and assignment of weightless
for past rate of return.
 The value of human asset will be an
underestimation.
It is too subjective and hence cannot be used.

42. Jaggi and 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.

43. Assumptions Of
Jaggi and Lau
Model
Movement of
employee is
constant
Probabilities can be
extended to other
period

44. Jaggi & Lau models is given below:
• TV = (N) rn (T)n(V)
Where :
• TV = current value of all employees
• (N) = number of employees currently
• n = time period
• r = Discount rate
• (T) =probability that an employee will be in
each rank
• (V) = economic value of an employee

45. Advantages
Jaggi-lau model is based on
group based valuation model.
It simplifies the measurement
It involves determination of
economic value of an employee
of each rank.

46. Morse Net Benefit Model
Steps :
1.Determine gross value of future services to be
rendered by employees.
2.Determination of cost (Total payment to be made to
employees in future)
3. Net Benefit: Step 2 – Step 1
4. Calculation of present value of net benefits by discounting at
predetermined rate of discount.

47. Therefore, there is a need for great deal of research which could be of
considerable help in the process of human resource development.
Certain models fail to recognise the factors determining the value of
human resources whereas others have computational problems.
The discussion of the HRA models reveals that there is not even a
single model which fulfills all the requirements of a model which could
help in the process of HRD.
CONCLUSION

48. OBJECTIONS AGAINST HUMAN
RESOURCE ACCOUNTING
Cannot be valued
Methods are
different
Not recognized by
tax laws
Cannot be
measured

49. Period of
existence
Constant fear
Extensive
research
Problem for
management

50. HUMAN RESOURCE ACCOUNTING IN
INDIA
• Though Human Resources Accounting was introduced way back
in the 1980s, it started gaining popularity in India after it was
adopted and popularized by NLC.
• Even though the situation prevails, yet, a growing trend towards
the measurement and reporting of human resources particularly
in public sector is noticeable during the past few years.
• CCI, ONGC, Engineers India Ltd., National Thermal Corporation,
Minerals and Metals Trading Corporation, Madras Refineries, Oil
India Ltd., Associated Cement Companies, SPIC, Metallurgical and
Engineering consultants India Limited, Cochin Refineries Ltd. Etc.
are some of the organizations, which have started disclosing some
valuable information regarding human resources in their financial
statements.

51. • It is needless to mention here that, the importance of human
resources in business organization as productive resources was
by and large ignored by the accountants until two decades ago.
• But still there are companies which do not follow uniform
policies in reporting human resource information as no
Internationally Accepted Accounting Standard has been evolved
and no guidelines are available as well.