HRA ppt

10.1 © 2003 by Prentice Hall

HUMAN RESOURCE ACCOUNTING



• The success of an organization depends on the quality, caliber and character of people working in it.

• The greatest asset of an organization and its success or failure depends on the skill and the performance of the employees.

• An organization finds itself in the midst of financial crisis if it does not have the right people to manage and conduct its affairs.

• Thus, human resources are a valuable asset without which an organization cannot progress in all directions.

NEED FOR HRA


• William Petty (in 1991) made the first attempt to value the human beings in monetary terms.

• He pointed out that labour was the father of wealth and it must be taken into consideration while making an estimate of wealth.

• Further efforts were made by William Far and Earnest Engel in this connection.


DEVELOPMENT OF HRA


• HRA is a new branch of accounting. It means accounting for people as the organizational resources.

• It involves measuring costs incurred to recruit, select, hire, train and develop employees and judge their economic value of the organization.

CONCEPT OF HUMAN RESOURCE ACCOUNTING


Few important definitions of HRA are :“HRA is the process of identifying and measuring data about human

resources and communicating this information to interested parties”.

- American Accounting Association’s Committee on HRA

"The measurement of quantification of human organization inputs such as recruitment, training, experience and commitment"

- Stephen Knauf “Human Resource Accounting is an attempt to identify and report

investments made in human resources of an organization 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 resources of the business.”

-Woodruff


“Human Resource Accounting is accounting for people as an organization resource. It involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human assets. It also includes measuring the economic value of people to organizations.”

-Flamholtz

HRA is the art of valuing, recording and presenting systematically the work of human resources in the books of account of an organization. Thus it is primarily an information system which informs the management about the changes that are taking place in the human resources of an organization.


Importance of Human Resource Accounting

1. Human Resource Accounting helps the management in the Employment, locating and utilization of human resources.

2. It helps in deciding the transfers, promotion, training and retrenchment of human resources.3. It helps to identify the causes of high labour turnover at various levels

and taking preventive measures to contain it.4. It provides valuable information for persons interested in making long

term investment in the firm.5. It helps employees in improving their performance and bargaining power6. 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.


OBJECTIVES OF THE SYSTEM

• 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 provide a determination of asset control.

• To allow management personnel to monitor effectively the use of human resources.

• To facilitate the effective and efficient management of resources.


Three important aspects of HRA

• Valuation of human resources.

• Recording the valuation in the books of account.

• Disclosure of the information in the financial statements of the business.


VALUATION OF HUMAN RESOURCES

Approach was first developed by William C Pyle in 1967 In this approach, actual cost incurred on recruiting, hiring,

training and developing the human resources of the organization are capitalized and amortized over the expected useful life of the human resources.

• Any amount spent on training and developing human resource increases its efficiency, hence capitalized.

• The amortization of human resource assets is done in the same way as that of other physical assets.

• If the asset is liquidated prematurely then it’s underwritten off amount is charged to revenue account.

• On the other hand, if it has a longer life than expected, its amortization is rescheduled.

The important approaches are:

1. HISTORICAL COST APPROACH


Advantageous• Simple to understand and easy to work out.• Meets the traditional accounting concept of matching cost with revenue.• It can provide a basis of evaluating a company’s return on its investments in

human resources.

Limitations• It takes into account a part of the employee’s acquisition costs and thus ignores

the aggregate value of their potential services.• It is difficult to estimate the number of years over which the capitalized

expenditure is to be amortised.• It is difficult to estimate the rate of amortization.• The economic value of human resources increases over time as the people gain

experience. But in this approach, the capital cost decreases through amortization.


Replacement Cost Approach

This approach first suggested by Rensis Likert, was developed by Eric G. Flamholtz on the basis of concept of replacement cost.

• The cost of replacing employees is used as the measure of company’s human resources.

• The human resources of a company are to be valued on the assumption as to what it will cost the concern if existing human resources are required to be replaced with other persons of equivalent experience and talent.

• In this the cost of recruiting, selecting, training, etc. of new employees to reach the level of competence of existing employees are measured


• More realistic as it incorporates the current value of company's human resources in its financial statements.

• It is more representative and logical.

Limitations• This method is at variance with the conventional accounting

practices of valuing the asset.• It is really difficult to find identical replacement of the existing

human resource in actual practice.• Difficult to find out the cost of replacing human resources and

different persons may arrive at different estimates.

Advantageous


Opportunity Cost Approach

• This method was first advocated by Hc Kiman and Jones for a company with several divisional heads.

• Opportunity cost is the value of an asset when there is an alternate use of it.• It is based on economic concept of opportunity cost which removes the

deficiency in replacement cost approach.• Measured through a competitive bidding process within the entity.

STEPS:• The entity is divided into investment centers.

• The investment centre managers bid for scarce employees they need within the entity

• The maximum bid price may be obtained by the capitalization of the excess profits generated by the employee.


LIMITATIONS OF OCA • The total valuation of human resource on the competitive bid

price may be misleading and inaccurate.

• Only scarce employees are included and as a result unscarced employees may lose their morale as they are not counted.

• It would be difficult to identify the alternative use of an employee in the organization.


4.STANDARD COST APPROACH

• Standard cost of recruiting, hiring, training and developing per grade employees are determined year after year.

• The standard costs so arrived at for all human beings employed in the organization are the value of human resources for accounting purposes.

• In this approach determination of standard cost for each grade of employee is a difficult process.


5.Present Value Approach

In this approach the value of the human resources of an organisation is determined according to their present value to the organisation.

There are number of valuation models have been developed to determine the present value


I. Present Value of Future Earnings Model.

• This model has been developed by Brauch Lev and Aba Schwartz in 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 upto retirement age arecalculated.4. The total earnings calculated as above are discounted at the rate of

costof capital. The value thus arrived at will be the value of humanresources/assets.5. The following formula has been suggested for calculating the value of

an employee according to this model –


• Vr = I(t) . t-r

(I+R) Where,

Vr = the value of an individual r years old.I(t) = the individual’s annual earnings upto the retirementt = retirement ageR = a discount rate


LIMITATIONS

1. A person’s value to an organization is not determined entirely by the person’s inherent qualities, traits and skills but also by the organizational role in which the individual is placed.

2. The model ignores the possibility and probability of an individual leaving the organization for reasons other than death or retirement.

3. The assumptions of the model that people will not make role changes during their career with the organization, also seems to be unrealistic.

4. It fails to correctly evaluate the team work involved.5. This model ignores security, bargaining capacity, skill and

experience etc which may affect the payment of higher or lower level salaries.


2.Rewards Valuation model.

• This model was suggested by Flamholtz • This is an improvement on ‘present value of future

earnings model’ since it takes into consideration the possibility or probability of an employee’s movement from one role to another in his career and also of his leaving the firm earlier, that his death or retirement.


The 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 services states, i.e., the roles that the mightoccupy including, of course, the time at which he will leaveOrganisation.3. Estimating the value derived by the organisation when aperson occupies a particular position for a specified timePeriod.4. Estimation of the probability of occupying each possiblemutually exclusive state at specified future times; and5. Discounting the value at a predetermined rate to get thepresent value of human resources.


3.Net Benefit Model(MORSE MODEL)

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. The following steps are involved under thisapproach:

1. The gross value of the services to be rendered in future bythe employees in their individual and collective capacity.

2. The value of direct and indirect future payments to theemployees 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 represents the net benefit to theenterprise because of human resources.


4.Certainty Equivalent Net Benefit Model.

Pekin Ogan (1976) has given Net benefit model. This, as a matter of fact, is an extension of “net benefit approach” as suggested by Morse.

According to this approach, the certainty with which the net benefits in future will accrue should also be taken into account, while determining the value of human resources. The approach requires determination of the following:

• Net benefit from each employee.

• Certainty factor at which the benefits will be available.

• 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.


5.Aggregate Payment Approach.

• This is the model envisaged by the Indian author Prof. S. K. Chakraborty in 1976, on the human resources.

• In his model, he has valued the human resources in aggregate and not on an individual basis.

• He has further suggested that the recruitment, hiring, selection, development and training cost of each employee can be recorded separately.


6.Total Cost Concept

• Prof. N. Dasgupta (1978) suggested his approach.

• Both employed and unemployed persons should be brought in its purview for determination of the value of human resources of the nation.

• According to him, the human resources valued as per his model should be shown both on the ‘assets’ 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. On the ‘Liabilities’ side, 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.’


7.Input / Output Control Mechanism

• This approach was suggested by Dr.Rao in 1983.

• Under this approach, a system of HRA was developed and illustrated its application in a transport equipment manufacturing concern.

• He has designed the system based on input/output control mechanism.

• The human resource deterioration is measured and adjusted with the help of amortization rates in each year.


HRA IN INDIA

• An increasing trend towards the measurement and reporting of human assets, particularly in the public sector, is noticeable during the past few years.

• There are about 12 companies in India which have adopted the concept of HRA so far. Some of the companies are:

1. Bharat Heavy Electrical Limited (BHEL), which is first Indian company to publish HRA from 1974-75 onwards and is one of the FORTUNE 500 companies listed outside USA.

2. Steel Authority of India Ltd. (SAIL), which is a holding company consisting of five integrated steel plants and two alloy steel units in the public sector.

3. Minerals and Metals Trading Corporation (MMTC), which is the biggest trading organization in India.

4. Southern Petrochemical Industries Corporation Ltd. (SPIC), which is one of the biggest diversified organizations in the joint sector, producing fertilizers, chemicals, electronic etc


BENEFITS OF HUMAN RESOURCE ACCOUNTING

1. Helpful in proper interpretation of return on capital employed2. Improves managerial-decision making3. Serves social purpose4. Increase productivity5. Invaluable contribution to humanity6. Essential where the human element is a prime factor7. Helps in investment decisions8. Completes MIS9. For successful operation of an organization


PROBLEMS AND LIMITATIONS OF HRA

1. There are no specific and clear cut guidelines for finding cost and value of human resources of an organization.

2. The life of human resource 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.

4. Human resources, unlike physical assets, are not capable of being owned, retained and utilized at the pleasure of the organization.

5. 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.

6. Tax laws does not recognize human beings as assets. So human resource accounting has been reduced to a merely theoretical concept.


•Thank You......