Human Resource accounting Unit: IV
Sep 01, 2014
Human Resource accounting
Unit: IV
According to American Accounting Association Committee,
It is a process of identifying and measuring data about human resource and communicating this information to interested parties.
According to S. Woodruff (Vice-President, R.G. Barry Corporations)
It is an information system that tells the management what changes are occurring over time to the human resource of the business.
According to P. K. Gupta (Director, Legato System India)It involves accounting for investment in people, their
replacement costs and the economic value of the people in an organization.
Definitions of HRA
Manpower is a valuable asset. Its utility depends upon the way of its
management. Knowledge of money invested in human
resource and its value is crucial for decision-making.
Basic Premises
Preparing policies and programs for training and development of manpower
Cost reduction Recruitment and Selection Man-power planning and controlling Decision regarding investment in human
resource
Significance
Acquisition Cost Development Cost Operational Wages and Salaries
Human Resource Cost
A. Cost Approach1. Historical Cost Method2. Replacement Cost Method3. Competitive Bidding Method
B. Economic Value Approach1. Jaggi and Lau Method2. Net Benefit Method3. Economic Value Method4. Present Value of Expected Earning Method5. Hermanson Models
Approaches to HRA
This approach was developed by Brummet, Flamholtz and Pyle.
According to this method, HR is measured like any other physical assets. Amount spent on acquiring, training and developing human resource is being capitalised under this method and written off over the expected useful life of the employee.
Historical Cost Method
This method was developed by the Likert and Flamholtz.
According to this method, HR should be valued on the basis of its replacement cost i.e. the cost to be incurred if existing personnel is being replaced with another person of equivalent experience and skills.
Replacement Cost Method
This method was developed by Hekimian and Jones.
This method suggests competitive bidding for scarce employee in an organisation i.e. opportunity cost of employees linked to scarcity. It proposes the capitalising of additional earning potential of human resource.
Competitive Building Method
This method estimates worth of human resource on a group basis. This approach assumes that HR group account for productivity and performance in organisation.
Net Benefit MethodThis method assumes that value of HR is equal to
present value of difference between gross value of services to be rendered by the employees in future (in both individual as well as collective capacity) and the payment to be made to employees.
Jaagi and Lau Method
This method was suggested by Brummet, Flamholtz and Pyle.
According to this approach, the value of human resource is equal to the present value of the portion of the firm’s forecasted earnings attributable to the human resource. In other words, the discounted value of future earnings is distributed to all the assets including human resource and the proportion of HR assets is its value.
Economic Value Method
This method was given by Lev and Scwartz.Under this method, the value of an employee
is assumed to be equivalent to the present value of his estimated future earnings from the organisation for the remaining service life.
Present Value of Future Earning Method
1. Adjusted Discounted Future Wage Model:According to this model,HR Value= PV of employee future earning from
organisation X Efficiency RatioHere, Efficiency Ratio= Firm’s Average Rate of Return
/ Average Rate of Return of all firms2. Goodwill Model:The value of HR is determined by capitalising the
earnings in excess of the industry’s average. This is because firm might have succeeded to earn profit more than industry average due to its employees.
Hermanson Models
Hr can’t be legally owned Determination of Amortisation Period Contribution Measurement Determination of discount rate Behavioural Impact HR asset differs from non-human resource
asset Lack of accepted accounting treatment
Problem area for HRA
Different case studies of Indian Companies
HRA in India
Inflation AccountingUnit: IV
1. Unrealistic Profit2. Insufficient provision for depreciation3. Unrealistic Value of Fixed Assets4. Misleading Return on capital employed5. Difficulty in comparison of profitability of
two plants6. Misleading inter-period and inter0-firm
comparison7. Mixing up holding gaib and operating
gains
Limitations of financial accounting
Accounting for changing prices is a system of accounting which regularly records all items in financial statement at their current values.
Approaches:1. Current Purchasing Power Accounting (CPP)2. Current Cost Accounting (CCA)3. Specific and General Price Level Accounting4. Periodic revaluation
Price Level accounting
This is also known as general price level accounting. This method adjusts historical cost for change in the
general level of prices as measured by general price level.
This method makes distinction between monetary and non-monetary items.
The holding of monetary items causes loss of purchasing power while the value of non-monetary items increases during inflation.
Suitability: When shareholders want to intact their investment. When trends are to be analysed.
CPP Method
This is the oldest and popular method. This system takes into account the change in price
relevant to a particular firm rather than the whole industry.
Under this method:◦ Fixed assets and stock are shown at their net replacement value
rather than depreciated original cost. ◦ Depreciation is calculated at the current value of assets.◦ Inventory consumed is valued at the price prevailed on the date
of consumption.◦ Under this approach assets and expenses are shown in the
financial statement at the current cost to replace those resources.Suitability:When management is replacing its assets.
CCA Method
Depreciation Adjustment Cost of Sales Adjustment Monetary Working Capital Adjustment Gearing adjustment
Adjustments require under CCA Method
Backlog Depreciation=Gross Replacement Cost-Net Replacement Cost-(Previous Accumulated Depreciation + Depreciation during the year)
Depreciation Adjustment= Backlog Depreciation – Depreciation during the year
Depreciation Adjustment
COSA = (closing historical cost of stock – Opening historical cost of stock)-Average Index {(Closing stock/ Closing Index) – (Opening Stock / Opening Index) }
Cost of Sales Adjustment
MWCA = (closing monetary working capital– Opening monetary working capital)-Average Index {(Closing WC/ Closing Index) – (Opening WC / Opening Index) }
Monetary Working Capital Adjustment
GA = Total Adjustment { Average Net Borrowing / (Average Net Borrowing + Average Shareholder Fund) }
= A x { L / (L+S) }
Gearing adjustment
Lack of Objectivity Loss of Credibility of Financial Statements Non-accepted for tax payment Results into arbitrary profit. Practical problems:
◦ Opposition from employees as well as management
◦ Need of special skill among employees
Limitations