HUMAN RESOURCE ACCOUNTING

Presented By: Alex Mathew & Papiya Banerjee

Introduction To HRA
The most valuable of all capital is that invested in human beings. - Alfred Marshall

HRA is an attempt to identify and record investment made in the human resources. Its an information system reporting the cost and value of the human factor to the organization.

Definition Of HRA

The American Accounting Association has defined HRA as

the process of identifying and measuring data about human resources and communicating information to interested parties. According to Woodruff Jr., VP of R.G. Barry Corporation U.S.A, HRA is an attempt to identify and report investment made in human resources of an organization that are not accounted for under conventional accounting practice. Its an information system that tells the management what changes over time are

Characteristics Of HRA

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.

Characteristics of HRA [Contd]

Helps the management to gain knowledge of the various aspects of employees which is necessary to take vital decisions for the progress of the organization. HRA is a part of MIS. Joint efforts of behavioral scientists, accountants and managements are needed for the working and development of HRA.

Objectives Of HRA

Proper management of human resources Improvement of human resources. Depicting the true value of the organization. Provides quantitative information on human resources which helps the managers and investors in making decisions. HRA communicates the worth of human resources to the organization and to the public.

Methods/Models Of HRA

Historical Cost Method: Actual cost incurred for recruiting, hiring, training and developing the human resources of the organization are capitalized and amortized over the expected useful life of the human resources.

Methods/Models Of HRA [Contd]

Replacement Cost Method: This is the measure of the cost to replace a firms existing human resources. This method has the advantages of adjusting the human value of price trends in the economy. Opportunity Cost Method: In this method, the human resource of an organization has to be valued on the basis of the economists concept of opportunity cost which is value of benefit foregone by putting it to present use.

Methods/Models Of HRA [Contd]

Present Value Of Future Earnings Method:

It recognizes an individuals expected economic value to the enterprise during his remaining service period. An estimate about the future earning is made, and these earnings relate to the period which extents to the date of retirement of the employees. Such earnings are discounted by an appropriate range to get the present value.

INFOSYS- A PROFILE

One of the leading technology consulting firms with operations in more than 15 countries. Provides software development and engineering through a network of development centers in Asia and America.

HRA IN INFOSYS
Our Assets walk out of the door each evening. We have to make sure that they come back the next morning. - N R Narayana Murthy

In 1995-96, Infosys began putting a value on its human assets. Infosys human assets today are valued at a mindboggling figure of Rs.28,334 crores ($6.4 billion). At the end of March 2005, the company had 36,750 employees on its rolls.

HRA IN INFOSYS [Contd]

The software deliver staffs are valued at Rs.26,550 crores while those in the support function are valued at Rs.1,784 crores. To arrive at the aforementioned values, Infosys had to take the following assumptions: employee compensation, incremental earnings based on group and age. The FY 2005 annual report on HRA of Infosys mentioned the dichotomy in accounting between human and nohuman capital is fundamental.

The HRA Method Of Infosys

Lev And Schwartz Accounting Model The model is based on human capital theory which recognizes human capital as one of the several forms of holding wealth for a business enterprise, such as money, securities and physical capital. The human capital value of a person is valued by taking into account the persons annual earnings up to retirement, a discount rate specific to the person and the persons retirement age.

HRA- A Challenge To HRM

The concept of HRA has encouraged HR professionals to take a more strategic and business focused approach in managing their human capital. Knowledge based organizations value and invest significantly in human capital. Measuring the HR, therefore, becomes even more critical from a business impact perspective.

THANK YOU

ACCOUNTI HUMAN NG

RESOURCE

HRA in simple terms means accounting for people as the organizational resources. According to American Accounting Association, HRA is the process of identifying and measuring data about human resources &

What is HRA?

The problem in fact starts when it comes to assessing the real value of human assets. While most organizations can readily give detailed information about their tangible assets like plant and machinery, land and buildings, transport and office equipment,

Converting Human Data Into Money Value

Objectives

To monitor effectively the use of human resources by the management. To have an analysis of human assets. To aid in the development of management principles & proper decision making for the future. It facilitates valuation of human resources, recording the valuation in the books of account & disclose the information in the financial statement.

Advantages

It checks the corporate plan of the organization. It offsets uncertainty and change. It provides scope for advancement & development of employees. It aims to see human involvement in the organization. It helps individual employee also to aspire for promotion, benefits, etc.

Approaches

Cost Based: Historical Cost Replacement Cost Opportunity Cost Standard Cost Present Value Monetary Value Based: Present Value of Future Earnings Rewards Valuation Net Benefit Non-Monetary Value Based: Certainty Equivalent Net Benefit Aggregate Payment

Limitations

There is no proper clear-cut & specific procedure or guidelines for finding the cost & value of human resources. The period of existence of human resources is uncertain & hence valuing them under uncertainty in future seems to be unrealistic.

Factors: Ownership Guarantee to derive benefits Maintenance Sale value

Difference in HRA School of Thought

CONCLUSIONS
Human assets accounting or human resource accounting (HRA), which stands for measurement and reporting of the cost and value of people as organizational resources, is still to become an accepted trend in the Indian IT industry.

INTRODUCTION
In order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills, and contribution of the human element as well as that of the organisational processes, like recruitment, selection, training etc., which are used to build and support these human aspects, is developed. Human resource accounting (HRA) denotes just this process of quantification/measurement of the Human Resource.

Defination
The American Accounting Associations Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as the process of identifying and measuring data about human resources and communicating this information to interested parties

the measurement and reporting of the cost and value of people in organizational resources.

There are a few organizations, however, that do recognize the value of their human resources, and furnish the related information in their annual reports. In India, some of these companies are : Infosys, Bharat Heavy Electricals Ltd (BHEL); the Steel Authority of India Ltd. (SAIL), the Minerals and Metals Trading Corporation of India Ltd. (MMTC), the Southern Petrochemicals Industries Corporation of India (SPIC), the Associated Cement Companies Ltd, Madras Refineries Ltd. , the Hindustan Zinc Ltd. , Engineers India Ltd, the Oil and Natural Gas Commission, Oil India Ltd., the Cement Corporation of India Ltd. etc.

WHY HRA ?

According to Likert (1971), HRA serves the following purposes in an organisation: It furnishes cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness; It allows management personnel to monitor effectively the use of human resources; It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved; It helps in the development of management principles by classifying the financial consequences of various practices.

Basically, HRA is a management tool which is designed to assist senior management in understanding the long term cost and benefit implications of their HR decisions so that better business decisions can be taken. If such accounting is not done, then the management runs the risk of taking decisions that may improve profits in the short run but may also have severe repercussions in future.

Three main aspects of HRA

Evaluation of human resources. Recording the valuation in the books of accounts. Presenting the information in the financial statements for communication to the interested parties.

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Basic Premises of Human Resources Accounting

People are valuable resources . Determining the usefulness of manpower as an organization resource .

Information on investment and value of human

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Significance of Human Resources Accounting.

The information generated through HRA is helpful in making decisions in the following areas:
1. 2. 3. 4. 5. 6.

Decisions regarding cost reduction programmes. Training and development. Recruitment planning and selection. Manpower planning and control. Conservation and rewarding of human resources. Making a choice between various types of human investment, investment in other assets, etc. 33

Objectives of Human Resource Accounting.

Determining the return on investment on human resources. Knowing about proper utilization of human resources. Provides quantitative information on human resources. To communicate the worth of human resources to the organization and the society at large.

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Objectives of HRA, according to Likert .

To furnish cost value information for making management decision. To allow management personnel to monitor effectively the use of human resources. To provide a sound and effective basis for asset control. To aid in the development of management principles by classifying the financial consequences of various practices.
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Advantages of Human Resource Accounting

It helps in knowing whether human asset is being built up in the business or not. It will give the cost of developing human resources in the business. The investment on the development of human resources can be compared with the benefits and results derived.
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Advantages of Human Resource Accounting

The return on investment can realistically be calculated only when investment on human resources is also taken into account. It will help management in planning and executing personnel policies. Human resource accounting will help in improving the efficiency of employees.
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The biggest challenge in HRA is that of assigning monetary values to different dimensions of HR costs, investments and the worth of employees. The two main approaches usually employed for this are:
1.

The cost approach which involves methods based on the costs incurred by the company, with regard to an employee. The economic value approach which includes methods based on the economic value of the human resources and their contribution to the companys gains. This approach looks at human resources as assets and tries to identify the stream of benefits flowing from the asset.

2.

Aspects / Methods of Human Resource Accounting

There are two major human resources accounting methods: Human Resource Cost Accounting (HRCA) Human Resource Value Accounting (HRVA)

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Human Resource Cost Accounting (HRCA)

It is the measurement and reporting of the costs incurred to acquire and develop people as organizational resources. It includes: Accounting for the costs of personnel activities and functions . Accounting for costs of development of people as human assets, also termed as Human Asset Accounting
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THE COST APPROACH

Brummet, Flamholtz and Pyle Cost is a sacrifice incurred to obtain some anticipated benefit or service. All costs have two portions, viz., 1 the expense and 2 the asset portions.
The expense portion is that which provides benefits during the current accounting period (usually the current financial year), whereas the asset portion is that which is expected to give rise to benefits in the future.

Two types of costs are of special importance in HRA.

Historical cost, and replacement cost

historical cost
The historical cost of human resources is the sacrifice that was made to acquire and develop the resource. These include the costs of recruiting, selection, hiring, placement, orientation, and on the job training. While some of the costs like salaries, for instance, are direct costs, other costs like the time spent by the supervisors during induction and training, are indirect costs.

opportunity cost
by Hekimian and Jones.
Sometimes, opportunity cost method, that is, a calculation of what would have been the returns if the money spent on HR was spent on something else, is also used. However, this method is seen to be not as objective as desired. Hence its use is restricted to internal reporting and not external reporting.

replacement cost resources is the cost that The replacement cost of human

would have to be incurred if present employees are to be replaced. For instance, if an employee were to leave today, several costs of recruiting, selection, hiring, placement, orientation, and on the job training would have to be incurred in order to replace him. Such costs have two dimensionspositional replacement costs or the costs incurred to replace the services rendered by an employee only to a particular position; and personal replacement cost

Reasons for Human Resource Accounting

Objectives of Human Resource Accounting