Hra

• Human resource accounting is the process of
identifying and measuring data about human
resources and communicating this
information to interested parties.
- by AAA’s commitee....

Outputs

Services
provided by
individual
and groups.

OBJECTIVES

• To overcome one of the major drawbacks of
traditional financial accounting system
• Helpful in making management decisions.
• Helps to management to monitor efficiency.
• Effective management of human resources.
• Greater accountability for human resources.
• Better human resource planning.

ADVANTAGES

• HRA will give the cost of developing human
resource s in the business.
• The investment on development of human
resource can be compared with the benefits
and results derived.
• Helps management in planning and executing
personnel policies.
• Helps in improving the efficiency of
employees.

PROBLEMS ENCOUNTERED IN
ACCOUNTING FOR HR
• HOW TO FIND VALUE OF HUMAN
RESOURCES?
• METHODOLOGY FOR RECORDING?

Models for accounting for human
resources
HUMAN RESOURCE ACCOUNTING

H.R. COST H.R. VALUE
ACCOUNTING ACCOUNTING

1. Hermanson’s
1. Historical cost model
method 2. Lev-schwartz’s
2. Replacement cost model
method 3. Flamholtz’s model
3. Opportunity cost 4. Ogan’s model
method 5. Jaggi and lau’s
model

HISTORICAL COST METHOD
• This approach was developed by BRUMMET, FLAMHOLTZ
and PYLE.
• The cost incurred on ACQUIRING and DEVELOPING the
human resources of an enterprise are CAPITALISED and
written off over the expected useful life of human
resources.
• ACQUISITION COST of human resources include
recruitment and selection cost incurred on human
resources.
• DEVELOPMENT COST of human resource include cost of
orientation, expenses incurred for off the job training and
expenses incurred for on the job training, any amount
spent for increase in efficiency of human resource.

HISTORICAL COST MODEL
ACQUISITION COSTS DEVELOPMENT COSTS

Merits
• Simple to understand and easy to develop
• Can provide a basis for evaluation of
companies ROI in human resources.
• This method also helps in control of personnel
costs

Demerits

• It takes into account only acquisition and
development costs but ignore the value of their
potential services
• It is very difficult to determine the number of
years over which capital expenditure on human
resource is to be amortised
• It is also difficult to determine the rate of
amortisation
• It has been found that economic value of human
resource increases with passage of time.

Replacement cost model
• It is based on the replacement cost of human
resource which is defined as the sacrifice
would have to be incurred today to replace
human resources presently employed.
• Flamholtz emphasised on positional
replacement cost, which refers to the sacrifice
that has to be incurred to replace a person
with substitute of same calibre, capable of
providing same set of services.

Positional replacement costs
ACQUISITION DEVELOPMENT SEPARATION
COSTS COSTS COSTS

DIRECT INDIRECT DIRECT INDIRECT DIRECT INDIRECT
COSTS COSTS COSTS COSTS COSTS COSTS
•
•COST OF
•ON THE VACANT
COST OF
JOB POSITION
RECRUITM PROMOTI-
TRAINING DURING
-ENT , ON COST OF SEPARAT
•FORMAL SEARCH
SELECTION OR TRAINER I-ON
TRAINING •LOSS OF
PLACING TRANSFER TIME PAY
AND EFFICIENCY
HIRING FROM
ORIENTATI- PRIOR TO
WITHIN
ON SEPARATIO
N

Merits
• Replacement cost model is the best value
measure.
• It is present oriented than future oriented.
• This model is a form of economic value of
individual’s services reflected by amount that
organisation would have to pay to replace.

Demerits
• Replacement cost is irrelevant in some
situations.
• This model is based on estimates only.
• This method does not reflect loyalties and
calibres of individuals.

Opportunity cost model
• This model was developed by HEKIMIAN and
JONES.
• This model is based on the fact that every human
asset has value only when it is scarce.
• The investment manager will bid for the scarce
employees, they need to recruit.
• The investment centre with the highest bid
would win the human resource and include the
price in its investment base. This model is also
known as competitive bidding.

Merits
• Suitable for scarce employees only
• All managers will be encouraged to bid
• Concept of opportunity cost is applied by
establishing an internal labour market within
an organisation through the process of
competitive bidding.

Demerits
• This model is subjective.
• It does not show the true cost of human
resource.
• The inclusion of scarce employees in the asset
base may be interpreted as discriminatory by
other employees.
• It may lower down the morale of employees.
• Quantification of future economic benefit is
difficult.

HUMAN RESORCE VALUE
ACCOUNTING
• Human resource value is present worth of
human’s expected future services.
• Human resource value accounting is
accounting for valuation of human resources.
• This concept is derived from the economic
concept of value which has two dimensions
1.Utility, value in use.
2.Purchasing power i.e, exchange value

HERMANSON’S MODEL
• This model is given by ROGER H HERMANSONS.
• This model is based on assumption that a
relationship can be established between employees
salary and his value to the organisation.
• In this the present value of discounted wages of
future is calculated for each year for coming 5 years.
• The present value is further adjusted by efficiency
ratio.

•This efficiency ratio is weighted average of the ROI of
reporting firm to all the firms of the economy, for a fixed
period.

Steps involved in the process of
valuation.
1. Estimation is to be done about annual salaries
and wages for the next 5 years.
2. Discount factor is to be applied to the annual
wages.
3. Present value of wages and salaries is calculated
by multiplying wages with discount factor.
4. Calculate efficiency ratio with the formula.
5. Present value of wages and salaries are
multiplied with efficiency ratio.

• The estimated annual wages and salaries for
next five years of nippon chemical company
are Rs. 3, 4, 5, 6, 7 lacs. The ARR of the
company for the current and proceeding
4years is 20, 15, 12, 12, and 10.and ARR of all
the firms in the chemical industry for the
corresponding period is 15, 10, 8, 6 and 5
resp. Assume the discount rate is 10%.

UNPURCHASED GOODWILL MODEL
• According to hermansons, the unpurchased
goodwill notion is based on the premise that
“ The best available evident of the present
existence of unowned resources is the fact
that a given firm earned higher than normal
rate of income for the most recent year”

MERITS
• Uses information from published financial
statements.
• Based on a logical indication of the presence
of human resources in an organisation.
• Easy to understand and easy to make.

DEMERITS
• It ignores human resource base that is
required to carry out normal operations of
organisation.
• It uses the actual earnings of most recent year
as the basis for calculating human assets
which puts restriction on the scope of making
very much discounts the reliability of forecasts
of future earning that could be more relevant
for managerial decisions.

• The average rate of return on tangible asset in
a particular industry over past five years has
been 12% and the firm has enjoyed 16%
return on its tangible assets of Rs. 30,00,000.
then calculate value of human resources of
that company.

Tangible assets=30,00,000
Profit of company= 16%
Profit= 30,00,000 x 16 / 100
= 4,80,000
Rate of return in industry = 12%
capital base = 4,80,000 / 12%
=40,00,000
Valuation of unowned assets= 40,00,000-30,00,000
Human resources=10,00,000

FLAMHOLTZ’S MODEL
• FLMHOLTZ was of the view that human beings cannot
be purchased or owned by the organisation like other
physical assets.
• They are free to either serve or turnover.
• He emphasised on dual aspect of an individual value
1. the amount that organisation could potentially realise
from his services if he stays in the organisation.
2. The other aspect refers to the amount actually
expected to be derived, taking into account the person
likelihood of leaving.

COMPENSATION MODEL
• This model was developed by BARUCH LEV
and SCHWARTZ .
• schwartz model also known as compensation
model, which determines present value of
future earnings of a person in an organisation.
• It recognises human resource as wealth
providing source of income and relies on
measurement of such wealth as present value
of future earnings.

There is a group of 200 skilled workers in sant valve ltd. In the age group of 20-29 .
It is estimated that every employee will earn as per earning profile as under

Calculate value of 200 employees by using schwartz model by assuming discount
rate 10% and age 20.

• Each employee will earn as under as per earning profile:
Rs. 8,000 per year for 1st 10 years.
Rs. 10,000 per year for 2nd 10 years.
Rs. 12,000 per year for 3rd 10 years.
Rs. 16,000 per year for 4th 10 years.
Calculate the present value:
8000 x 6.145(1-10)=49,160
10000 x 2.369(11-20)=23,690
12000 x .913(21-30)=10,956
16000 x .352(31-40)=5,632

• Value of each employee=89,438
• Value of 200 employees= 200 x 89,438
=1,78,87,600

Limitations
• It ignores the possibility and probability of an
individual leaving an organisation for reasons
other than retirement and death.
• The assumptions of schwartz that human beings
will not make role changes during thier tenure in
the organisation seems unrealistic.
• it fails to accurately evaluate the group and the
team work involved.
• It ignores security, bargaining capacity, skill and
experience which may affect the payment of
more or low salaries.

• Subjectivity is likely to be there while
determining future level of salaries even
about determination of discount rate.
• A value of human being to the organisation is
not determined entirely by person inheritent
qualities, traits and skills, but also by
organisation role in which individual is placed

OGANS MODEL
• Ogan was of the view that there are seven
major determinants which can helpful in
valuation of human resources.

MERITS
• This model is suitable for service organisation.
• It generates data that is amenable for use in
an on going manner like performance
evaluation system.

DEMERITS
• Total value of individual is not considered.
• Model is limited for use in professional service
organisation.
• The model does not concern itself with the
value of complement of standard work index.

JAGGI AND LAU’S MODEL
• JAGGI and LAU have proposed the model which is
based on groups rather than individuals.
• It is based on homogeneous groups
• A markov chain representation is used.
• Duration of employment is taken into
consideration.
• Promotion paths are taken into consideration.
• Multiple probabilities of further changes are
taken in to consideration.

Duration of service of a group is=20 years
(250 days, @ 8 hours per day)working hours 40,000 hours/worker/a year
chargeable rate per hour)

For worker Rs. 10 per hour
For supervisor Rs. 15 per hour
For manager Rs.25 per hour
For general manager Rs. 30 per hour
after 20 years, current position of the group is
predicted as follows:
RANKS NUMBERS
Workers 70
Supervisors 20
Managers 8
General managers 2

Calculate the value per employee by assuming probability and
path/routes and assuming that there will be 4 stages as
under:
STAGES YEAR
1 0-5 1ST Five years
2 6-10 2nd Five years
3 11-15 3rd Five years
4 16-20 4th Five years

After every 5 years., every worker becomes eligible for promotion.
Promotion path / routes along with probability are as under:

W = Worker
S=Supervisor
M=Manager
G.M. = General Manager

MERITS
• Time saving and economical model
• Model motivates the total group as a whole.
• Less chances of feeling of jealously among
employees.
• Easily acceptable by the trade unions.
• Valuation of all employees is done.
• In this model only multiple probability are
taken in to account for valuation purposes.

DEMERITS
• Difficult to understand by illiterate working
class.
• All workers are given equal attention.
• Predicting further is difficult task.
• Subjectivity is likely to be there.
• Lack of reliable data.

REASONS OF SLOW PROGRESS OF HRA
IN INDIA
AT MACRO LEVEL
• No legal binding and backing.
• Lack of initiative in private sector.
• India is trend follower and not trend setter
• Lack of initiation from professional institutes.
• No contribution from universities
• Family denominations in private sector.

AT MICRO LEVEL
 TO ENTREPRENEURS
• Lack of computer technology.
• Costs are more than the benefits.
• Fear of bargaining by trade unions.
 TO INVESTORS
• Lack of awareness among investors.
• No standard model.
• Difficulty in comparison.

 TO WORKERS
• Workers are liabilities not assets.
• High labour turnover.
• Illiteracy among the working class.

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