Presentation on theme: "HUMAN RESOURCE ACCOUNTING"— Presentation transcript:
1 HUMAN RESOURCE ACCOUNTING Kamalpreet kaurAssistant professorGCCBA-42, Chandigarh
2 HRA: CONCEPT“The process of identifying and measuring data about human resources and communicating this information to interested parties”.“Human Resource Accounting is basically an information system that tells management what changes are occurring over time to the human resources of the business. HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organization,”HRA, thus, not only involves measurement of all the costs/investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organization.
3 Meaning of human resource accounting Human Resources accounting, also known as Human Asset Accounting, involved identifying, measuring, capturing, tracking and analyzing the potential of the human resources of a company and communicating the resultant information to the stakeholders of the company. It was a method by which a cost was assigned to every employee when recruited, and the value that the employee would generate in the future. Human Resource accounting reflected the potential of the human resources of an organization in monetary terms, in its financial statements.
4 Definitions of Human Resource Accounting AAA Definition: “ The process of identifying and measuring data about human resources and communicating this information to the interested parties ” Stephen Knauf (1983): “ The measurement and quantification of human organizational inputs such as recruiting, training, experience and commitment ” Eric Flamholtz “ Accounting for people as organizational resources. It is the measurement of the cost and value of people for the organization ”
5 Why HRA?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.
6 Need for hraHR Accounting is very much needed to provide effective & efficient management within the organization. * If there is any change in the structure of manpower, it is HRA which provides information on it to the management. * HRA provides qualitative information & also assess the cost incurred in personnel. * It gives a platform to the management by providing factors for better decision-making for future investment. * The return on Investment on human capital is best evaluated through HRA. * HRA communicates to the organization & public about the worth of human resources & also its proper allocation within the organization. * HR helps the management in developing principles by classifying the financial consequences of the various practices.
7 Valuation Approaches of Human Resource Measurement is arbitrary and there are mainly 2 approaches;Cost based approachesPresent Value of Future EarningCost Based Approaches1. Historical Cost Approach2. Replacement Cost Approach3. Opportunity Cost Approach
8 NON-MONETARY MEASURES MEASUREMENTS IN HRAAPPROACHCOSTECONOMIC VALUEMONETARY MEASURESNON-MONETARY MEASURES
9 COST APPROACH IN HRA HISTORICAL COST REPLACEMENT COST The historical cost of human resources is the sacrifice that was made to acquire and develop the resource.OPPORTUNITY COSTa calculation of what would have been the returns if the money spent on HR was spent on something elseREPLACEMENT COSTthe cost that would have to be incurred if present employees are to be replaced.
10 Historical Cost Approach The cost of recruitment, selection, development are all capitalized and amortized over the useful life time of the employee. This amortization may be dealt according to the situation. Benefits: Easy to operate, Conforms with the matching principle, Similar to the treatment of other fixed assetsShortcomings: Estimation of the useful life time may not be easy, The value of humans are generally increasing over time - but this method gives a declining picture, This method doesn’t actually measure the value but undermines it
11 Replacement Cost Approach The cost to replace the existing human resources are estimated. All costs incurred to attain the current level of competence of an existing employee. Created from scratch Benefits: Is present/ future orientedDisadvantage: Not always possible to obtain such a measure (identical replacement), It is hence subjective
12 Opportunity Cost Approach Is based on economic concept which overcomes the deficiency in replacement cost app. Measured through a competitive bidding process within the entity. Steps: 1. The entity is divided in to investment centers 2. The investment centre managers bid for scarce employees they need within the entity 3. The maximum bid price may obtained by the capitalization of the excess profits generated by employee
14 ECONOMIC VALUE APPROACH PRESENT VALUE OF FUTURE EARNINGSCOMPETITIVE BIDDING MODELIND.VALUE TO ORGANIZATIONvalue of an individual is the present worth of the services that he is likely to render to the organization in futurean internal market for labor is developed and the value of the employees is determined by the managers. Managers bid against each other for human resources already available within the organization. The highest bidder ‘wins’ the resource.This method helps in determining what an employee’s future contribution is worth today.
15 Monetary value based approaches: i) The Lev and Schwartz Modelii) The Eric Flamholtz Modeliii) Morse Model
16 The Lev and Schwartz Model(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 andskill.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 anemployee according to this model –
17 CONT.. Vr = ÓTt= I(t)/(1+R)t-r, Where, V = the value of an individual “r“years old. I(t) = the individual’s annual earnings upto the retirement t = retirement age r = present age of the employee R = discount rate
18 Flamholtz Model (Reward Valuation method) (1971). 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.
19 Cont..The model suggests a five steps approach for assessing the value of an individual to the organisation : 1. Forecasting the period will remain in the organisation, i.e., his expected service life; 2. Identifying the services states, i.e., the roles that the might occupy including, of course, the time at which he will leave organisation; 3. Estimating the value derived by the organisation when a person occupies a particular position for a specified time period; 4. Estimation of the probability of occupying each possible mutually exclusive state at specified future times; and 5. Discounting the value at a predetermined rate to get the present value of human resources.
20 MORSE MODEL (1973)Under it the value of human resources is equivalent to the presentvalue of the net benefits derived by the enterprise from the serviceof 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.
21 Non- monetary value -based approaches: i) Likert Modelii) Ogan Model
22 LIKERT’S MODEL (1960)Rensis Likert in the 1960s was the first to research in HR and emphasized the importance of strong pressures on the HR's qualitative variables and on its benefits in the long-run. According to Likert's model, human variable scan be divided into three categories:(i) causal variables;(ii) intervening variables; and(iii) end-result variables.The interaction between the causal and interveningvariables affect the end-result variables by way of job satisfaction,costs, productivity and earnings
23 OGAN’S MODELPekin Ogan (1976) has given Net benefit model. This, as a matter of fact, isan extension of “net benefit approach” as suggested by Morse.According to this approach, the certainty with which the net benefits in futurewill accrue should also be taken into account, while determining the value ofhuman 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 certaintyfactor will give certainty-equivalent net benefits. This will be thevalue of human resources of the organization.
24 Advantages of HRA Foresee the changes Provides different methods of testingIncrease productivityBrings high returnHelps individual employee to aspireProvides scope for advancementThrows light on the strength and weaknesses of the existing workforce
25 Limitations Not easy to value human asset Results in dehumanizing human resourceNo evidenceHr is full of measurement problemEmployees and unions may not like the ideasUnrealisticLack of empirical evidence
26 Hra in indiaThough 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. BHEL, Cement Corporation of India, 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. 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.