HRD
The role of human resource accounting in
human resource management
Human Resources Accounting (HRA) is the process of identifying and measuring
data about human resources and communicating this information to interested
parties. Basically it is an information system that tells the management what
changes over time are occurring to the human resources of the organisation.
H
uman Resources are the
energies, skills, talents and
knowledge of people which
are, or which potentially can be
applied to the production of goods
or rendering useful services. Such
investment in human resources refers
to all forms of investments directed
to raise knowledge, skills and
aptitudes of the organisations
workforce.
The importance of human re-
sources in business organisation as
productive resources was by and
large ignored by the accountants un-
til two decades ago. During the early
and mid 1960's Behavioral scientists
attacked the conventional account-
ing system for its failure to value the
human resources of the organisation
along with its other material re-
sources. In this changing perspec-
tive the accountants were also called
upon to play there role by assigning
monetary value to the human re-
sources deployed in the organisation.
In the management terminology this is
called Human Resource Accounting.
Human Resources Accounting
(HRA) is the process of identifying
and measuring data about human
Lecturer (Selection Gr.) Dept. of
Commerce, Veinala College, Thrissur.
M. Narayanankutty
resources and communicating this
information to interested parties.
Basically it is an information system
that tells the management what
charges overtime are occuring to the
human resources of the organisation.
Human Resources Accounting in
India :
The concept of HRA in India is of
recent origin and is struggling for
acceptance. In India, HRA has not
been introduced so far as a system.
The Indian Companies Act does not
provide any scope for furnishing any
significant information about human
resources in financial statements.
But a growing trend towards the
measurement and reporting of human
resources, partienlarly in the public
sector is noticeable during the past
few years. BHEL, Cement Corpora-
tion of India, ONGC, Engineers
India Ltd., National Thermal Power
Corporation, Minerals and Metals
Trading Corporation, Madras Refin-
eries, Oil India Ltd., Associated Ce-
ment Companies. SPIC, Metallurgical
and Engineering Consultants
India Ltd., Cochin Refineries Ltd. etc.
are some of the organisations which
have started disclosing some valu-
able information regarding
human resources in their financial
statements.
Human Resource valuation Models :
For valuing human resources,
different models have been
developed. Some of them are
opportunity cost Approach.
standard cost Approach current
purchasing power Approach, Lev
and schwartz present value of future
earnings Model Flamholtz's
stochastic rewards valuation Model
etc. Of these, the model suggested
by Lev and schwartz have become
popular. Under this method, the
future earnings of the human
resources of the organisation until
their retirement is aggregated and
discounted at the cost of capital to
arrive at the present value.
Human Resource Accounting for
Human Resource Management
HRA system consists of two aspects
namely.
(a) The investment made in human
resources .
(b) The value human resource.
Measurement of the investments
in human resources will help to evalu-
ate the charges in human resource
investment over a period of time. The
information generated by the
analysis of investment in human
resources has many application for
managerial purposes. The organisa-

tional and human performance can be
evaluated with the help of such an
analysis. It also helps in guiding the
management to frame policies for
human resource management. The
present performance results will act
as input for future planning and the
present planning will have its impact
on future results. The same relation-
ship is also applicable to the areas of
managerial applications in relation to
the human resource planning and
control.
Investment in human resources
can be studied under two heads.
(1) Investment pattern
(2) Investment in current costs.
Investment pattern in human
resources :
The human resource investment
usually consists of the following
items:-
(1) Expenditure on advertisement for
recruitment.
(2) Cost of selection
(3) Training cost
(4) On the job training cost
(5) Subsistence allowance
(6) Contribution to provident Fund
(7) Educational tour expenses
(8) Medical expenses
(9) Ex-gratia payments
(10) Employee's Welfare Fund.
All these items influence directly
or indirectly the human resources
and the productivity of the
organisation.
Investment in current costs:
After analysing the investment
pattern in the human resources of an
organisation the current cost of
human resources can be ascertained.
For this purpose, current cost is
defined as the cost incurred with
which the organisation derives
benefit of current nature. These are
the costs which have little bearing
on future costs. Thus the expenses
incurred for the maintenance of
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human resources are termed as
current costs. Current costs consist
of salary and wages. dearness
allowance, overtime wages, bonus,
house rent allowance, special pay
and personal pay.
Human Resource cost coefficient
After ascertaining the human re-
source investment and the current
costs on human resources for a few
years the human resource cost coef-
ficient can be estimated. For this
purpose. first of all Total Human
Resource cost (THRC) can be ascer-
tained. THRC = Human Resource
Investment plus human resource cur-
rent costs. Human Resource cost co-
efficient is computed by taking the
share of each class of human re-
sources in the total human resource
cost. The following Table shows the
Total cost and cost co-efficient of
Cochin Port Trust for 5 years ending
on 31.3.1993. (See Table-1)
The co-efficient will give idea to
the management regarding how the
investment in human resources is
spread among various classes of hu-
man resources.
Times Rate or Return:
Another technique that can be
employed for measuring the
efficiency of human resource of
organisation is Times Rate of
Returns. Times Rate of Return is a
direct indicator of the production
performance of the human resource.
For this purpose the total operating
income of the organisation is taken
Table-1
Year Officers Staff
THRC Co- THRC
efficient
1988-89 175.08 0.0808 1772.04
1989-90 215.34 0.0889 1964.64
1990-91 289.82 0.1060 2192.56
1991-92 315.28 0.1140 2201.66
1992-93 353.51 0.1117 2544.99
as the contribution made by human
resources. This operating income is
apportioned among different classes
of human resources in the ratio of
human resource cost co-efficient.
The share of operating income is
reduced by current costs on human
resources and the resultant is the
value of output that can be attributed
to the investment made in human
resources. The Times Rate of Return
is computed by dividing the net
operating income by the net
investment in human resources. A
high Times Rate of Return is an
indicator of high efficiency of the
human resources.
Percapita Investment and percapita
operating Income
The efficiency of human re-
sources can also be studied by mak-
ing an analysis of the percapita in-
vestment and percapita operating in-
come. For this purpose, the number
of human resource in different cat-
egories are compared with the in-
vestment made in human resources
and operating income. While a
higher percapita investment shows
the concern of the management for
the human resources a higher
percapita operating income shows
the efficiency of the human resources
in contributing towards the income
of the organisation.
Value of Human Resources
The value of human resources of
an organisation is a useful
information to the top level
(in lakhs)
Labour Total
Co- THRE Co
efficient efficient
0.8175 220.45 0.1017 2167.5
0.8116 240.75 0.0995 2420.73
0.8020 251.44 0.0920 2733.82
0.7962 248.31 0.0898 2765.15
0.8038 267.72 0.0845 3166.22
 HRD

management for its planning and that the Human Resources of the of this limitation another approach
control purposes. All the commonly organisation remain underutilised. If can be attempted.
suggested valuation models are not the rates of return is above the cut- In this approach, it is tried to
free from limations. However, the off rate, then it can be concluded that ascertain the operating income
model suggested by Lev and the Human Resources are properly contributed by Human Resources by
schwartz with slight modifications is utilised for generating income for the analysing each income of the Port
widely used by organisations for orgaoisation. Trust. An analysis of the two major
valuation of their human resources. As part of my study in Cochin heads of operating income viz. Cargo
The value of human resources Port Trust for the purpose of handling and storage charges and
using productivity Linked Human calculating the Human Resources Port and Dock charges reveals that
Resource valuation Model of Cochin contribution, the following there are certain income which are
Port Trust as on 31.3. 1993 is given methodology is adopted. earned without any human effort.
below. Such items are Demurrage on general
The income of Cochin Port Trust
Table showing human Cargo, hire on equipment for
consists of three items. These are
resource value container handling, miscellaneous
(i) Cargo handling and storage charges, Port dues and income from
Category Amount Average charges pollution control unit. The total of
(in lakhs) Rs. (ii) Port and Dock charges (including such income during the year 1992-93
Class I -Officers 852 6,50,700.00 pilotage fees) amounted to Rs.834 Lakhs.
Class II -Officers 291 3,98,730.00 (iii) Estate rentals. The remaining income are the
Class III -Staff 8320 2,20,520.00 Of these, estate rentals is non- result of the combined effort of
Class IV -Workers 3472 1,81,042.00 operating and hence excluded from this Human Resources and capital assets.
Shore Labourers 465 1,24,778.00 study. The total operating income of Such incomes during the year are:-
the Trust was 6194 lakhs during 1992- Cargo handling and Rs.
Total 13400 2,13,823.00
93. This income is earned by Human storage charges:- (in Lakhs)
HRA Ratios : -To analyse HRA Resources. capital assets and capital
information and to relate to other Handling and storage
contribution. The interest on capital
variables ratio analysis can be used. charges on general Cargo 841.79
during the year is Rs.828 lakhs. The
The ratios are:- remaining income is Rs.5316 lakhs. Storage of goods in
(1) Human Resources to Total This income is generated by Human bonded warehouse 0. 11
Resources Resources and capital assets. The Crainage 46.25
(2) Human Resources to Capital Assets value of Human Resources and capital Petroleum, oil and
(3) Human Resources to Salaries & assests are 13400 1akhs and 24,333 lubricants handling
Allowances lakhs respectively. When the above charges 2950.74
income of Rs.5366 lakhs is divided in Wharfage of contain-
(4) Human Resources to Operating
the ratio of Human Resources and erised cargo 139.98
Income
capital assets, the Human Resources Import cargo on
(5) Human Resources to Profit contribution can be arrived at which stream landing 19.62
before tax amounts to Rs.1905.61 lakhs. When Export Cargo on
(6) Human Resources to Value this figure is compared with the value stream landing 0.33
Added of Human Resources. the rate of return Port and Dock charges:-
Rate of Return on Human Resources on Human Resources can be
Towage and mooring fees 56.75
: ascertained at 14.22%.
Berth hire charges 445.57
In order to study the efficiency The above approach has a major
Pilotage fees 779.85
of the management of an limitation that it divides the total
operating income in the ratio of Dry Docking charges 15.35
organisation in utilising its Human
Resources for generating income, the human asset and capital asset on the Water supply to shipping 63.84
human contribution is compared with assumption that the contribution of Total 5360.18
value of Human Resources. If the rate both these factors towards the
of return is less than the cost of operating income of the Port Trust is
capital of the organisation, it means on the basis of their value. Because
 A study conducted by the planning element is thus to be foregrounded
and Research Cell of the Cochin Port into the industrial arena. for the
Trust during 1993 has revealed that betterment of the economy.
nearly 12% of the operating income is
contributed by Human Resources and References:
the remaining 88% by other factors. (1) Prabhakara Rao D, "Human Resources
Following the above findings, the Accounting" Inter- India.
income generated by Human Publications New Delhi. 1986
Resources by Cochin Port Trust during (2) Bhargava. P.P. "Human Resources
1993 can be estimated at to 643.22 lakhs. Accounting" A tool for control and
management of assets", Anmol
The value of Human Resources as on Publication New Delhi 1990.
31st March 1993 is Rs.13.400 lakhs and
(3) Dasgupta.N. "Human Resources
hence the return on Human Resources Accounting" Sultan Chand & Sons
investment is only 4.8%. New Delhi 1980.
Under both these approaches the
return on Human Resources is less
than 18%. Hence it is concluded that
the Human Resources of Cochin Port
Trust is not properly utlised by the
management.
In a business organisation the
above approach can be adopted very
easily. Such an analysis will give an
idea about the utilisation of human
resources in an organisation. Thus
the Human Resources management
becomes easy and more effective.
Conclusion
The HRA system tries to evaluate
the worth of Human Resources of an
organisation is a systematic manner
as a whole to the organisation and the
society and record them for
presenting the information in a
significant manner in the financial
statement to communicate their worth
with changes over the period and
results obtained from their utilisation
to the uses of financial statements.
The amount of investment made in the
Human Resources and its value can
be utilised by the Human Resources
management personnel to determine
how far the investment in Human
Resources is utilised by the
management in producing income for
the organisation. Such an information
will be in the best interest of the
Managementt Human Resources and
the Society. The Human Resources -
an indispensable but often neglected