Professional Documents
Culture Documents
Introduction
The term ‘Labour’ and ‘Men’ have now been christened ‘Human resource’, popularly
known as HR, the human resource is not just the number of pairs of hands engaged in
any organization. But, above all, it may be thought of as the total knowledge, skills,
creative abilities, talents & aptitudes of an organization’s workforce.
It is worth recalling what Alfred marshal said long ago, “The most valuable of all capital is
that invested in human beings”.
It is very common that capital base of even new undertakings are oversubscribed if it is
controlled by competent person. This is because, the investor in the capital market place
high value in the human ability rather than any other factors, like, net worth, yield, price-
earning ratio which are not available in case of new company.
The past few decades have witness a global transition from manufacturing to service
based economics. In the former, the physical assets, like, plant, machinery, material etc.
are of utmost importance, whereas, in latter, knowledge and attitude of the employees
matters.
For instance, in the case of an IT firm, the value of its physical assets is negligible when
compared with the value of the knowledge and skills of its human resources. Hence, the
success of these organizations is contingent on the quality of their human resources, i.e.,
its knowledge, skills, competence and motivation.
However, in order to estimate and project the worth of the knowledge, motivation, skills
and contribution of the human element as well as that of the cost of recruitment,
selection, training, etc., which are used to build and support these human aspects is
developed.
Flamholtz, too, has offered a similar definition for HRA. They define HRA as “the
measurement and reporting of the cost and value of people in organizational resources”.
Thus the concept of HRA can be basically examined from two dimensions:
The expenditure incurred for creating, increasing and updating the human resource
quality is known as investment in human resources. The yield or fruitful results, which the
investment in human resources generates, will be considered as the basis of human
resource value.
Human capital becomes the most important asset in the organization. In our traditional
accounting practices, the heavy amount incurred on the recruitment, placement,
selection, training and development of the personnel is generally treated as revenue
expenditure and hence, it is debited to profit and loss account of the period during which
such amount is incurred.
But today, it is argued that these expenditures incurred by an enterprise, to get the
benefit of the services of its manpower force in future, are against the accounting
principles to treat them completely of a revenue nature. In fact, such expenditure should
be capitalized and be shown in the balance sheet. The failure of accountants to treat
human resources as assets just like physical and financial assets attracted the attention
of academics and in 70’s concept of HRA was evolved.
If we look at the annual reports of public enterprises and private enterprises in India, we
find that chairman’s report invariable contains the statements highlighting the
significance of human resources.
Generally, chairman of these enterprises make their remarks at the annual general
meeting of the shareholders that ‘I wish to place it as record of my sincere gratitude for
hard work done by the employees of our company’. ‘I thankfully acknowledge the
contribution made by our employees’. These qualitative pronouncements reflect the
importance of human resources in an enterprise but the quantitative information relating
to their contribution of their value is nowhere recorded or shown in financial accounts.
However, in practice, a few organizations, stated below, value their human resources and
reports this information in their annual reports.
A. Public Sector Enterprises:
The opportunity cost of an employee in one department is calculated on the basis of the
bid made by other departments for the employees working in this department in the
same organization.
The use of this method is restricted to internal reporting & not external reporting.
Replacement cost is a cost that 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.
Thus, this approach incorporates the current value of an organization’s human resources
in its financial statements prepared at the year-end.
The methods for calculating the economic value of individuals may be classified into
monetary and non-monetary methods.
This model is developed by Flamholtz, according to him, “As an individual moves from
one position to another, at the same level or at different levels, the profile of the services
provided by him is likely to change. The present cumulative value of all the possible
services that may be rendered by him during his/her association with the organization is
the value of the individual”.
Typically, this value is uncertain & has two dimensions. The first is expected
conditional value of the individual, i.e., the amount that the organization could
potentially realize from the services of an individual during his/her productive service life
in an organization.
The second dimension of an individual value is the expected realizable value, which is
a function of the expected conditional value & the probability that the individual will
remain in the organization for the duration of his/her productive service life.
Prof. Flamholtz has presented the following formula for calculating an individual’s
expected realizable value:
The model has been developed by Brauch Lev & Aba Schwarts. It is the basic
model employed by Indian organizations.
The basic theme of this model is to compute the present value of the future direct
& indirect payments to their employees as a measure of their human resources
value.
According to this model, the value of human capital represented by a person who
is ‘y’ years old, is the present value of his/her future earnings from employment &
can be calculated by using the following formula:
To set the things on right perspective, One school of thought emphasizes the need for
incorporating the asset value of HR in the Balance Sheets and further identifies the
reasons that people are a valuable resources as long as they perform services, they can
be quantified.
Contrary to that, other school of thought totally refuses the very idea on the contention
that quantification of HR is beyond imagination as there cannot be any business without
HR. It could be argued that when HR is the ‘Creator’ of all resources, who dares to
quantify the ‘Creator’? HR is the very ‘Soul & body’ and ‘Blood & flesh’ of the business.
When one tries to quantify the HR on par with other resources it amounts to degradation
of the HR. Above all, quantifying the HR to fit into the balance sheet is Herculean task
since HR as an intangible asset changes its value according to the working environment
of the business and the management policies.
In India, Human Resources Accounting has not been introduced so far as a system. The
Companies Act, 1956 does not require furnishing of any significant information about
human resources in financial statements of companies.
The ICAI has issued accounting standards of different technical subjects of accounting but
it has not been able to bring any definitive accounting standard for measurement and
reporting of cost and value of human resources of an organization.
In recent years, the Financial Reporting Standards used in United States, often referred to
as Generally Accepted Accounting Principles (GAAP), have been moving towards
adoption of more complex measurement methods compared with the traditional
historical cost approach to asset measurement, including a focus on the measurement of
the time value of money & present value calculations. Under International Financial
Reporting Standards, certain assets are now reported at their fair market value at each
balance sheet date, & many items on the balance sheet that are non-current are
measured at the present value of the estimated future cash flows.
All such complex & alternative measurement approaches, viz., measurement of the time
value of money and present value calculations, etc. under IFRS, are somewhat similar to
approaches taken in developing HRA value measures.
For example, IAS-38 on Intangibles Assets & IFRS-3 on business combinations allows for
the recognition of the intangibles assets- Goodwill. The valuation of Goodwill often
involves complex assessments of fair values as well as periodic reassessments to
determine whether the fair values have become impaired. These more difficult and
challenging measurements of goodwill & other fair values are similar to challenges under
the measurement of human resources.
This might suggest the need for & consider the measurement and use of HRA in future
external financial reporting.
Summary
Human resource accounting provides quantitative information about the value of human
assets, which helps the top management to take decisions regarding the adequacy of
human resources. When proper valuation and accounting of human resource is not done
then the management may not be able to recognize the negative effects of certain
programmes , which are aimed at improving profit in short run. If not recognized on time,
these programmes could lead to a fall in productivity levels, high turnover rate and low
morale of existing employees.
Therefore, whatever, the tool or approach to HRA, much of the potential for developing
human resource accounting capability and gaining its advantage depends upon the
availability of and accessing to the required data. In those organizations, where the data
is not readily available or routinely maintained, the first step towards Human Resource
Accounting (HRA) will have to be Human Resource Information System (HRIS).