Assignment

On

Human Resource Accounting Practices

At

Bharat Heavy Electricals Limited (BHEL)

:Assigned By: :Prepared By:

Mr. Bhavik Parmar Chirag V. VyasLecturer – MHRD MHRD Sem 2

Roll No:05

:Submitted To:

M.H.R.D. DepartmentM.J. College of Commerce,

Bhavnagar Unviersity,Bhavnagar

Gratitude Expression

Words cannot express the gratitude in my heart for all the people who are directly

or indirectly connected with this assignment.

I am Grateful to Mr. Bhavik Parmar – Lecturer MHRD, for providing me this

assignment and his valuable guidance to complete the assignment. I am thankful

to Dr. K.S. Vataliya – Principla – M.J.College of Commerce for his support. I

would like to take the opportunity to thank Mrs. Swati Patel –Coordinator –M.J.

College of Commerce for allowing me to do this assignment and for her

valuable inputs.

Here how can would like to express my gratitude for my classmates Deepali,

Dolly, Ravi, Ketan, Hiten, Kripal, Mahesh, Brijraj, Anjana, Trupti, Priya, Purna,

and others for their fullest support.

Thank You.

Chirag V. Vyas

2

Table of Contents

Sr. No. Contents Page No.

01 Introduction 04

02 Meaning and Definition 05

03 Importance of Human Resource

Accounting (HRA)

06

04 Human Resource Accounting (HRA)

Practices In India

07

05 BHEL at Glance 12

06 HRA Approach use by BHEL 15

07 Conclusion 21

08 Bibliography 22

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Introduction

To ensure growth and development of any organization, the efficiency of

people must be augmented in the right perspective. Without human

resources, the other resources cannot be operationally effective. The original

health of the organization is indicated by the human behavior variables, like

group loyalty, skill, motivation and capacity for effective interaction,

communication and decision making.

Men, materials, machines, money and methods are the resources required for

an organization. These resources are broadly classified into two categories,

viz., animate and inanimate (human and physical) resources. Men, otherwise

known as the human resources, are considered to be animate resources.

Others, namely, materials, machines, money and methods are considered to

be inanimate or physical resources.

The success or otherwise of an organization depends on how best the scarce

physical resources are utilized by the human resource. What is important

here is that the physical resources are being activated by the human

resources as the physical resources cannot act on their own. Therefore, the

efficient and effective utilization of inanimate resources depends largely on

the quality, caliber, skills, perception and character of the people, that is, the

human resources working in it.

The term Human resource at macro level indicates the sum of all the

components such as skills, creative abilities, innovative thinking, intuition,

imagination, knowledge and experience possessed by all the people. An

organization possessed with abundant physical resources may sometimes

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miserably fail unless it has right people, human resources, to manage its

affairs. Thus, the importance of human resources cannot be ignored.

Meaning and Definition of Human Resource Accounting

The concept of human resource accounting can be better understood if one

goes through some of the important definitions given by the competent

authors in the accounting field.

The American Accounting Society Committee on Human Resource

Accounting defines it as follows:

“Human Resource Accounting is the process of identifying and measuring

data about human resources and communicating this information to

interested parties.”

In simple terms, it is an extension of the accounting principles of matching

costs and revenues and of organizing data to communicate relevant

information in financial terms.

Mr. Woodruff Jr. Vice President of R. G. Batty Corporation defines it as

follows:

“Human Resource Accounting is an attempt to identify and report investments

made in human resources of an organization that are presently not accounted

for in conventional accounting practice. Basically it is an information system

that tells the management what changes over time are occurring to the

human resources of the business.”

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Importance of Human Resource Accounting

o Human Resource Accounting helps the management in the

Employment, locating and utilization of human resources.

o It helps in deciding the transfers, promotion, training and retrenchment

of human resources.

o It provides a basis for planning of physical assets vis-à-vis human

resources.

o It assists in evaluating the expenditure incurred for imparting further

education and training in employees in terms of the benefits derived by

the firm.

o It helps to identify the causes of high labour turnover at various levels

and taking preventive measures to contain it.

o It helps in locating the real cause for low return on investment, like

improper or under-utilization of physical assets or human resource or

both.

o It helps in understanding and assessing the inner strength of an

organization and helps the management to steer the company well

through most adverse and unfavourable circumstances.

o It provides valuable information for persons interested in making long

term investment in the firm.

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Human Resource Accounting (HRA) Practices In India

Success of corporate undertakings purely depends upon the quality of human

resources. It is accentuated that; Human element is the most important input

in any corporate enterprise. The investments directed to raise knowledge;

skills and aptitudes of the work force of the organization are the investments

in human resource. In this context, it is worth while to examine and human

resource accounting practices in corporate sector in India.

Human resource accounting is of recent origin and is struggling for

acceptance.  .It is clearly said that, Human resources accounting is an

accounting measurement system and a large body of literature has been

published in the last decade setting for the various procedures for

measurement.  At the same time the theory and underlying concepts of

accounting measurement have received sizeable attention from academics

and a substantial body of literature has developed. The conventional

accountings of human resources are not recognized as physical or financial

assets. 

Though Human Resources Accounting was introduced way back in the

1980s, it started gaining popularity in India after it was adopted and

popularized by NLC.  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. 

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Human Resource accounting reflected the potential of the human resources

of an organization in monetary terms, in its financial statements.

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. 

During the early and mid 1980’s, behavioral scientists attacked the

conventional accounting system for its failure to value the human resources of

the organization along with its other material resources.  In this changing

perspective the accountants were also called upon to play their role by

assigning monetary value to the human resources deployed in the

organization. Human Resource Accounting involves the dimension of cost

incurred by the organization for all the personnel function. 

Hence the issue is to be addressed is how to measure the economic value of

the people to the organization and various cost based measures to be taken

for human resources. The two main components of Human Resources

Accounting were investment related to employees and the value generated by

them.  Investment in human capital included all costs incurred in increasing

and upgrading the employees’ skill sets and knowledge of human resources. 

The output that an organization generated from human resources was

regarded as the value of its human resources. 

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Human Resources accounting is used to measure the performance of all the

people in the organization, and when this was made available to the

stakeholders in the form of a report, it helped them to take critical investment

decisions.All the models stressed that human capital was considered an

investment for future earnings, and not expenditure.

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 Flam holtz’s stochastic rewards valuation Models etc.  Of

these, the model suggested by Lev and Schwartz has become popular. 

Under this method, the future earnings of the human resources of the

organization until their retirement is aggregated and discounted at the cost of

capital to arrive at the present value.

Human resources accounting 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 evaluate

the charges in human resource investment over a period of time.  The

information generated by the analysis of investment in human resources

has many applications for managerial purposes.  The organizational

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. 

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The present performance result will act as input for future planning and the

present planning will have its impact on future result.  The same

relationship is also applicable to the areas of managerial applications in

relation to the human resource planning and control. Investment in human

resources can be highlighted under two heads, namely,

 Investment pattern:

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 organization.

 Investment in current costs

After analyzing the investment pattern in the human resources of an

organization the current cost of human resources can be ascertained.  For

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this purpose, current cost is defined as the cost incurred with which

derives benefit of current nature. 

These are the costs, which have little bearing on future cost.  Thus, the

expenses incurred for the maintenance of human resources are termed as

current costs.  Current cost consists of salary and wages, Dearness

allowance, overtime wages, bonus, house rent allowance, special pay and

personal pay.

Amidst this background, it is significant to mention  that  the importance

and value of human assets were  recognized in the early 1990s when

there was a major increase in employment in firms in service, technology

and other knowledge-based sectors.  In the firms in these sectors, the

intangible assets, especially human resources, contributed significantly to

the building of shareholder value. 

The critical success factor for any knowledge-based company was its

highly skilled and intellectual workforce. Soon after, the manufacturing

industry also seemed to realize the importance of people and started

perceiving its employees as strategic assets.  For instance, if two

manufacturing companies had similar capital and used similar technology,

then it was only their employees who were the major differentiating factor. 

Due to the above development, the need for valuing human assets

besides traditional accounting of tangible assets was increasingly

experienced.

From the above discussions, it is felt that, Human resource accounting

provides quantitative information about the value of human asset, which

helps the top management to take decisions regarding the adequacy of

human resources. Hence, It is Concluded that, the Human Resources are

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an indispensable but often neglected element is thus to be fore grounded

into the industrial area for the betterment of the economy.

BHEL at Glance

BHEL is the largest engineering and manufacturing enterprise in India in the

energy-related/infrastructure sector, today. BHEL was established more than

40 years ago, ushering in the indigenous Heavy Electrical Equipment industry

in India - a dream that has been more than realized with a well-recognized

track record of performance. The company has been earning profits

continuously since 1971-72 and paying dividends since 1976-77. 

BHEL caters to the core sectors of the Indian Economy, viz. Power,

Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and

Defence. The wide network of BHEL’s 15 Manufacturing Divisions, 4 Power

Sector Regional Centres, 8 Service Centres, 15 Regional Offices, 4 Overseas

Offices, 1 Subsidiary and over 100 project sites spread all over India enables

the Company to promptly serve its customers and provide them with suitable

products, systems and services -- efficiently and at competitive prices.

The high level of quality & reliability of its products is due to the emphasis on

design, engineering and manufacturing to international standards by acquiring

and adapting some of the best technologies from leading companies in the

world, together with technologies developed in its own R&D centres.

BHEL has acquired certifications to Quality Management Systems (ISO

9001), Environmental Management Systems (ISO 14001) and Occupational

Health & Safety Management Systems (OHSAS 18001) and is also well on its

journey towards Total Quality Management.

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BHEL has

Installed equipment for over 1,00,000 MW of power generation- for

Utilities, Captive and Industrial users.

Supplied over 2,25,000 MVA transformer capacity and other equipment

operating in Transmission & Distribution network up to 400 kV (AC & DC).

Supplied over 25,000 Motors with Drive Control System to Power projects,

Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants,

etc.

Supplied Traction electrics and AC/DC locos to power over 12,000 kms

Railway network.

Supplied over one million Valves to Power Plants and other Industries.

BHEL's operations are organised around three business sectors, namely

Power, Industry - including Transmission, Transportation and Renewable

Energy - and Overseas Business. This enables BHEL to have a strong

customer orientation, to be sensitive to his needs and respond quickly to the

changes in the market.

BHEL's vision is to become a world-class engineering enterprise, committed

to enhancing stakeholder value. The company is striving to give shape to its

aspirations and fulfill the expectations of the country to become a global

player.

The greatest strength of BHEL is its highly skilled and committed 42,600

employees. Every employee is given an equal opportunity to develop himself

and grow in his career. Continuous training and retraining, career planning, a

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positive work culture and participative style of management all these have�

engendered development of a committed and motivated workforce setting

new benchmarks in terms of productivity, quality and responsiveness.

 Rupees (In Million)

2006-07 2007-08 CHANGE (%)

Turnover 18739 21401 14.2

Value Added 7182 8323 15.9

Employee (Nos.) 42124 43636 3.6

Profit Before Tax 3736 4430 18.6

Profit After Tax 2415 2859 18.4

Dividend 600 746 24.4

Dividend Tax 93 127 36.8

Retained Earnings 1722 1986 15.3

Total Assets 22280 29352 31.7

Net Worth  8788 10774 22.6

Total Borrowings 89 95 6.3

Debt : Equity 0.01 0.01 0.0

Per Share (in Rupees) : 

- Net worth 179.5# 220.1 22.6

- Earnings 49.3# 58.4 18.4

- Dividend      

(US $ in million)

Turnover 4344 5419 24.8

Profit Before Tax 866 1122 29.5

Profit After Tax 560 724 29.3

Conversion Rates (Rates as on 31st March) :1 US $ = Rs. 43.14 for 2006-071 US $ = Rs. 39.49 for 2007-08

 

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HRA Approach use by BHEL

Human is the core factor and which is required to be recognized prior to any

other 'M's But till now an urgent need based modification is required while

identifying and measuring data about human resources. In this paper my

objective is to identify the extensive use of Lev & Schwartz model of Human

resource accounting, in spite of several criticized from various sides regarding

its applicability. Further more, it also portrays the applicability in wide variety

of organization of such model (some pubic sector units and IT based sector).

Human is the buzzword in the modern knowledge based society. It is the

most vital input on which the success & failure of the organization very much

depend upon. Starting from the classical economist to modern human capital

economist such development in considered to be a continuous process.

It is one of the most important 'M' associated, which is considered while taken

care of 4M's associated with any organization and they are money machines,

materials and men. But the most interesting thing is that the first three are

recognized and find a place in the assets side of the Balance sheet of the

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organization. But in case of fourth one ambiguity prevails among the

accountant.

In spite of its usefulness has been acclaimed is various literature over the

decades but its application still remain a suspectable issue, the IASB and the

ASB in different countries have not been able to formulate any specific

accounting standard for measurement & reporting of such valuable elements.

It is a popular phenomenon among the Indian corporate world is to disclose

information relating to human resource in annual statements. In this context, it

is necessary to conduct a study to assess the disclosure pattern of HRA

information in Indian corporate World.

It first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public

enterprise, during the financial year 1972-73. Later it was also adopted by

other leading public and private sector Organization in the subsequent years.

Some of them are Hindustan Machine Tools Ltd.(HMTL). Oil and Natural Gas

Corporation Ltd.(ONGC), NTPC, Cochin Refineries Ltd. (CRL), Madras

Refineries Ltd.,(MRL), Associated Cement Company Ltd.(ACC) and Infosys

Technologies Ltd.(ITL).

However, adaptability of various model (mainly Lev and Schwartz model,

Flamholtz model and Jaggi and Lev model) and discount rate fixation and

disclosure pattern ie. either age wise, skill wise etc in BHEL, SAIL, MMTC

(Minerals & Metals Trading Corporation Of India Ltd.) HMTL, NTP make it

clear, that there has been no uniformity among Indian enterprises regarding

HRA disclosure.

Problem Statement:

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Understanding the way of valuation of human resources by using Lev &

Schwartz model and how valuation of such asset are related with the other

financial variables for financial reporting purpose.

Objectives of HRA approach Study at BHEL and Other Organizations:

The main objectives of the study are:

i) To asses the way of presenting HRA information in the financial statement

by selected companies

ii) To identify HRA methods and models (mainly the extensive use of Lev &

Schwartz model) which are used to arrive at human resource value.

iii) How human resource are related with the other accounting variables for

the purpose of human financial reporting in selected companies.

The ways of presentation of HRA information disclosed by some of the

companies

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Productivity & Performance Indicators

Source:  Secondary

Terminology used:

1) PBT-Profit Before Tax

2) HR- Human Resource

3) TA-Total Assets

4) Turn-Turnover ( or Sales)

5) FA-Fixed Assets

6) VA- Value Added

Models of Human Capital Valuation

Many models have been created to value human capital. Some are based on

historic costs while some are based on future earnings. But each has its own

limitations and one model has proved to be more valid than other. Although

18

the Lev and Schwartz model has been the most widely use model for its ease

of use & convenience.

The Lev & Schwortz Model

The Lev and Schwartz model states that the human resource of a co is the

summation of value of all the Net present value (NPV) of expenditure on

employees. The human capital embodied in a person of age r is the present

value of his earning from employment

Under this model, the following steps are adopted to determine HR Value.

i) Classification of the entire labour force into certain homogeneous groups

like skilled, unskilled, semiskilled etc. and in accordance with different classed

and age wise.eg. In Infosys the classification is based on software

professionals & support staff etc.

ii) Construction of average earning stream for each group.eg. At Infosys

Incremental earnings based on group/ age have been considered.

iii) Discounting the average earnings at a predetermined rate in order to get

present value of human resource's of each group.

iv) Aggregation of the present value of different groups which represent the

capitalized future earnings of the concern as a whole,

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Where,  Vr      =  the value of an Individual  r years old

           I (t)  = the individual's annual earnings up to retirement

            t      = retirement age

            r      = a discount rate specific to the cost of capital to the company.

Critical appraisal of the Lev & Schwartz model: –

It is essentially an input measure .It ignores the output i.e. productivity of

employees.

Service state of each individual employee is not considered.

The training expenses incurred by the company on its employees are not

considered.

The attrition rate in organization is also ignored.

Factors responsible for higher earning potentiality of each individual

employees like seniority, bargaining capacity, skill, experience etc. which

may cause differential salary structure are also ignore.

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Conclusion

The conceptual thinking about valuation human resources is still in a

developing stage. No model of HR accounting is accepted by the accounting

bodies all over the world. However, still we find some application of Lev &

Schwartz model is most public sector units and IT based sectors.

In knowledge based sectors where human resources are considered to be the

key elements for monitoring the business activities to attend their goals

successfully, may not overlooked this side.

Hence, considering the great significance of HRA proper initiation should be

taken by the government along with that other professional & accounting

bodies both at the national & international levels for the measurement &

reporting of such valuable assets.

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Bibliography

[01] N.P. Agarwal, Sugan C. Jain, Priti Gupta “Human Resource Accounting”,

Raj Publishing House, Jaipur

[02] Sumanta Dutta ”HR Accounting - A Strategic Use of Lev & Schwartz

Model”

[03] http://www.bhel.com/about.php

[04] http://www.bhel.com/financial_information/bhelglance.php

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