HR Accounting

HUMAN RESOURCE ACCOUNTINGHuman is priceless.. Can Account?

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What is human resource accounting?

To record, report and analyse human resource related figures through accounting system.

The result can be used for decision making purpose.


Human Resource An Asset ?

IASC Definition of an Asset: Is a resource controlled by the enterprise, as a result

of past event and from which future benefits areexpected to flow to the enterprise

Theoretical Questions:1. Are Humans resources?2. Are they controlled by the enterprise?3. Do they result from past events?4. Do they bring future economic benefits? If Yes for all it is an asset


Meaning of human resource accounting

Human Resources accounting, also known as Human AssetAccounting, involved identifying, measuring, capturing,tracking and analyzing the potential of the human resourcesof a company and communicating the resultant informationto the stakeholders of the company.

It was a method by which a cost was assigned to everyemployee when recruited, and the value that the employeewould generate in the future.

Human Resource accounting reflected the potential of thehuman resources of an organization in monetary terms, inits financial statements.


Definition

AAA Definition: The process of identifying and measuring data about human

resources and communicating this information to the interestedparties

Stephen Knauf: 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


Objectives

Furnish cost information for managerial decision regarding acquiring, allocating, developing and maintaining HR.

Allow management personnel to monitor effectively the use of HR.

Provide a determination of HR control. To aid in the development of management principles, and

proper decision making for the future Attract and retain qualified people Improve management by analyzing investment in HR Evaluate ROI in HR.


Furnishes cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness

Helps the management in the employment, locating and utilization of human resources

Helps in deciding the transfers, promotion, training and retrenchment of human resources

Assists in evaluating the expenditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm

Importance of HRA


Management tool designed to assist senior management in understanding the long term cost and benefit implications of their HR decisions

Helps in identifying the causes of high labour turnover at various levels and taking preventive measures to control it

Helps in identifying improper or under-utilization HR

Provides valuable information for persons interested in making long term investment in the firm

Contd


Valuation of HR

Historical Cost Approach Replacement Cost Approach Opportunity Cost Approach Standard Cost Approach Present Value Approach

Present Value of Future Earnings Model Rewards Valuation Model Net Benefit Model Certainty Equivalent Model Aggregate Payment Approach Total Cost Concept


Historical Cost Approach

William C Pyle & R.G. Bary Corporation Actual cost incurred for recruiting, hiring, training and developing

HR are capitalised and amortised over the expected useful life of HR.

Proportion of expenditure is written off to the income of next few years.

If HR are liquidated prematurely, write off the whole remaining amount.

Similar to the book value of physical assets. Additional costs incurred in training and developing are also

capitalised and amortised.


Historical Cost approach... Contd...

Takes into account the acquisition cost, ignores value of their potential service.

Difficult to estimate the number of years over which capitalised expenditure are to be amortised.

Difficult to determine the rate of amortisation. What about the value of employee as he gains experience?


Replacement Cost Approach

Rensis Likert, Eric G Flamholtz What would be the cost of the firm for replacing existing

resources with other persons of equivalent talents and experience!

Takes into consideration all cost. Incorporates current value of companys HR in the financial

statements. Not matching with historical accounting. Can a person be replaced with another?! Replacement value is biased!


Opportunity Cost

Hc Kimman & Jones Several divisional heads bidding for the services of various people

they need. Bid price is the investment cost. There is no opportunity cost for the employees that are not scarce. No auction for top management people no value for them?! Affect morale of employees. Value changes according to department. Concept of alternative is wrong.


Standard Cost Approach

Establish a standard cost per grade of employee. Updated every year. Replacement cost can be used for developing standard cost of

recruitment, training and development. Compare standards. Controlling is easy. But Standard cost???


Present Value of Future Earnings Model

Brauch Lev, Aba chwartz Divided the whole labour in to homogeneous group. Average earning for different classes and age groups are prepared

for each group separately. The aggregate present value of different groups represents the

capitalised future earnings of the firm as a whole. Value of HR is the present value of his remaining future earnings

from his employment. Future earnings can not be calculated. Value determined on situations. No Promotion/ Role change? Ignored teamwork. Skill, experience, bargaining capacity etc ignored.


Rewards Valuation Model

Flamholtz Forecasting the period of service. Identify the services states, ie, roles till he leaves. Estimate the value derived by the organisation. Estimate the probability of occupying each state. Discounting the value at a predetermined rate to get present value

of HR. As the people move from one role to another they render services

and rewards. Can predict carer movements? Expensive.


Net Benefit Model

Morse Value of HR is equivalent to the present value of the net benefits

derived by the enterprise from the services of its employees. Calculate the gross services to be provided by the employees. Value of payments to employees is determined. The excess of gross services represents the net benefit to the

enterprise because of HR. By applying predetermined discount rate, the present value is

determined.


Certainty Equivalent Net Benefit Method

Pekin Ogan Taking in to consideration the certainty with which the net

benefit in future will accrue to the enterprise. Multiply Net benefit from each employee with certainty

factor.


Aggregate Payment Approach

S.K Chakraborty The value of HR on a group basis can be found by multiplying the

average salary of the group with the average period of employment in that group.

Employment costs are to be treated as deferred revenue expenditure.

Written off over the expected average stay of employees. Present value calculated on average capital employed.


Total Cost Concept

N. Dasgupta Total Cost incurred by an individual, the

state and the organisation to bring that individual up to the present position should be taken as the value of that person.

Costs such as Education, training, etc are ascertained.

Revise value at the end of each year.


No specific procedure for finding cost and value of human resources of an organization

Form and manner of including HRA value in the financial statement is not clear

Life is uncertain Employee with a comparatively low value may feel

discouraged Can not own employees Fear of opposition from trade unions Amortization of HR value is not clear Tax laws do not recognize human beings as assets

Limitations


HR Accounting

Documents

Transcript of HR Accounting