Human Resouce Accounting-Final

8/12/2019 Human Resouce Accounting-Final

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HUMAN RESOURCE

ACCOUNTING


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Introduction to HRA

`The most valuable of all capital is that invested in

human beings.

- Alfred Marshall


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Definition

The process of identifying and measuring data

about human resources and communicating thisinformation to interested parties-AmericanAccounting Associations Committee on Human

Resource Accounting

The measurement and reporting of the cost and

value of people in organizational resources-Flamholtz


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Purpose

Improve management by analyzing investment inHuman Resource

Attract and retain qualified people

Profile the organization in financial terms.


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Importance

helps the management in the employment andutilization of human resources.

helps in deciding the transfers, promotion,

training and retrenchment of human resources. provides a basis for planning of physical assets

vis--vis human resources. assists in evaluating the expenditure incurred for

imparting further education and training inemployees in terms of the benefits derived bythe firm.


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Importance

helps in locating the real cause for low return oninvestment, like improper or under-utilization ofphysical assets or human resource or both.

helps in understanding and assessing the innerstrength of an organization and helps themanagement to steer the company well throughmost adverse and unfavourable circumstances.

provides valuable information for personsinterested in making long term investment in thefirm.


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Importance

helps to identify the causes of high labourturnover at various levels and taking preventivemeasures to contain it.

helps employees in improving their performanceby letting them understand their contributiontowards the betterment of the firm vis--vis the

expenditure incurred by the firm on him.


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Deterrents

no clear-cut and specific procedure or guidelinesfor finding cost and value of human resources ofan organization

period of existence of human resource isuncertain and hence valuing them underuncertainty in future seems to be unrealistic.

fear that HRA may dehumanize and manipulateemployees.


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Deterrents

much needed empirical evidence is yet to befound to support the hypothesis that HRA as atool of the management facilitates better and

effective management of human resources.

form and manner for including values in thefinancial statement is the question yet to be

classified on which there is no consensus in theaccounting profession.


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Methods/Approaches

There are two methods of Human ResourceAccounting:

Cost approachwhich involves methods based on

the costs incurred by the company, with regard toan employee.

Economic value approachwhich includes

methods based on the economic value of thehuman resources and their contribution to thecompanys gains.


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Cost Approach

Involves methods based on the costs incurredby the company, with regard to an employee.

Methods used under this approach:

Historical Cost Approach

Replacement Cost Approach

Opportunity Cost Approach

Standard Cost Approach


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Cost Approach

Historical Cost Approach-

is the sacrifice that was made to acquire and developthe resource.

includes the costs of recruiting, selection, hiring,placement, orientation, and on the job training.

direct costs- salaries

indirect costs-time spent by the supervisors duringinduction and training.


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Cost Approach

Merits of Historical Cost Approach:

simple to understand and easy to work out.

meets the traditional accounting concept of matchingcost with revenue.

provides a basis of evaluating a companys return on its

investment in human resources.


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Cost Approach

Demerits of Historical Cost Approach:

measures only the costs of employees to theorganization and ignores completely the value of the

employee to the organization difficult to estimate the number of years over which the

expenditures incurred on an employee has to be

amortised value of on asset decreases with amortisation but in

case of human resources it is just the reverse.


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Cost Approach

Replacement Cost Approach- cost that would have to be incurred if present

employees are to be replaced

positional replacement costs or the costs incurred toreplace the services rendered by an employee only to aparticular position

personal replacement cost or the cost incurred to

replace all the services expected to be rendered by theemployee at the various positions that he might haveoccupied during his work life in the organisation.


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Cost Approach

Merits of Replacement Cost Approach:

more realistic as it incorporates the current value of theorganizations human assets


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Cost Approach

Demerits of Replacement Cost Approach:

there may be no similar replacement for certain existingassets.

the replacement value is affected by subjectiveconsiderations and therefore the value is likely to differfrom one another.

it is against conventional accounting practice.


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Cost Approach

Opportunity Cost/Market Value Approach-

proposed by Heckiman and Jones

is a calculation of what would have been the returns ifthe money spent on Human Resource was spent onsomething else.

proposes that a human asset has a value only if it is

scarce i.e. Employees not considered scarce are notincluded in human asset base of an organization.


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Cost Approach

Opportunity Cost/Market Value Approach-

proposes a competitive bidding process which involvesthe managers of investment centres bidding for scarce

employees they desire.


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Cost Approach

Demerits of Opportunity Cost Approach:

valuation of human resource on the competitive bidprice may be misleading and inaccurate.

only scarce employees are included in this method andas a result unscarce employees may lose their morale, asthey are not counted.

difficult to identify the alternative use of an employee inthe organization.


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Cost Approach

Standard Cost Approach-

suggested by David Watson.

includes costs associated with the recruitment, hiring,

training and developing per grade of employees aredetermined annually. The total costs for all thepersonnel signify the worth of the human resources.

easy to explain and can work as a suitable basis forcontrol purposes through the technique of varianceanalysis.


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Cost Approach

Demerits of Standard Cost Approach:

determination of the standard cost for each grade ofemployee is a tricky issue.


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Economic Value Approach

Involves methods that measures value humancapital based on present worth of the servicesthat they are likely to render in future.

Methods used under this approach: Lev and Schwartz Model

Flamholtz Model

Morse Net Benefit Model S.K. Chakraborthy Model (Aggregate payment

approach)


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Giles and Robinsons Human Asset multiplier

Method

Rogar H.Hermanson Model

Jaggi and Lau Model Certainity Equivalent Net Benefit Model


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Lev and Schwartz Model

all employees are classified in specific groups accordingto their age and skill.

average annual earnings are determined for variousranges of age.

the total earnings which each group will get upto

retirement age are calculated. the total earnings calculated as above are discounted at

the rate of cost of capital. The value thus arrived at willbe the value of human resources/assets.


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Demerits of Lev and Schwartz Model

this model implies that the future role of the employeewill not change over the span of his working life

the approach does not take into account the possibilitythat the employee will withdraw from the organizationprior to his death or retirement which is not realistic.


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Flamholtz Model

this is an improvement on present value of future

earnings model since it takes into consideration the

possibility or probability or an employees movementfrom one role to another in his career and also of hisleaving the firm earlier, that his death or retirement.

according to this model, the ultimate measure of anindividuals value to an organization is his expected

realizable value.


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Demerits of Flamholtz Model

the model suffers from nearly all the drawbacks fromwhich the present value of future earnings models

suffers.


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Morse Net Benefit Model

according to this approach, the value of humanresources is equivalent to the present value of net

benefits derived by the organization from the service ofits employees.


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S.K. Chakraborthy Model(Aggregate paymentapproach)

valued the human resources in aggregate and not on an

individual basis. managerial and non managerial man power can be

evaluated separately.

the value of human resource on a collective or group

basis can be is multiplied by the average tenure ofemployment of the employees in that group and is theinvestment in human resource.


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Giles and Robinsons Human Asset MultiplierMethod

calculation of human asset value is based on the notion

that an individuals remuneration or the remunerationof a group of persons in the same grade can bemultiplied by a factor determined on the basis of hiscontribution to the success of the business

the total value of human assets employed in thebusiness can be calculated by simply adding together allindividual values so calculated


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Rogar H. Hermanson Model

he recommend to measure the value of humanresources on the basis of relative efficiency of an

organization. It relates with the extra profit the firmearns over and above the industry expectations.

the value of the human resources is measured on thecapitalized value of the excess future profits realized bythe firm.


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Jaggi and Lau Model

suggests valuation of human assets on a group basisrather than individual basis. It is an improvement over

Flamholtz model . according to the model it might be difficult to predict

an individuals future period of stay and chances of

promotion and hence it introduces a group concept.


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with the use of historical data employee movementpatterns are expressed in terms of probabilities forgroup of employees.

the expected stay of employees on a group basis can bemultiplied by the length of expected service in eachrank they are expected to occupy during their stay inthe organization


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Certainity Equivalent Net Benefit Model

suggested by Pekin Ogan

net benefit from each employee as explained under net

benefit approach. certainty factor at which the benefits will be available

the net benefits from all employees multiplied by their

certainty factor will give certainty equivalent netbenefits. This will be the value of human resources ofthe organization.


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Human Resouce Accounting-Final

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