Human resource accounting
Human Resource Accounting is a method to measure the effectiveness of personnel management activities and the use of people in an organization.
Historical cost approach
This approach is developed by Brummet, Flamholtz and Pyle but the first attempt towards employee valuation made by R. G. Barry Corporation of Columbus, Ohio in the year 1967. This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition; formal training and, familiarization; informal training, Informal familiarization; experience; and development. The costs were amortized over the expected working lives of individuals and unamortized costs (for example, when an individual left the firm) were written off.
Limitations
* The valuation method is based on false assumption that the dollar is stable. * Since the assets cannot be sold there is no independent check of valuation. * This method measures only the costs to the organization but ignores completely any measure of the value of the employee to the organization (Cascio 3).
Replacement Cost approach
This approach measures the cost of replacing an employee. According to Likert (1985) replacement cost include recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.
Limitations
* Substitution of replacement cost method for historical cost method does little more than update the valuation, at the expense of importing considerably more subjectivity into the measure. This method may also lead to an upwardly biased estimate because an inefficient firm may incur greater cost to replace an employee (Cascio 3-4).
Present Value of Future Earnings
Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees’ death/separation/retirement. This method helps in determining what an employee’s future contribution is worth today.
According to this model, the value of human capital embodied in a person who is ‘y’ years old, is the present value of his/her future earnings from employment and can be calculated by using the following formula:
E(Vy) = Σ Py(t+1) Σ I(T)/(I+R)t-y T=Y Y where E (Vy) = expected value of a ‘y’ year old person’s human capital T = the person’s retirement age Py (t) = probability of the person leaving the organization I(t) = expected earnings of the person in period I r = discount rate
Limitations
* The measure is an objective one because it uses widely based statistics such as census income return and mortality tables. * The measure assigns more weight to averages than to the value of any specific group or individual (Cascio 4-5).
Value to the organization
Hekimian and Jones (1967) proposed that where an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that division’s investment base. For example a value of a professional athlete’s service is often determined by how much money a particular team, acting in an open competitive market is willing to pay him or her.
Limitations
* The soundness of the valuation depends wholly on the information, judgment, and impartiality of the bidder (Cascio 5).
Expense model
According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job performance are measured using traditional organizational tools, and then costs are estimated for each criterion. For example, in costing labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs. Case Details: | Price: | Case Code | : | HROB031 | For delivery in electronic format: Rs. 300;
For delivery through courier (within India): Rs. 300 + Rs. 25 for Shipping & Handling Charges ThemesHR concepts and issues | Case Length | : | 13 Pages | | Period | : | 1995 - 2001 | | Pub Date | : | 2003 | | Teaching Note | : | Available | | Organization | : | Infosys | | Industry | : | Software | | Countries | : | India | |
Abstract:
This case examines the various models of human resources accounting (HRA) for valuing human assets in an organization. It gives an overview of the HRA models adopted by the public sector and software companies in India. The case also explains in detail the HRA model adopted by Infosys, a leading software company in India. Finally, the case mentions the advantages and the hurdles in adopting HRA models in India. | |
Issues:
» Concept and various human resources accounting models available to value human assets of an organization
Key Words:
Various, models, human resources accounting, HRA, human assets, organization, public sector, software companies, India, Infosys

Valuing Human Resources In the financial year 1995-96, Infosys Technologies (Infosys) became the first software company to value its human resources in India. The company used the Lev & Schwartz Model (Refer Exhibit I) and valued its human resources assets at Rs 1.86 billion. Infosys had always given utmost importance to the role of employees in contributing to the company's success. Analysts felt that human resources accounting (HRA) was a step further in Infosys' focus on its employees. Narayana Murthy (Murthy), the then chairman and managing director of Infosys, said: "Comparing this figure over the years will tell us whether the value of our human resources is appreciating or not. For a knowledge intensive company like ours, that is vital information." | |
The concept of HRA was not new in India. HRA was pioneered by public sector companies like Bharat Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way back in the 1970s. However, the concept did not gain much popularity and acceptance during that time. | It was only in the mid-1990s, after Infosys started valuing its employees, that the concept gained popularity in India. By 2002, HR accounting had been introduced by leading software companies like Satyam Computers and DSQ Software, as well as leading manufacturing firms like Reliance Industries.

HR managers were quick to respond on the above developments by stating that more and more organizations had now started to realize the importance of skilled workforce. They felt that to be successful in highly competitive markets, companies require to continuously improve the level of performance of their workforce. |

It was only in the mid-1990s, after Infosys started valuing its employees, that the concept gained popularity in India. By 2002, HR accounting had been introduced by leading software companies like Satyam Computers and DSQ Software, as well as leading manufacturing firms like Reliance Industries.

HR managers were quick to respond on the above developments by stating that more and more organizations had now started to realize the importance of skilled workforce. They felt that to be successful in highly competitive markets, companies require to continuously improve the level of performance of their workforce.

HRA enabled companies to understand whether the skill sets of their human capital was appreciating or not. R. Krishnaswamy, an actuarial accountant, said, "The value can be used internally by an organization to make comparisons from unit to unit, from year to year, as well as within its industry."
Valuing Human Resources Contd... Stock market analysts felt that the 'comprehensive disclosure policy' was becoming a differentiating factor among companies in various industries. Yezdi H. Malegam, managing director, S.B. Billimoria & Company commented, "In the last few years, people are realizing that their intangible assets are worth much more than their tangible ones. Now an attempt is being made to put a value to these intangibles, and to bring these hidden values to book."

Analysts felt that HRA was an investor-friendly disclosure, and assured stakeholders that the company had the right human capital to meet its future business requirements. | |
Background Note
The assets of an organization could be broadly classified into tangible and intangible assets. Tangible assets referred to all the physical assets which could be presented in the balance sheet including plant and machinery, investments in securities, inventories, cash, cash equivalents and bank balance, marketable securities, accounts and notes receivables, finance receivables, equipment on operating leases, etc. Intangible assets included the goodwill, brand value and human assets of a company. The human assets involved the capabilities, knowledge, skills and talents of employees in an organization.

In the past, less importance was given by organizations to value their human assets. Moreover, it was also considered difficult to value them since there were no defined parameters of valuation. Companies did not value human resources as these were never treated as an asset in the past. All investments related to employees, including salary as well as recruitment and training costs were considered as expenditures. |
In addition, accountants also felt that the stakeholders2 of a company may not accept the concept of placing a monetary value on human resources.

The importance and value of human assets started to be recognized in the early 1990s when there was a major increase in employment in firms in service, technology and other knowledge-based sectors3. 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 skilled and intellectual workforce.
HRA in Practice at Infosys Infosys' HRA model was based on the present value of the employees' future earnings with the following assumptions:

• An employee's salary package included all benefits, whether direct or otherwise, earned both in India and in a foreign nation.
• The additional earnings on the basis of age and group were also taken into account.

To calculate the value of its human assets in 1995-96, all the 1,172 employees of Infosys were divided into five groups, based on their average age. Each group's average compensation was calculated. Infosys also calculated the compensation of each employee at retirement by using an average rate of increment... | |
HRA - The Benefits and Hurdles
The benefits of adopting HRA were manifold. It helped an organization to take managerial decisions based on the availability and the necessity of human resources. When the human resources were quantified, it gave the investors and other clients true insights into the organization and its future potential. Proper valuation of human resources helped organizations to eliminate the negative effects of redundant labor. | This, in turn, helped them to channelize the available skills, talents, knowledge and experience of their employees more efficiently. By adopting and implementing HRA in an organization, the following important information could be obtained:

• Cost per employee
• Human capital investment ratio
• The amount of wealth created by each employee
• The profit created by each employee
• The ratio of salary paid to the total revenue generated
• Average salary of each employee
• Employee absenteeism rates
• Employee turnover rate and retention rate... |
Exhibits
Exhibit I: Models for Valuing/Measuring Human Assets
Exhibit II: Human Resources Values of Companies in India
Exhibit III: Human Asset Value of Bhel
Exhibit IV: Sail's Hra Model
Exhibit V: Infosys Balance Sheet (Including Intangible Assets)
2] A stakeholder is one who has a share or an interest in an enterprise. Stakeholders include the shareholders, directors and management of a company, its suppliers, etc.

3] Organizations in fields like consulting, education, research, software, and other technology-based industries.
Valuing Human Resources In the financial year 1995-96, Infosys Technologies (Infosys) became the first software company to value its human resources in India. The company used the Lev & Schwartz Model (Refer Exhibit I) and valued its human resources assets at Rs 1.86 billion. Infosys had always given utmost importance to the role of employees in contributing to the company's success. Analysts felt that human resources accounting (HRA) was a step further in Infosys' focus on its employees. Narayana Murthy (Murthy), the then chairman and managing director of Infosys, said: "Comparing this figure over the years will tell us whether the value of our human resources is appreciating or not. For a knowledge intensive company like ours, that is vital information." | |
The concept of HRA was not new in India. HRA was pioneered by public sector companies like Bharat Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way back in the 1970s. However, the concept did not gain much popularity and acceptance during that time. | It was only in the mid-1990s, after Infosys started valuing its employees, that the concept gained popularity in India. By 2002, HR accounting had been introduced by leading software companies like Satyam Computers and DSQ Software, as well as leading manufacturing firms like Reliance Industries.

HR managers were quick to respond on the above developments by stating that more and more organizations had now started to realize the importance of skilled workforce. They felt that to be successful in highly competitive markets, companies require to continuously improve the level of performance of their workforce. |
HRA enabled companies to understand whether the skill sets of their human capital was appreciating or not. R. Krishnaswamy, an actuarial accountant, said, "The value can be used internally by an organization to make comparisons from unit to unit, from year to year, as well as within its industry."
Human Resources Accounting in Infosys - Next Page>>

1] Based in Bangalore (Karnataka), Infosys is a publicly held, ISO-9001 certified company offering information technology, consulting and software services to Fortune 1000 companies. The software services offered included application development (on a fixed-time and fixed-fee basis), Internet consulting and software maintenance services.

HUMAN RESOURCE ACCOUNTING (HRA) PRACTICES IN INDIA by Assistant on September 27, 2009
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. 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. 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. 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 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 an indispensable but often neglected element is thus to be fore grounded into the industrial area for the betterment of the economy.
Article Source:http://www.articlesbase.com/human-resources-articles/human-resource-accounting-hra-practices-in-india-1272765.html
Human Resource Accounting In Bhel
The Non accounting of human resources and the change occurring therein, of an organization may provide a poor picture of the profits and profitability of the organization.
“Human Resource Accounting” is the offshoot of various research studies conducted in the areas of accounting and finance. Human resource is an asset whose value gets appreciated over the period of time provided placed, applied and developed in the right direction.
Human Resource Accounting is the measurement of the cost and value of people to the organization. It involves measuring costs incurred by the organizations to recruit, select, hire, train and develop employees and judge their economic value to the organization.

“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.

Historical Score Card of Human Resource Accounting:
The concept of considering the human beings as an asset is an old one. The importance which Emperor Akbar gave to the nine jewels (courtiers) is a strong evidence for the same. The history of our freedom movement will not be complete without mentioning the names of distinguished freedom fighters such as Shri Motilal Nehru, Mahatma Gandhi, Sardar Vallabh Bhai Patel and several others but no effort was made to assign any monetary value to such individuals in the Balance Sheet of the Nation.

Objectives of Hunan Resources Accounting
•Improve management by analyzing investment in HR
•Consider people as its asset
•Attract and retain qualified people
•Profile the organization in financial terms.

There are many limitations which make the management reluctant to introduce HRA. Some of the attributes are:
•There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human resources of an organization. The systems which are being adopted have certain drawbacks.
•The period of existence of human resource is uncertain and hence valuing them under uncertainty in future seems to be unrealistic.
•There is a fear that HRA may dehumanize and manipulate employees.
•The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a tool of the management facilitates better and effective management of human resources.
•In what form and manner, their value to be included in the financial statement is the question yet to be classified on which there is no consensus in the accounting profession.
•As human resources are not capable of being owned, retained and utilized, unlike the physical assets, there is problem for the management to treat them as assets in the strict sense.

Human Resource Accounting Disclosures:

Public Sector Enterprises
1. Bharat Heavy Electricals Limited (BHEL)
2. Steel Authority of India Limited (SAIL)
3. Cement Corporation of India Limited (CCI)
4. Oil and Natural Gas Commission (ONGC)
5. Electronics India Limited
6. Engineers India Limited
7. Hindustan Shipyard
8. National Thermal Power Corporation Limited (NTPC)

Private Sector Enterprise
1. Infosys

By Priti Shah
Laurent & Benon Management Consultants Ltd, a public limited company with its corporate office Gurgaon with Pan-India presence. We as an organization strive to offer the right Human Resource Solutions at the right time and enable our clients to enhance the net worth of their human resource capital.

For further Information please Visit us at: http://www.laurentandbenon.co.in/
Visit Blog at: http://laurentandbenon.blogspot.com/

more at http://www.citehr.com/163143-human-resource-accounting.html#ixzz15B3hU4Lt
ASSESSMENT & REVIEW OF CURRENT HUMAN RESOURCES OF A COMPANY
Human resource planning begins by developing a profile of the current status of human resources. Basically, this is an internal analysis that includes an inventory of the workers and skills already available within the organization and a comprehensive job analysis. A human resource inventory report includes a list of names, education, training, prior employment, current position, performance ratings, salary level, languages spoken, capabilities and specialized skills for every employee in the organization. This input is valuable in determining what skills are currently available in the organization. It not only acts as a guide for considering new pursuits for the organization but also has value in other activities, such as selecting individuals for training and executive development, for promotion and for transfers. Some organizations also generate a separate executive inventory report which covers individuals in middle and top management positions. This adds a new dimension to the planning activity by highlighting those positions that may become vacant in future due to retirements, promotions, transfers or resignations. The individual manager’s inventory can be placed against the list of positions to determine if there is sufficient managerial talent to cover both the expected and unexpected vacancies.
While the human resources inventory is concerned with telling us what individual employees can do, job analysis defines the jobs within the organization and the behaviors necessary to perform these jobs. Job analysis is the systematic collection and recording of information concerning the purposes of a job, its major duties, the conditions under which it is performed and the knowledge, skills and abilities needed to perform the job effectively. The results of job analysis are often used to develop job descriptions
A job description is a statement of the duties, working conditions and other significant requirement associated with a particular job. Job descriptions are frequently combined with job specifications, which is a statement of skills, abilities, education and pervious work experience that are required to perform a particular job. Though the formats for job descriptions and job specifications vary, the information is typically used for activities that require a solid understanding of the job and the qualifications necessary for performing it. In essence, the assessment of the organization’s current human resources situation based on human resource inventory and a thorough job analysis identifies where people are by taking a close look at the jobs currently being done and the people doing those jobs.
Review
Demand for human resource is a result of demand for the organization’s products or services. Based on the estimate of total revenue, the organization can attempt to establish a number and mix of human resources needed to reach these revenues. As a result, before we can estimate future human resources needs, some formal statement is required of what course the organization plans to take in the future, defined in terms of sales or revenue.
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BENEFITS OF HUMAN RESOURCE ACCOUNTING ( HRA)
Benefits of HRA can be listed thus:
1. The adoption of the system of HRA discloses the value of human resources. This helps in proper interpretation of Return on Capital Employed. Such information would give a long term perspective of the business performance which would be more reliable than the Return on Capital Employed under the conventional system of accounting.
2. The maintenance of detailed record relating to internal human resources(i.e. employees) improves managerial decision-making specially institutions like direct recruitment versus promotions; transfer versus retention retrenchment or relieving versus retention; utility of cost reduction programs in view of its possible impact on human relations and impact of budgetary control on human relations and organizational behavior. Thus, the use of HRA will definitely improve the quality of management.
3. The adoption of the system of HRA serves social purposes by identification of human resources as a valuable asset which will help prevention of misuse and under use due to thoughtless or rather reckless transfers, demotions, layoffs and day-to-day maltreatment by supervisors and other superiors in the administrative hierarchy; efficient allocation of resources in the economy ;efficiency in the use of human resources; and proper understanding of the evil effects of avoidable labor unrest / disputes on the quality of internal human resources.
4. The system of HRA would no doubt, pave the way for increasingly productivity of human resources, because, the fact that a monetary value is attached to human resources and that human talents devotion and skill considered as valuable assets and allotted a place in the financial statements of the organization, would boost the morale, loyalty and initiative of the employees, creating in their mind a sense of belonging towards the organization and would act as a great incentive, giving rise to increased productivity.
HRA in India
Under the constraints the financial statements are prepared pursuant to the Company Law in India there is no scope for showing any significant information about human resources in financial statements except the remuneration paid to them and the number of employees getting compensation beyond certain amount per annum.
But there is nothing to prohibit the companies to attach information about the worth of human resources and the results of their performance during the accounting period in notes or schedules.
The following are the general considerations in the working of the HR concept by organizations.
1. Only internal human organization (employees) is considered. External organizations like customers are not considered.
2. All categories of employees are included. The value of employee potential services is considered.
3. HR value is worked out on certain standardized formula developed by experts.
4. A 12% discount rate is adopted.
5. Employees are classified according to age and pay scales under six categories—executives, supervisors, supporting technical staff, skilled artisans, unskilled and semi-skilled workers and clerical staff.
6. Weighted average is calculated for each group on information of total number of employees at each incremental stage and in each grade.
7. Future number of employees is worked out on the basis of general promotion policy.
8. Employee considerations include direct and indirect benefits.
HRM and HRA is now followed by most of the medium and large scale companies in India as there is awareness of the benefits in terms of Revenue, productivity, flexibility in skill development and so on. What used to be a designation like ‘Personnel Manager’ is now ‘Human Resources Manager’ and the manager can grow up to Director’s level in some companies. That is the importance bestowed by companies for the Human Resources function.