Human Resource Accounting
Human
Resource Accounting
By
Dr.K.Chitra
Chellam
Human
resource is the most precious part of an organisation. The total knowledge,
skills, creative abilities, talents and aptitude of employees in an organisation
is called human resource. The success or failure of an enterprise depends on
the people who work in the enterprise.
Definition;
According to Eric, “HRA is a tool to measure the cost of human resources in the
organisation”.
The American Accounting has defined
HRA as, “The process of identifying and measuring data about human resources
and communicating this information to interested parties”.
Objectives
of Human Resource Accounting (HRA):
Following
are the objectives of HRA:
- To
provide information about human resources to managers and investors so as
to enable them to take decisions.
- To
utilise human resources effectively.
- To
utilise the return on investment of human resources
- To
measure the efficiency of human resources
- To
communicate the worth (value) of human resources to organisation and the
society.
Methods
of valuation of human asset / Valuation methods / Approaches to human resource
accounting;
There are 2 approaches to value
human resources.one approach is based on cost and the second approach measures
the economic value of resources based on capitalisation of earnings. Following
are the 2 approaches to HRA:
A.Human
Resource Cost Accounting (HRCA):
HRCA
is the measurement of the costs incurred to acquire, develop and replace people
in an organisation.
HRCA
methods:
1.Historical
cost method:
Under this method,
actual costs incurred in recruitment, hiring, training and developing employees
are considered and capitalised. This capitalised cost is written off over a
period of time during which the employee remains in the firm. When an employee
is recruited by a firm, the value of human assets can be increased by making
additions. If an employee leaves the organisation prematurely, then the
unwritten cost is transferred to P & L a/c. Historical cost approach was
first developed by William C.Pyle and r.G.Barry Corporation, USA in 1967.
Advantages
of this method are as follows:
- This
method is simple to understand
- Costs
incurred are matched with revenues
- This
method can be used as a basis for valuing return on investment on human
resources.
Disadvantages
of this method are as follows:
- Only
a part of acquisition cost is considered
- Aggregate
value of the potential services of employees is not considered
- It
is difficult to estimate the service period of employees as the chances of
employees switching over to another organisation are more.
- According
to this method, the value of human resources decreases every year as a
fixed asset. But in reality, the value of human resources increases due to
experience and skills.
2.Replacement
cost method:
Under this method, the cost of replacing
existing human resources is considered and this replacement cost is taken for
valuing human resources. This method was introduced by Renis Likert.
Advantages
of this method are as follows:
· Human
resources are shown at their current values in financial statements.
· This
method is more representative and logical.
Disadvantages:
· It
is impossible to ascertain correct replacement cost of existing human
resources.
· Chances
of personal prejudices are more
· Replacement
cost may not be similar.
3.Opportunity
cost method / market value method:
This method was introduced by Hekmian
and Jones. Opportunity cost is the value of an asset which has alternative use.
In this method, opportunity cost is considered for valuing human resources. Human
resources are valued on the basis of their alternative use. If an employee has
no alternative use, then no value will be placed on him.
4.Standard
cost method:
His
method was introduced by David Watson. Under this method, standard cost of
recruiting, hiring, training, and developing employees are determined every
year. The standard cost for all employees in the organisation is the value of
human resources.
B.
Human Resource Value Accounting
1.Present
value approach:
Under this method, the value of
human resources of an organisation is determined according to their present
value to the organisation.
2.Present
value of future earnings model:
This method was introduced by Brauch
Lev and Schwartz. Under this method, present value of future earnings is
calculated and this value forms the basis for valuing human resources.
Formula for calculating the value of
an individual:
I (t)
Vr = ………….. Vr = Value of an individual ‘r’
years old
(I+R) t-r
I (t) = Individual’s annual earnings
up to the date of retirement
t = Retirement age; r = present age of the
employee; R = discount rate
3.Reward
valuation method: This method was introduced by Flamholz.
The expected realisable value of an individual is calculated and this value is
the present worth (value) of future services expected to be provided during the
period he is expected to remain in the organisation.
4.Net
benefit method: This method was suggested by Morse. The
present value of net benefits received by the organisation from the services of
its employees is the value of human resources.
5.Aggregate
payment method: This method was suggested by
Prof.S.K.Chakrabothy in 1976. He is the first Indian to suggest a model for
valuation of human resources. Under this method, human resources are valued as
a group and not as an individual.
Benefits
of Human Resource Accounting:
- HRA
reveals the value of human resources
- HRA
helps to improve managerial decision making
- It
helps to take decisions regarding transfers, promotions and training of
human resource
- It
helps in human resource planning
- It
helps to increase the productivity and efficiency of employees
- Cost
of labour turnover can be easily calculated
- It
helps investors to take long-term investment decisions
- HRA
provides complete information required by the organisation and employees.
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