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INTRODUCTION
Human Resource Accounting (HRA) means to measure the cost and
value of the people (i.e. of employees and managers) in the organization.
It measures the cost incurred to recruit, hire, train and develop employees
and managers.

HRA also finds out the present economic value of its employees and
managers. After measuring the cost and value of its employees and
managers, the organization prepares a report. This report is called HRA
Report. It is shown to the top level management . It can also be shown
to the employees, managers and outside investors.

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Definition:
‘HRA is a process of identifying and measuring data about human
resources and communicating this information to interested
parties’.
- American Association of Accountants

‘HRA is the measurement and quantification of human

organizational inputs such as recruiting, training, experience and
commitment’.

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 Meaning Of Human Resource Accounting

Human resource accounting is defined as:

 The art of valuing,
 recording and
 presenting systematically
 the worth of human resources in the books of
account of an organization.

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 Characteristics Of HRA

The following characteristics of HRA are:

• Its a system of accounting in which identification
of human resources is made.
• Investment made in human resources is recorded.
• Measurement of costs and values are made.
• Changes occurring in human resources over a
period of time are also recorded.
• Communicates information through financial
statements to interested parties.
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BASIC PREMISES OF HRA

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 Basic Premises Of HRA

• People are valuable resources of an

enterprise.
• The usefulness of manpower as an
organizational resources is determined by the
way in which it is managed.
• Information on investment and value of the
human resources is useful in the enterprise

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Reasons For Emergence Of HRA
The following are the reasons why Human Resources
Accounting has been receiving so much attention in the
recent years.
 Firstly, there is genuine need for reliable and complete
management of human resources.
 Secondly, a traditional framework of Accounting is in the
process to include a much broader set of measurement
than was possible in the past.
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 8
Need and significance of HRA
The human resource accounting is more
concerned with decision making area of
accounting.

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 The information generated through HRA can help for
making decisions in following areas:-

• Formulating policies and programmes for the development of

human resources.
• Decisions regarding cost reduction programmes.
• Training and development.
• Recruitment and selection.
• Manpower planning and control.
• Conservation and reward of human resources.
• Making a choice between various type of human investment
and investment in other assets.

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 Need for HRA

 Under conventional accounting, no information is made

available about the human resources employed in an
organization, and without people the financial and physical
resources cannot be operationally effective.

 The expenses related to the human organization are charged

to current revenue instead of being treated as investments, to
be amortized over a period of time, with the result that
magnitude of net income is significantly distorted. This
makes the assessment of firm and inter-firm comparison
difficult.
 If the value of human resources is not duly reported in
profit and loss account and balance sheet, the important act
of management on human assets cannot be perceived.

 Expenses on recruitment, training, etc. are treated as

expenses and written off against revenue under conventional
accounting. All expenses on human resources are to be
treated as investments, since the benefits are accrued over a
period of time.
The productivity and profitability of a firm largely depends on
the contribution of human assets. Two firms having identical
physical assets and operating in the same market may have
different returns due to differences in human assets. If the value of
human assets is ignored, the total valuation of the firm becomes
difficult.
 Objectives of HRA
EXAMINING
EXPENDITURE ON
PERSONNEL

COMMUNICATE
HELPS IN CREATING THE WORTH OF
GOODWILL HUMAN
RESOURCE

PROVIDES SOUND
PROVIDES
AND EFFECTIVE
QUANTITATIVE
BASIS FOR QUALITY
INFORMATION
CONTROL

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 Advantages of HRA
Information for manpower planning
Information for making personnel policie
Utilisation of human resources
Proper placements
Increases morale and motivation
Attracts best human resources
Valuable information to investors

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 Limitations
 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.

 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.

 There are no specific and clear cut guidelines for 'cost' and 'value' of
human resources of an organization. The present valuation systems
have many limitations.

 In spite of all its significance and necessity, tax laws do not recognize
human beings as assets.

 There is no universally accepted method of human asset valuation.

ASPECTS/METHODS OF HUMAN RESOURCE ACCOUNTING
HUMAN
RESOURCE
ACCOUNTING

Human Human
resource cost resource value
accounting accounting

 The lev and schwartz model

1.Historical
2.Replacemen  Flamholtz model (1971)
cost
t cost  Giles and robinson’s human asset
approach
approach multiplier method
3. Opportunity  Hermanson’s unpurchased goodwill and
cost approach adjusted discounted future wage model
 Jaggi and lau model
 Morse net benefits model (1973) 18
 Human resource cost accounting

• Measurement and reporting of costs incurred to acquire

and develop people as organizational resources
• Deals with accounting for investment made by
organization
• HRCA includes :
1. accounting for the cost of personnel activities and function
2. accounting for costs of developing people as human assets
• Approaches to Human resource accounting was first
developed 1691

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 Historical cost approach

• This approach is developed by Brummet, Flamholtz

and Pyle
• This method measures the organization’s investment
in employees using the five parameters: recruiting,
selecting, training, placing and developing.
• Any procedure followed for human resource asset is
the same as that of other physical assets.
• This model suggest instead of charging the costs to P
& L accounting it should be capitalized in balance
sheet.
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MERITS
1. Simple to understand and easy to work.
2. Traditional accounting concept of matching cost with
revenue is followed
3. Helping a firm in finding out a return on HR investment

LIMITATIONS
1. Difficult to estimate the number of years an
employee will be with the firm
2. Difficult to fix a rate of amortisation
3. Value of an asset decreases with amortisation

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 Replacement cost approach

This method is developed by Rensis Likert & Eric G. flamholtz.

The price that will have to pay to replace an existing asset
with new asset i.e, employee is called replacement cost. All
costs incurred to attain the current level of competence of an
existing employee.
In replacement cost approach the cost of recruitment, selection,
training, development etc of new employees to reach the
level of competence of existing employees are measured.

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 The concept of the replacement cost of human resource is
defined as the sacrifice that should have to be incurred today to
replace human resource presently employed.
There are three basic components of positional replacement
cost

Acquisition
cost

Separation
Learning
cost
cost

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Merits Demerits

More realistic difficult to find the identical

Representative and logical replacement
Adjusting of human value of Not possible to obtain
price trends in economy measure of a particular
Present oriented employee
Does not reflect the
knowledge, competence

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 Opportunity Cost Approach
This approach is suggested by Hekimian and Jones.
This approach values human resources on the basis
of the economic concept of Opportunity cost. The
human resource values are measured through a
competitive bidding process within the firm, based
on the concept of Opportunity Cost. They bid for an
employee and the bid price is included in investment
cost.
Opportunity cost is the value of an asset when there is
an alternative use of it.
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There are two ways to measure cost
through human resource accounting:

1.Original or
historical cost of
human resources 2.Replacement cost
of human resources

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Merits Demerits

 Promising approach Discrimination among

 Quantitative base employees
 Evaluating and developing Lower morale of employee
 Strong theoretical approach May be misleading
 Useful in decentralized set- Difficult to quantify future
up economic benefits

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CASE STUDY

This report is based on human resource practices in life insurance at

Reliance Life Insurance New Delhi. Reliance Life Insurance is an
associate company of Reliance Capital Ltd., a part of Reliance - Anil
Dhirubhai Ambani Group. Reliance Capital is one of India’s leading
private sector financial services companies, and ranks among the top 3
private sector financial services and banking companies, in terms
of net worth.
Organizations have now started realizing that the systematic attention
to human resources is the only way to increase organizational
efficiency in terms productivity, quality, profits and better customer
orientation.
HR can help deliver organizational excellence by focusing on learning,
quality, teamwork, and through various employee friendly strategies
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They studied in their research:

punctuality

Building marketing
trust

Inter
Handling personal
customers relationship
s

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 Human Resource Value Accounting

The concept is based on views that difference in

present and future earning of two similar firms is due
to the difference in their human organization.
The economic value of the firm can be determined by
obtaining the present value of future earnings.

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The Lev and Schwartz model
Lev and Schwartz developed an economic model in 1971 for determining the
value of human resources. According to them the value of human capital
emboided in a person of age t is the present value of his remaining future
earning from employment.

1. All employees are classified in specific groups according to their age and skill.

2.Average annual earnings are determined for various ranges of age.

3.The total earnings which each group will get up to retirement age are
calculated.
4.The total earnings calculated as above are discounted at the rate of cost of
capital. The value thus arrived at will be the value of human resources/assets.

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INFOSYS
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 and valued its human resources assets at Rs 1.86 billion. 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.

Infosys used the Lev and Schwartz method to value Human Resource
According to this model the present value of future earning capacity of an employee,
from the time of joining the organization till retirement was estimated . 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 group were also
taken into account.

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The method is as follows
.
1. All the employees of Infosys were divided into five groups, based on
their average age .

2. Each group’s average compensation was calculated. Infosys also

calculated the compensation of each employee at retirement by using
an average rate of increment .

3.The increments were based on industry standards, and the

employee’s performance and productivity.

4. Finally the total compensation of each group was calculated.

This value was discounted at the rate percent per annum which was
the cost of capital at Infosys to arrive at the total human resources of
Infosys.

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Disadvantages
1.This model implies that the future work condition of the employee will not
change over the span of his working life, but will remain the same as at
present.

2.The approach does not take into account the possibility that the employee
will withdraw from the organization prior to his death or retirement. It is
therefore not realistic.

3. It ignores the variable of the career movement of the employee within the
organization.

4.It does not take into account the role changes of employees. However, this
method does not give correct value of human assets as it does not measure
their contributions to achieving organizational effectiveness.

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FLAMHOLZ MODEL (1971)

According to this model, an individual’s value to an organization is determined by the

services he is expected to render to the organization during the period he is likely to
remain with the organization in various positions or service states.
This model involves the following steps.
1.Estimation of period for which an individual is expected to render service.
2.Identification of various positions or service states that the employee might hold.
3.Estimation of probable period for which he is expected to hold each position.
4.Calculation of expected service to be derived from the individual by

Where Si represents the quantity of services expected to be delivered in each state and
P (Si) is the probability that the same will be obtained.

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5.Determination of the monetary equivalent value of the future service by
multiplying the quantity of service with the price and calculation of the income
expected to be derived from their use.

6.Calculation of present value of expected future services at predetermined

rate.

DISADVANTAGES
1.It is very difficult to estimate the likely service states and positions of each
employee.

2. Individuals working in a group have higher value for the organisation as

compared to the sum or their individual values.

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GILES AND ROBINSON’S HUMAN ASSET MUTIPLIER
METHOD
They suggested a human asset measurement method known as human asset
multiplier. According to this method, the valuation of human resources should
be made in the same way as other business assets on a going concern basis.
The calculation of human asset value under this method is based on the notion
that an individual’s remuneration or the remuneration of a group of persons in
the same grade may be multiplied by a factor determined on the basis of his
contribution of the success of business.

The total value of human assets employed in the business can be calculated
simply by adding together all the individual values so calculated.

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 EXAMPLE
GRADES REMUNERATION FACTORS VALUE OF
(IN LAKH) HUMAN
ASSET
A 5 4 20

B 7 3 21

C 10 2 20

D 30 1 30

TOTAL VALUE = 20 + 21 + 20 + 30
= RS 91 LAKHS 38
 Hermanson’s Model

Unpurchased
Goodwill
Hermanson has Method
suggested two
models: Adjusted
Discounted
Future Wage
Model
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 Goodwill Method

Model in brief:
 Extra profits earned by organization as compared to
industry average rate. i.e, HR value = goodwill*
investment in HR / total investments.
 Under the first model it is argued that super normal
profits in a firm are the indicators of presence of
human resources.
The rate of earnings may be influenced by other
external factors also and cannot be purely linked to
HR.

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 Disadvantages
o Goodwill may not be attributable to investment
in suppliers, the customers, the public image, etc.
o This model cannot be implemented if the rate of
earnings of the company is less than the industry
average.
o This model is more subjective and unless
relationship of various factors to the company’s
goodwill is established, this model is debatable.

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 Adjusted Discounted Future Wage Model

The adjustment rate of return refers

Model in brief: to average rate of return on owned
HR value is the PV(person’s value) of assets of all firms in the economy
future wages payable for next 5 multiplied by the efficiency ratio of
years discounted at the adjusted the organization during the last five
rate of return. years on weighted average basis.

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 The following formula is used:
Efficiency Ratio =

RF (0) RF(1) RF(2) RF(3) RF(4 )

5 ---------+4 -------+3 -------+2 --------+ -------
RE(0) RE(1) RE(2) RE(3) RE(4)
Where:
 RF(0) is the rate of accounting income on owned assets for the firm
for the current year.
 RE (0) is the rate of accounting income on owned assets for all the
firms in the economy for the current year.
 RF(4) is the rate of accounting income on owned assets for the firm
for the fourth previous year.
 RE(4) is the rate of accounting income on owned assets for all the
firms in the economy for the fourth previous year.

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Appraisal:

Rate of return of a specific organization may not be

comparable with other firms in the economy.

Remarks:
The model is subjective with respect to PV being
restricted for five years, efficiency ratio calculated in
past five years, and assignment of weightless for past
rate of return.
 The value of human asset will be an underestimation.

It is too subjective and hence cannot be used.

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 Jaggi and Lau Model
• Valuation of assets on group basis.
• A group implies homogeneous employees
who may or may not belong to the same
department or division.
• Easy evaluation on group basis.

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Assumptions Of
Jaggi and Lau
Model
Movement of
employee is
constant
Probabilities can be
extended to other
period 46
Jaggi & Lau models is given below:
• TV = (N) rn (T)n(V)
Where :
• TV = current value of all employees
• (N) = number of employees currently
• n = time period
• r = Discount rate
• (T) =probability that an employee will be in
each rank
• (V) = economic value of an employee

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 Advantages

Jaggi-lau model is based on

group based valuation model.

It simplifies the measurement

It involves determination of
economic value of an employee
of each rank.
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 Morse Net Benefit Model
Steps :

1.Determine gross value of future services to be

rendered by employees.

2.Determination of cost (Total payment to be made to

employees in future)

3. Net Benefit: Step 2 – Step 1

4. Calculation of present value of net benefits by discounting at

predetermined rate of discount.
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 CONCLUSION
The discussion of the HRA models reveals that there is not even a
single model which fulfills all the requirements of a model which could
help in the process of HRD.

Certain models fail to recognise the factors determining the value of

human resources whereas others have computational problems.

Therefore, there is a need for great deal of research which could be of

considerable help in the process of human resource development.

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OBJECTIONS AGAINST HUMAN
RESOURCE ACCOUNTING

Cannot be valued

Cannot be Methods are

measured different

Not recognized by
tax laws
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 Period of
existence

Problem for
Constant fear
management

Extensive
research

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HUMAN RESOURCE ACCOUNTING IN INDIA
•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.

• 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.

• CCI, 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.

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• 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.

• But still there are companies which do not follow uniform

policies in reporting human resource information as no
Internationally Accepted Accounting Standard has been evolved
and no guidelines are available as well.

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