Chapter-1
Content
INTRODUCTION
To ensur ensuree grow growth th and and devel developm opmen entt of any orga organi niza zati tion, on, the the efficiency of people must be augmented in the right perspective. Without human resources, the other resources cannot be operationally effective. The origina originall health health of the organ organiza izatio tion n is indica indicated ted by the human human behavi behavior or variables, like group loyalty, skill, motivation and capacity for effective interaction, communication and decision making.
Men, materials, machines, money and methods are the resources required for an organization. These resources are broadly classified into two categories, viz., animate and inanimate (human and physical resources. Men, Men, othe otherw rwis isee known known as the the human human reso resour urce ces, s, are are cons consid ider ered ed to be animat animatee resou resource rces. s. !thers !thers,, namely namely,, materi materials als,, machin machines, es, money money and methods are considered to be inanimate or physical resources.
The success or otherwise of an organization depends on how best the scarce physical resources are utilized by the human resource. What is important here here is that that the the physi physical cal reso resour urce cess are are bein being g activ activat ated ed by the the human human resources as the physical resources cannot act on their own. Therefore, the efficient and effective utilization of inanimate resources depends largely on the quality, caliber, caliber, skills, perception and character of the people, that is, the human resources working in it. The term "uman resource at macro level indicates the sum of all the components such as skills, creative abilities, innovat innovative ive thinkin thinking, g, intuit intuition ion,, imagin imaginati ation, on, knowle knowledge dge and e#peri e#perienc encee possessed by all the people. $n organization possessed with abundant physical resources may ma y sometimes miserably fail unless it has right people, pe ople, human resources, to manage its affairs. Thus, the importance of human resources cannot be ignored
KRUPANIDHI SCHOOL OF MANGAMENTPage 1
Development of the concept of Human Resource Accounting:
%"uman %"uman &esource &esource $ccounting' $ccounting' is the offshoot offshoot of various various research research studies studies conducted in the areas of accounting and finance. "uman resource is an asset whose value gets appreciated over the period of time provided placed, appl applie ied d and and deve develo lope ped d in the the righ rightt dire direct ctio ion. n. Till the the rece recent nt past past,, organizations took few efforts to assign monetary value to human resource in its accounting practice. ehavioral scientists initiated efforts to develop appropriate methodology for finding out the value of human resource to the organization. They were against the conventional accounting practice for its failure to value the human resource of an organization along with physical resources.
The The tradi traditi tiona onall conce concept pt sugg sugges este ted d that that e#pen e#pendi ditu ture re on human human resource is treated as a charge against revenue as it does not create any physical asset. $t present there is a change in this concept and the e#penses incurred on any asset (as human resources should be treated as capital e#penditure as it yields benefits which can be derived for a long period
KRUPANIDHI SCHOOL OF MANGAMENTPage 2
The following are the reasons why "uman &esources $ccounting has been receiving so much attention in the recent years.
)irstly, there is genuine need for reliable and complete management of human resources. *econdly, a traditional framework of $ccounting is in the process to include a much broader set of measurement than was possible in the past.
The people are the most important assets of an organization but the value of this asset yet to appear in financial statements. +t does not get included in management information systems too. onventional accounting of human resources took note of all e#penses of "uman capital formation which does not seem to be correct or meeting the actual needs.
"uman &esource $ccounting is the measurement of the cost and value of people to the organization. +t involves measuring costs incurred by the organizations to recruit, select, hire, train and develop employees and -udge their economic value to the organization.
Historical Score Card of Human Resource Accounting:
The concept of considering the human beings as an asset is an old one. The importance which mperor $kbar gave to the nine -ewels (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 *hri Motilal /ehru, Mahatma 0andhi, *ardar 1allabh hai 2atel and several others but no effort was made to assign any monetary value to such individuals in the alance *heet of the /ation. KRUPANIDHI SCHOOL OF MANGAMENTPage 3
*ir William 2etty was the pioneer in this direction. The first attempt to value the human beings in monetary terms was made by him in 3453. 2etty considered that labour was %the father of wealth6 and it must be included in any estimate of national wealth without fail. )urther efforts were made by William )ar in 3789, arnest ngle in 3779. The real work started only when behavioural scientists vehemently criticized the conventional accounting practice of not valuing the human resources along with other resources. $s a result, accountants and economists realized the fact that an appropriate methodology has to be developed for finding the cost and value of the people to the organization. )or a long period of time, a number of e#perts have worked on it and produced certain models for evaluating human resources. The important among them are *hultz, )lamholtz, :av and *chwartz, and ;ennath *inclare.
"uman &esource $ccounting was first started with simple measures of trying to convert output data into contributions. When an "& programme had effected a change in the output especially for organizations operating on profit basis, its value was determined by calculating the profit contribution.
&ensis :ikert in the 354<s was the first to research in "& and emphasized the importance of strong pressures on the "&=s qualitative variables and on its benefits in the long>run. $ccording to :ikert=s model, human variables can be divided into three categories? (i causal variables@ (ii intervening variables? and (iii end>result variables. The interaction between the causal and intervening variables affect the end>result variables by way of -ob satisfaction, costs, productivity and earnings.
"istorically the first ma-or systematic effort at evaluation was made by &0 arry orporation of olumbus in 354A. Their annual report detailed the KRUPANIDHI SCHOOL OF MANGAMENTPage 4
inauguration of "&$ procedures developed by the company to enable them to
report accurate estimates of the worth of the organization=s human assets. $ccumulated costs under the categories namely recruiting and acquisition@ formal training and familiarization@ informal training and familiarization@ e#perience@ and development were accounted. osts for the e#pected working lives of individuals (or sometimes shorter periods were amortized, and unamortized costs (for e#ample, when an individual left the company were written off. That is, today, known as the "istorical ost $pproach to employee valuation. +mprovement over the years has helped evolve other bases of valuation, which have been providing supplemental information.
Today they fall under three ma-or categories namely replacement cost, present value of future earnings and present value to the organization, i.e. profit contribution.
The formation of a separate Ministry for human resources development by 0overnment of +ndia with an initial outlay of &s.l8!! crores infused a new vigour into all human development programs of the nation. reating such portfolio by every company creates the necessity of accounting for the same. "uman resources is one of the most valuable assets and needless to say that the human beings co>ordinate the best of machines, men and money. omputers, of course, may challenge the human resources but computer is not a brain and it simply carries out human commands. Therefore, $ccounting for such human resources is very essential for the organization.
Importance of Human Resource Accounting:
KRUPANIDHI SCHOOL OF MANGAMENTPage 5
"uman
&esource $ccounting
provides useful information
to the
management, financial analysts and employees as stated below?
•
"uman &esource $ccounting helps the management in the mployment, locating and utilization of human resources.
•
+t helps in deciding the transfers, promotion, training and retrenchment of human resources.
•
+t provides a basis for planning of physical assets vis>B>vis human resources.
•
+t assists in evaluating the e#penditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm.
•
+t helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it.
•
+t helps in locating the real cause for low return on investment, like improper or under>utilization of physical assets or human resource or both.
•
+t helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavourable circumstances.
•
+t provides valuable information for persons interested in making long term investment in the firm.
KRUPANIDHI SCHOOL OF MANGAMENTPage 6
•
+t helps employees in improving their performance and bargaining power. +t makes each of them to understand his contribution towards the betterment of the firm vis>B>vis the e#penditure incurred by the firm on him.
HRA in Indian IT scenario
*uccess of corporate undertakings purely depends upon the quality of human resources. +t is accentuated that@ "uman 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. +n this conte#t, it is worth>while to e#amine and human resource accounting practices in corporate sector in +ndia. "uman resource accounting is of recent origin and is struggling for acceptance. .+t is clearly said that, "uman 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. $t 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 "uman &esources $ccounting was introduced way back in the 357<s, it started gaining popularity in +ndia after it was adopted and popularized by /:. "uman &esources accounting, also known as "uman $sset $ccounting, involved identifying, measuring, capturing, tracking and analyzing the potential of the human resources of a company and
KRUPANIDHI SCHOOL OF MANGAMENTPage 7
communicating the resultant information to the stakeholders of the company. +t 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. "uman &esource accounting reflected the potential of the human resources of an organization in monetary terms, in its financial statements. ven 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. ":, ement orporation of +ndia, !/0, ngineers +ndia :td., /ational Thermal orporation, Minerals and Metals Trading orporation, Madras &efineries, !il +ndia :td., $ssociated ement ompanies, *2+, Metallurgical and ngineering consultants +ndia :imited, ochin &efineries :td. tc. are some of the organizations, which have started disclosing some valuable information regarding human resources in their financial statements. +t 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. Curing the early and mid 357<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. +n 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. "uman &esource $ccounting involves the dimension of cost incurred by the organization for all the personnel function. "ence 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 "uman &esources $ccounting were investment related to employees and the value generated by them. +nvestment in human capital included all costs incurred in increasing and upgrading the employees skill sets and knowledge of human resources. The KRUPANIDHI SCHOOL OF MANGAMENTPage 8
output that an organization generated from human resources was regarded as the value of its human resources. "uman &esources 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. $ll the models stressed that human capital was considered an investment for future earnings, and not e#penditure. )or valuing human resources, different models have been developed. *ome of them are opportunity cost $pproach, standard cost approach, current purchasing power $pproach, :ev and *chwartz present value of future earnings Model )lam holtzDs stochastic rewards valuation Models etc. !f these, the model suggested by :ev and *chwartz has become popular. Ender 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. "uman 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. +t 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
KRUPANIDHI SCHOOL OF MANGAMENTPage 9
in relation to the human resource planning and control. +nvestment in human resources can be highlighted under two heads, namely, Investment pattern:
The human resource investment usually consists of the following items?> 3
#penditure on advertisement for recruitment
F
ost of selection
9
Training cost
G
!n the -ob training cost
8
*ubsistence allowance
4
ontribution to provident )und
A
ducational tour e#penses
7
Medical e#penses
5
#>gratia payments 3< mployees Welfare )und
$ll these items influence directly or indirectly the human resources and the productivity of the organization. Investment in current costs
$fter analyzing the investment pattern in the human resources of an organization the current cost of human resources can be ascertained. )or 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 KRUPANIDHI SCHOOL OF MANGAMENTPage 1
future cost. Thus, the e#penses incurred for the maintenance of human resources are termed as current costs. urrent cost consists of salary and wages, Cearness allowance, overtime wages, bonus, house rent allowance, special pay and personal pay. $midst this background, it is significant to mention that the importance and value of human assets were recognized in the early 355<s when there was a ma-or increase in employment in firms in service, technology and other knowledge>based sectors. +n 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.*oon after, the manufacturing industry also seemed to realize the importance of people and started perceiving its employees as strategic assets. )or instance, if two manufacturing companies had similar capital and used similar technology, then it was only their employees who were the ma-or differentiating factor. Cue to the above development, the need for valuing human assets besides traditional accounting of tangible assets was increasingly e#perienced. )rom the above discussions, it is felt that, "uman 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. "ence, +t is oncluded that, the "uman &esources are an indispensable but often neglected element is thus to be fore grounded into the industrial area for the betterment of the econo my.
+T>2! industry in +ndia has today become a growth engine for the economy, contributing substantially to increases in the 0C2, urban employment and e#ports, to achieve the vision of a %young and resilient' +ndia.
KRUPANIDHI SCHOOL OF MANGAMENTPage 11
While the effects of the economic crisis are e#pected to linger in the near term future, the +ndian +T>2! industry has displayed resilience in countering the unpredictable conditions and reiterating the viability of +ndia6s fundamental value proposition. onsequently, +ndia has retained its leadership position in the global sourcing market.
The +ndian +T>2! industry is estimated to achieve revenues of E*C A3.A billion in )HF<<5, with the +T software and services industry accounting for E*C 4< billion of revenues. Curing this period, direct employment is e#pected to reach nearly F.F9 million, an addition of FF4,<<< employees, while indirect -ob creation is estimated to touch 7 million. Different approaches to evaluate the Human Resource •
:ev and *chwartz6s model
•
ehavioral Model
•
Myers I )lowers method
•
Jaggi and :au6s method of "&$
ev ! Sch"art#$s %odel:
:ev and *chwartz6s model is based on human capital theory which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital. +n this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor e#plaining and predicting the future economic growth of the company.
KRUPANIDHI SCHOOL OF MANGAMENTPage 12
)ormula to calculate the value of "uman apital "(1iK$a(rL3(3Ld2r>a Where "(1i> value of human capital of an employee i> age of employee > employees annual earnings till retirement r> age of retirement $a> probability of an employee aged Na6 dying at age Nr6 d > discount rate •
The formula uses an earnings profile, which is a graphic mathematical representation of the income stream generated by a person.
•
Typically, earnings increase with age. $s the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.
•
This model postulated in 35A3 remains largely unused as a result of criticism from accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset.
&ehavioral %odel: •
Measure the key dimensions of human organization, using a :ikert scale at specified time periods. These are in non>monetary measurements.
•
The scaled responses to questionnaire items called Nscores6 are then standardized by statistical methods to take into account the degree of variability of the set of responses. This is done for responses in each time period.
KRUPANIDHI SCHOOL OF MANGAMENTPage 13
•
The difference between two standardized scores from one period to the ne#t is then calculated. This difference (called delta represents the change in an inde# of specified dimensions of the human organization.
•
)rom present changes in dimensions of the human organization, the e#pected future change in end result variables is estimated.
•
:astly, the standard scores are converted into the measuring monetary units for the end result variables.
•
:ikert points out those changes in the productive capability of a firm6s human organization cannot be assessed correctly unless periodic measurements of causal and intervening dimensions of that organization are taken regularly.
•
When profits increase, it is often assumed that the human organization has become more productive, but steps taken to maintain
•
arnings or prevent losses may actually result in a decrease in the productive capability of the human organization.
•
There is some controversy about the validity and reliability of this method. $ccording to )lamholtz, future research on this method is necessary because its validity and feasibility have not yet been established.
•
:ikert, however, maintains that the method is feasible where reliable and valid measurements of the coefficients are available.
%'ers ! (lo"ers method: •
They suggest five dimensions in valuing human resource in an organization they are
knowledge, skills, health, availability and
attitude. KRUPANIDHI SCHOOL OF MANGAMENTPage 14
•
The five dimensions are factorial and not additive ? all are required to for good performance.
•
2erformance of the employee in relation to these dimensions represent employee value in organization.
•
The ma-or short coming is the attitude measurement.
•
The model suggest the use of attitude score and their respective weights to arrive at an attitude inde# for a group of employees.
•
ased on the premise that employee attitude is the most important factor that governs the productive behavior of employees on the -ob, it has been considered that the employee attitude inde# multiplied by the wages payable should reflect the likely benefits as against wages payable as the cost and the gap between the benefits and the cost should reflect an individual6s value.
•
$ttitude though important, may not be the only influencing factor. +n the final analysis it is the interplay of various other factors that propels performance.
•
The model needs to be firmly established. +n absence of an acceptable measure of benefits against the cost of wages, the gain concept as hypothesized may not reflect "& value.
•
$ccording to "ermanson, the unpurchased goodwill notion is based on the premise that Nthe best available evidence of the present e#istence of un owned resources is the fact that a given firm earned a higher than normal rate of income for the most recent year. "& value K 0oodwillO$mount invested in "&PTotal +nvestment. Weak as does not consider the e#ternal variables.
•
"ere "ermanson is proposing that supernormal earning are an indication of resources not shown on the balance sheet, such as human assets.
KRUPANIDHI SCHOOL OF MANGAMENTPage 15
•
ven though his method of valuing human resources is e#plicitly intended for use in a company6s published financial statements rather than for internal consumption.
•
This would necessarily involve forecasting future earnings and allocating any e#cess above normal e#pected earnings to human resources of the organization. "owever, the assumptions would be sub-ect to the uncertainties involved in any forecast of future events.
•
*ince the methods limits recognition of human resources to the amount of earnings in e#cess of normal, the human resource base that is required to carry out normal operations is totally ignored. $s a result, the value of human assets will be an underestimation.
•
The method only uses the actual earnings of the most recent year as the basis for thereby, ignoring the forecasts of future earnings that are equally relevant for managerial decision making.
)aggi and au$s method of HRA: •
ased on valuation of groups than individuals.
•
0roup Q "omogeneous set of employees who may be working in different departments.
•
+nformation from group valuation provides basis for career movements of employees within organization and chances of their quitting. (ormula
[TV] = [N] . ∑rn . KRUPANIDHI SCHOOL OF MANGAMENTPage 16
T1 K
column vector indicating the current value of all
current employees in each rank. / K
column vector indicating the number of employees
currently in each rank. n K
time period
r K
discount rate
T
K
rank transitional matri# indicating the probability
that an employee will be in each rank with the organization or terminated in the ne#t period given his current rank. 1 K
olumn vector indicating the economic value of an
employee of rank Ni6 during each period.
The main objectives of a HR Accounting system are as follows:
•
To furnish cost value information for making proper and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost effective organizational objectives.
•
To monitor effectively the use of human resources by the management.
•
To have an analysis of the human asset i.e. , whether such assets are conserved, depleted or appreciated.
•
To aid in the development of management principles, and proper decision making for the future by classifying financial consequences, of various practices.
•
In all, it facilitates valuation of human resources, recording the valuation in the books of account and disclosure of the information in
KRUPANIDHI SCHOOL OF MANGAMENTPage 17
the financial statement. •
Further, it is to help the organization in decision making in the following areas: o
Direct Recruitment Vs promotion.
o
Transfer Vs. Retention.
o
Retrenchment Vs. Retention
o
Impact on budgetary controls of human relations and organizational behaviour.
o
Decision on reallocation of plants, closing down existing units and developing overseas subsidiaries etc.
Limitations of Human Resource Accounting: Human Resource Accounting is the term used to describe the accounting methods, system and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in financial terms. It presumes that there is great difference among the personnel in their knowledge, ability and motivation in the same organization as well as from organization to organization. It means that some become liability too instead of being human assets.
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.
KRUPANIDHI SCHOOL OF MANGAMENTPage 18
•
There is a fear that HRA may de-humanize and manipulate employees.
•
For e.g., an employee with a comparatively low value may feel discouraged and develop a complex which itself will affect his competency to work.
•
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.
•
There is constant fear of opposition from the trade unions as placing a value
on
employees
would
make
them
compensations based on such valuation.
KRUPANIDHI SCHOOL OF MANGAMENTPage 19
claim
rewards
and
KRUPANIDHI SCHOOL OF MANGAMENTPage 2
To ensur ensuree grow growth th and and devel developm opmen entt of any orga organi niza zati tion, on, the the efficiency of people must be augmented in the right perspective. Without human resources, the other resources cannot be operationally effective. The origina originall health health of the organ organiza izatio tion n is indica indicated ted by the human human behavi behavior or variables, like group loyalty, skill, motivation and capacity for effective interaction, communication and decision making.
Men, materials, machines, money and methods are the resources required for an organization. These resources are broadly classified into two categories, viz., animate and inanimate (human and physical resources. Men, Men, othe otherw rwis isee known known as the the human human reso resour urce ces, s, are are cons consid ider ered ed to be animat animatee resou resource rces. s. !thers !thers,, namely namely,, materi materials als,, machin machines, es, money money and methods are considered to be inanimate or physical resources.
The success or otherwise of an organization depends on how best the scarce physical resources are utilized by the human resource. What is important here here is that that the the physi physical cal reso resour urce cess are are bein being g activ activat ated ed by the the human human resources as the physical resources cannot act on their own. Therefore, the efficient and effective utilization of inanimate resources depends largely on the quality, caliber, caliber, skills, perception and character of the people, that is, the human resources working in it. The term "uman resource at macro level indicates the sum of all the components such as skills, creative abilities, innovat innovative ive thinkin thinking, g, intuit intuition ion,, imagin imaginati ation, on, knowle knowledge dge and e#peri e#perienc encee possessed by all the people. $n organization possessed with abundant physical resources may ma y sometimes miserably fail unless it has right people, pe ople, human resources, to manage its affairs. Thus, the importance of human resources cannot be ignored
KRUPANIDHI SCHOOL OF MANGAMENTPage 1
Development of the concept of Human Resource Accounting:
%"uman %"uman &esource &esource $ccounting' $ccounting' is the offshoot offshoot of various various research research studies studies conducted in the areas of accounting and finance. "uman resource is an asset whose value gets appreciated over the period of time provided placed, appl applie ied d and and deve develo lope ped d in the the righ rightt dire direct ctio ion. n. Till the the rece recent nt past past,, organizations took few efforts to assign monetary value to human resource in its accounting practice. ehavioral scientists initiated efforts to develop appropriate methodology for finding out the value of human resource to the organization. They were against the conventional accounting practice for its failure to value the human resource of an organization along with physical resources.
The The tradi traditi tiona onall conce concept pt sugg sugges este ted d that that e#pen e#pendi ditu ture re on human human resource is treated as a charge against revenue as it does not create any physical asset. $t present there is a change in this concept and the e#penses incurred on any asset (as human resources should be treated as capital e#penditure as it yields benefits which can be derived for a long period
KRUPANIDHI SCHOOL OF MANGAMENTPage 2
The following are the reasons why "uman &esources $ccounting has been receiving so much attention in the recent years.
)irstly, there is genuine need for reliable and complete management of human resources. *econdly, a traditional framework of $ccounting is in the process to include a much broader set of measurement than was possible in the past.
The people are the most important assets of an organization but the value of this asset yet to appear in financial statements. +t does not get included in management information systems too. onventional accounting of human resources took note of all e#penses of "uman capital formation which does not seem to be correct or meeting the actual needs.
"uman &esource $ccounting is the measurement of the cost and value of people to the organization. +t involves measuring costs incurred by the organizations to recruit, select, hire, train and develop employees and -udge their economic value to the organization.
Historical Score Card of Human Resource Accounting:
The concept of considering the human beings as an asset is an old one. The importance which mperor $kbar gave to the nine -ewels (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 *hri Motilal /ehru, Mahatma 0andhi, *ardar 1allabh hai 2atel and several others but no effort was made to assign any monetary value to such individuals in the alance *heet of the /ation. KRUPANIDHI SCHOOL OF MANGAMENTPage 3
*ir William 2etty was the pioneer in this direction. The first attempt to value the human beings in monetary terms was made by him in 3453. 2etty considered that labour was %the father of wealth6 and it must be included in any estimate of national wealth without fail. )urther efforts were made by William )ar in 3789, arnest ngle in 3779. The real work started only when behavioural scientists vehemently criticized the conventional accounting practice of not valuing the human resources along with other resources. $s a result, accountants and economists realized the fact that an appropriate methodology has to be developed for finding the cost and value of the people to the organization. )or a long period of time, a number of e#perts have worked on it and produced certain models for evaluating human resources. The important among them are *hultz, )lamholtz, :av and *chwartz, and ;ennath *inclare.
"uman &esource $ccounting was first started with simple measures of trying to convert output data into contributions. When an "& programme had effected a change in the output especially for organizations operating on profit basis, its value was determined by calculating the profit contribution.
&ensis :ikert in the 354<s was the first to research in "& and emphasized the importance of strong pressures on the "&=s qualitative variables and on its benefits in the long>run. $ccording to :ikert=s model, human variables can be divided into three categories? (i causal variables@ (ii intervening variables? and (iii end>result variables. The interaction between the causal and intervening variables affect the end>result variables by way of -ob satisfaction, costs, productivity and earnings.
"istorically the first ma-or systematic effort at evaluation was made by &0 arry orporation of olumbus in 354A. Their annual report detailed the KRUPANIDHI SCHOOL OF MANGAMENTPage 4
inauguration of "&$ procedures developed by the company to enable them to
report accurate estimates of the worth of the organization=s human assets. $ccumulated costs under the categories namely recruiting and acquisition@ formal training and familiarization@ informal training and familiarization@ e#perience@ and development were accounted. osts for the e#pected working lives of individuals (or sometimes shorter periods were amortized, and unamortized costs (for e#ample, when an individual left the company were written off. That is, today, known as the "istorical ost $pproach to employee valuation. +mprovement over the years has helped evolve other bases of valuation, which have been providing supplemental information.
Today they fall under three ma-or categories namely replacement cost, present value of future earnings and present value to the organization, i.e. profit contribution.
The formation of a separate Ministry for human resources development by 0overnment of +ndia with an initial outlay of &s.l8!! crores infused a new vigour into all human development programs of the nation. reating such portfolio by every company creates the necessity of accounting for the same. "uman resources is one of the most valuable assets and needless to say that the human beings co>ordinate the best of machines, men and money. omputers, of course, may challenge the human resources but computer is not a brain and it simply carries out human commands. Therefore, $ccounting for such human resources is very essential for the organization.
Importance of Human Resource Accounting:
KRUPANIDHI SCHOOL OF MANGAMENTPage 5
"uman
&esource $ccounting
provides useful information
to the
management, financial analysts and employees as stated below?
•
"uman &esource $ccounting helps the management in the mployment, locating and utilization of human resources.
•
+t helps in deciding the transfers, promotion, training and retrenchment of human resources.
•
+t provides a basis for planning of physical assets vis>B>vis human resources.
•
+t assists in evaluating the e#penditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm.
•
+t helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it.
•
+t helps in locating the real cause for low return on investment, like improper or under>utilization of physical assets or human resource or both.
•
+t helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavourable circumstances.
•
+t provides valuable information for persons interested in making long term investment in the firm.
KRUPANIDHI SCHOOL OF MANGAMENTPage 6
•
+t helps employees in improving their performance and bargaining power. +t makes each of them to understand his contribution towards the betterment of the firm vis>B>vis the e#penditure incurred by the firm on him.
HRA in Indian IT scenario
*uccess of corporate undertakings purely depends upon the quality of human resources. +t is accentuated that@ "uman 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. +n this conte#t, it is worth>while to e#amine and human resource accounting practices in corporate sector in +ndia. "uman resource accounting is of recent origin and is struggling for acceptance. .+t is clearly said that, "uman 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. $t 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 "uman &esources $ccounting was introduced way back in the 357<s, it started gaining popularity in +ndia after it was adopted and popularized by /:. "uman &esources accounting, also known as "uman $sset $ccounting, involved identifying, measuring, capturing, tracking and analyzing the potential of the human resources of a company and
KRUPANIDHI SCHOOL OF MANGAMENTPage 7
communicating the resultant information to the stakeholders of the company. +t 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. "uman &esource accounting reflected the potential of the human resources of an organization in monetary terms, in its financial statements. ven 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. ":, ement orporation of +ndia, !/0, ngineers +ndia :td., /ational Thermal orporation, Minerals and Metals Trading orporation, Madras &efineries, !il +ndia :td., $ssociated ement ompanies, *2+, Metallurgical and ngineering consultants +ndia :imited, ochin &efineries :td. tc. are some of the organizations, which have started disclosing some valuable information regarding human resources in their financial statements. +t 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. Curing the early and mid 357<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. +n 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. "uman &esource $ccounting involves the dimension of cost incurred by the organization for all the personnel function. "ence 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 "uman &esources $ccounting were investment related to employees and the value generated by them. +nvestment in human capital included all costs incurred in increasing and upgrading the employees skill sets and knowledge of human resources. The KRUPANIDHI SCHOOL OF MANGAMENTPage 8
output that an organization generated from human resources was regarded as the value of its human resources. "uman &esources 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. $ll the models stressed that human capital was considered an investment for future earnings, and not e#penditure. )or valuing human resources, different models have been developed. *ome of them are opportunity cost $pproach, standard cost approach, current purchasing power $pproach, :ev and *chwartz present value of future earnings Model )lam holtzDs stochastic rewards valuation Models etc. !f these, the model suggested by :ev and *chwartz has become popular. Ender 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. "uman 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. +t 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
KRUPANIDHI SCHOOL OF MANGAMENTPage 9
in relation to the human resource planning and control. +nvestment in human resources can be highlighted under two heads, namely, Investment pattern:
The human resource investment usually consists of the following items?> 3
#penditure on advertisement for recruitment
F
ost of selection
9
Training cost
G
!n the -ob training cost
8
*ubsistence allowance
4
ontribution to provident )und
A
ducational tour e#penses
7
Medical e#penses
5
#>gratia payments 3< mployees Welfare )und
$ll these items influence directly or indirectly the human resources and the productivity of the organization. Investment in current costs
$fter analyzing the investment pattern in the human resources of an organization the current cost of human resources can be ascertained. )or 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 KRUPANIDHI SCHOOL OF MANGAMENTPage 1
future cost. Thus, the e#penses incurred for the maintenance of human resources are termed as current costs. urrent cost consists of salary and wages, Cearness allowance, overtime wages, bonus, house rent allowance, special pay and personal pay. $midst this background, it is significant to mention that the importance and value of human assets were recognized in the early 355<s when there was a ma-or increase in employment in firms in service, technology and other knowledge>based sectors. +n 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.*oon after, the manufacturing industry also seemed to realize the importance of people and started perceiving its employees as strategic assets. )or instance, if two manufacturing companies had similar capital and used similar technology, then it was only their employees who were the ma-or differentiating factor. Cue to the above development, the need for valuing human assets besides traditional accounting of tangible assets was increasingly e#perienced. )rom the above discussions, it is felt that, "uman 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. "ence, +t is oncluded that, the "uman &esources are an indispensable but often neglected element is thus to be fore grounded into the industrial area for the betterment of the econo my.
+T>2! industry in +ndia has today become a growth engine for the economy, contributing substantially to increases in the 0C2, urban employment and e#ports, to achieve the vision of a %young and resilient' +ndia.
KRUPANIDHI SCHOOL OF MANGAMENTPage 11
While the effects of the economic crisis are e#pected to linger in the near term future, the +ndian +T>2! industry has displayed resilience in countering the unpredictable conditions and reiterating the viability of +ndia6s fundamental value proposition. onsequently, +ndia has retained its leadership position in the global sourcing market.
The +ndian +T>2! industry is estimated to achieve revenues of E*C A3.A billion in )HF<<5, with the +T software and services industry accounting for E*C 4< billion of revenues. Curing this period, direct employment is e#pected to reach nearly F.F9 million, an addition of FF4,<<< employees, while indirect -ob creation is estimated to touch 7 million. Different approaches to evaluate the Human Resource •
:ev and *chwartz6s model
•
ehavioral Model
•
Myers I )lowers method
•
Jaggi and :au6s method of "&$
ev ! Sch"art#$s %odel:
:ev and *chwartz6s model is based on human capital theory which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital. +n this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor e#plaining and predicting the future economic growth of the company.
KRUPANIDHI SCHOOL OF MANGAMENTPage 12
)ormula to calculate the value of "uman apital "(1iK$a(rL3(3Ld2r>a Where "(1i> value of human capital of an employee i> age of employee > employees annual earnings till retirement r> age of retirement $a> probability of an employee aged Na6 dying at age Nr6 d > discount rate •
The formula uses an earnings profile, which is a graphic mathematical representation of the income stream generated by a person.
•
Typically, earnings increase with age. $s the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.
•
This model postulated in 35A3 remains largely unused as a result of criticism from accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset.
&ehavioral %odel: •
Measure the key dimensions of human organization, using a :ikert scale at specified time periods. These are in non>monetary measurements.
•
The scaled responses to questionnaire items called Nscores6 are then standardized by statistical methods to take into account the degree of variability of the set of responses. This is done for responses in each time period.
KRUPANIDHI SCHOOL OF MANGAMENTPage 13
•
The difference between two standardized scores from one period to the ne#t is then calculated. This difference (called delta represents the change in an inde# of specified dimensions of the human organization.
•
)rom present changes in dimensions of the human organization, the e#pected future change in end result variables is estimated.
•
:astly, the standard scores are converted into the measuring monetary units for the end result variables.
•
:ikert points out those changes in the productive capability of a firm6s human organization cannot be assessed correctly unless periodic measurements of causal and intervening dimensions of that organization are taken regularly.
•
When profits increase, it is often assumed that the human organization has become more productive, but steps taken to maintain
•
arnings or prevent losses may actually result in a decrease in the productive capability of the human organization.
•
There is some controversy about the validity and reliability of this method. $ccording to )lamholtz, future research on this method is necessary because its validity and feasibility have not yet been established.
•
:ikert, however, maintains that the method is feasible where reliable and valid measurements of the coefficients are available.
%'ers ! (lo"ers method: •
They suggest five dimensions in valuing human resource in an organization they are
knowledge, skills, health, availability and
attitude. KRUPANIDHI SCHOOL OF MANGAMENTPage 14
•
The five dimensions are factorial and not additive ? all are required to for good performance.
•
2erformance of the employee in relation to these dimensions represent employee value in organization.
•
The ma-or short coming is the attitude measurement.
•
The model suggest the use of attitude score and their respective weights to arrive at an attitude inde# for a group of employees.
•
ased on the premise that employee attitude is the most important factor that governs the productive behavior of employees on the -ob, it has been considered that the employee attitude inde# multiplied by the wages payable should reflect the likely benefits as against wages payable as the cost and the gap between the benefits and the cost should reflect an individual6s value.
•
$ttitude though important, may not be the only influencing factor. +n the final analysis it is the interplay of various other factors that propels performance.
•
The model needs to be firmly established. +n absence of an acceptable measure of benefits against the cost of wages, the gain concept as hypothesized may not reflect "& value.
•
$ccording to "ermanson, the unpurchased goodwill notion is based on the premise that Nthe best available evidence of the present e#istence of un owned resources is the fact that a given firm earned a higher than normal rate of income for the most recent year. "& value K 0oodwillO$mount invested in "&PTotal +nvestment. Weak as does not consider the e#ternal variables.
•
"ere "ermanson is proposing that supernormal earning are an indication of resources not shown on the balance sheet, such as human assets.
KRUPANIDHI SCHOOL OF MANGAMENTPage 15
•
ven though his method of valuing human resources is e#plicitly intended for use in a company6s published financial statements rather than for internal consumption.
•
This would necessarily involve forecasting future earnings and allocating any e#cess above normal e#pected earnings to human resources of the organization. "owever, the assumptions would be sub-ect to the uncertainties involved in any forecast of future events.
•
*ince the methods limits recognition of human resources to the amount of earnings in e#cess of normal, the human resource base that is required to carry out normal operations is totally ignored. $s a result, the value of human assets will be an underestimation.
•
The method only uses the actual earnings of the most recent year as the basis for thereby, ignoring the forecasts of future earnings that are equally relevant for managerial decision making.
)aggi and au$s method of HRA: •
ased on valuation of groups than individuals.
•
0roup Q "omogeneous set of employees who may be working in different departments.
•
+nformation from group valuation provides basis for career movements of employees within organization and chances of their quitting. (ormula
[TV] = [N] . ∑rn . KRUPANIDHI SCHOOL OF MANGAMENTPage 16
T1 K
column vector indicating the current value of all
current employees in each rank. / K
column vector indicating the number of employees
currently in each rank. n K
time period
r K
discount rate
T
K
rank transitional matri# indicating the probability
that an employee will be in each rank with the organization or terminated in the ne#t period given his current rank. 1 K
olumn vector indicating the economic value of an
employee of rank Ni6 during each period.
The main objectives of a HR Accounting system are as follows:
•
To furnish cost value information for making proper and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost effective organizational objectives.
•
To monitor effectively the use of human resources by the management.
•
To have an analysis of the human asset i.e. , whether such assets are conserved, depleted or appreciated.
•
To aid in the development of management principles, and proper decision making for the future by classifying financial consequences, of various practices.
•
In all, it facilitates valuation of human resources, recording the valuation in the books of account and disclosure of the information in
KRUPANIDHI SCHOOL OF MANGAMENTPage 17
the financial statement. •
Further, it is to help the organization in decision making in the following areas: o
Direct Recruitment Vs promotion.
o
Transfer Vs. Retention.
o
Retrenchment Vs. Retention
o
Impact on budgetary controls of human relations and organizational behaviour.
o
Decision on reallocation of plants, closing down existing units and developing overseas subsidiaries etc.
Limitations of Human Resource Accounting: Human Resource Accounting is the term used to describe the accounting methods, system and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in financial terms. It presumes that there is great difference among the personnel in their knowledge, ability and motivation in the same organization as well as from organization to organization. It means that some become liability too instead of being human assets.
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.
KRUPANIDHI SCHOOL OF MANGAMENTPage 18
•
There is a fear that HRA may de-humanize and manipulate employees.
•
For e.g., an employee with a comparatively low value may feel discouraged and develop a complex which itself will affect his competency to work.
•
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.
•
There is constant fear of opposition from the trade unions as placing a value
on
employees
would
make
them
compensations based on such valuation.
KRUPANIDHI SCHOOL OF MANGAMENTPage 19
claim
rewards
and
KRUPANIDHI SCHOOL OF MANGAMENTPage 2
