Term Paper on Hra

7/29/2019 Term Paper on Hra

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is the offshoot of variousresearch studies conducted in the areas of accounting andfinance. Human resource is an asset whose value getsappreciated over the period of time provided placed,applied and developed in the right direction. Thetraditional concept suggested that expenditure on human

resource is treated as a charge against revenue as it doesnot create any physical asset. At present there is a changein this concept and the expenses incurred on any asset (ashuman resources) should be treated as capital expenditureas it yields benefits which can be derived for a long periodof time and could be measured in monetary terms.

The people are the most important assets of anorganization but the value of this asset yet to appear infinancial statements. It does not get included inmanagement information systemstoo. Conventional accounting of human resources took note of all expenses ofHuman capital formation which does not seem to be

correct or meeting the actual needs.is the measurement of the cost and value of people to the organization. It involves measuring costsincurred by the organizations to recruit, select, hire, trainand develop employees and judge their economic value tothe organization.
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The American Accounting Society Committee on

defines it as follows: HumanResource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties. Insimple terms, it is an extension of the accounting

principles of matching costs and revenues and oforganizing data to communicate relevant information in

financial terms.Thus, human resources accounting may be defined as, a

process of accounting which identifies, quantifies andmeasures human resources for the use of management tocope up with the changes in its quantum and quality sothat equilibrium could be achieved in between the requiredresources and the provided human resources.


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Human Resource Accounting provides useful informationto the management, financial analysts and employees asstated below:

1.Human Resource Accounting helps the management inthe Employment, locating and utilization of humanresources.

2.It helps in deciding the transfers, promotion, training andretrenchment of human resources.

3.It provides a basis for planning of physical assets vis--vis human resources.

4.It assists in evaluating the expenditure incurred forimparting further education and training in employees interms of the benefits derived by the firm.

5.It helps to identify the causes of high labor turnover atvarious levels and taking preventive measures to containit.

6.It helps in locating the real cause for low return oninvestment, like improper or under-utilization of physicalassets or human resource or both.

7.It helps in understanding and assessing the inner strengthof an organization and helps the management to steer thecompany well through most adverse and unfavorablecircumstances.

8.It provides valuable information for persons interested inmaking long term investment in the firm.


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9.It helps employees in improving their performance and bargaining power. It makes each of them to understand his contributiontowards the betterment of the firm vis--vis the expenditure incurred by the firm on him.HumanResource Accounting is the process of identifying and measuring data about Human Resources and communicating this information to the interested parties.It is an attempt to identify and report the Investmentsmade in Human Resources of an organization that arecurrently not accounted for in the Conventional

Accounting Practices.

Thus is a term applied bythe Accountancy Profession to quantify the cost and valueof employees of their employing organisation.

1. Helpful in making management decisions.2. Helps to management to monitor efficiency.3. Human resource accounting provides determination

of asset control.

4. Effective management of human resources.5. Greater accountability for human resources6. Better Human resource Plaining.


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The main benefits of Human Resource Accounting are:-

1.HR Accounting helps the company ascertain howmuch Investment it has made on its Employees and how much return it can expect from this Investment

2.The Ratio of Human Capital to Non-Human Capitalcomputed as per the HR Accounting

Concept indicates the degree of Labour Intensity of an Organisation.3.HR Accounting provides a basis for planning of

physical assets vis-a vis Human Resources4.HR Accounting provides valuable information to

Investors interested in making Long Term

Investments in Service Sector Companies


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There are several

. The monetary approaches to

measurement ofhuman assetsare broadly based eitherupon cost or economic value. The cost approaches involve

computation of the to the

organization. The cost are capitalized and amortized over

the useful life of the asset.

COST BASED

MODELS

VALUE

BASED

MODELS
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In Historical Cost method, the basic contributing factorssfor developing the human resource of the organizationhas been equated to the actual cost incurred. In thisapproach, the actual costs of recruiting, selectinghiring, training, placing and developing the employees of

an organization are capitalized and amortized over theexpected useful life of the asset concerned. If the asset isliquidated prematurely, losses are recorded, and if an assethas a longer life than estimates, revisions are made in theamortization schedule.
http://www.mbaknol.com/human-resource-management/definition-of-recruitment/http://www.mbaknol.com/human-resource-management/different-employee-training-development-methods/http://www.mbaknol.com/human-resource-management/different-employee-training-development-methods/http://www.mbaknol.com/human-resource-management/definition-of-recruitment/http://www.mbaknol.com/human-resource-management/human-resource-accounting/http://www.mbaknol.com/human-resource-management/human-resource-accounting/


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Historical cost approach relies primarily on accountingtechniques which have been in common use for many

years. It is easy to develop and operate these systems.Management also has little difficulty in interpreting themeaning and the information supplied by cost based systems since the underlying concepts are consistent withthose of the conventional accounting data. It simplyinvolves an extension of the concept of proper matching ofcosts with revenue. Historical cost of human resources istreated very much like the cost of fixed assets. The same

principles of capitalization and amortization are applied.

It is quite simple to understand and can be easilyworked out.

It satisfies the traditional accounting concept of relating cost revenue.

It provides a basis for evaluating the companysreturns on investment in human resources.

It takes into account only a part of the employeesacquisition cost and ignores the aggregate value of their potential services.

It is not easy or it may not be possible to estimate thenumber of year over which the capitalized expenditureis to be amortized.


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Because of the above problem, it will be difficult todetermine a precise rate of amortization. A questionmay arise as to whether it should constant, increasingor decreasing.

One fact to be considered is that gaining experienceeconomic value of human resources increase. But underthis method the capital cost decreases, withamortization. The question arises as to how thedifference could be recover.

The approach was propounded first by Rensis Likert andwas further developed by Eric G. Flamholtz. This ismainly based on the concept of Replacement cost. This is ameasure the cost to replace a firms human resource.

Rensis Likert had suggested determination of the value oftotal human organization on the basis of the assumptionthat a new similar organization has to be created fromscratch. He says Suppose that tomorrow, your firm had all of its present facilities but no personnel except theChairman and he had to rebuild the human organization

back to its present effectiveness. How much would t cost?All costs would be included which are involved in therecruiting, hiring, training the developing the replacementto the present level of proficiency and familiarity with theorganization. This should serve the basis of valuation of human resources of the organization from time to time.


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This approach incorporates the current value of thecompanys human resources. It takes into account the

fluctuations of the job market and the general rise in pricelevel. Replacement costs have the advantage of being

present oriented. This method is regard as as goodsurrogate for the economic value of the asset in the sensethat market considerations are essential in reaching a final

figure. Such a final figure is also generally intended to beconceptually equivalent to a notion of a persons economicvalue.


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replacement cost is that it may not always be possibleto obtain such a measure for a particular employee.

It is difficult to fit identical replacement of theexisting human resources in actual practice.

Replacement cost does not necessarily reflecttheknowledge, competence and loyalties concerningan organization that an individual can build over

time.Further, the managers asked to estimate the cost ofcompletely replacing their human organization mayhave difficulty doing so, and different managers mayarrive at quite different estimates.
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To meet the deficiencies of the Replacement cost,Hekimain and Jones have suggested the use of Opportunity Cost Concept. For capital equipment and assets Joel Dean has defines Opportunity Cost as Themost profitable alternative use that is foregone by

putting it to present use. Under this method the value ofan employee in his alternative use is determines that valueis taken as the basis for estimating. If employees can behired early eternally there is no opportunity cost for them.Hekimian and Jones have suggested a competitive bidding

process for the scarce employee in a organization. Underopportunity cost method, the investment center managerswill bid for the scare employee they to recruit. Thesescare employees come from within the firm and includeonly those who are the subjects of recruitment requestmade by an investment center manager. In other words,employees not considered scare are not included in thehuman asset base of the organization.In opportunity cost concept, the divisional of investmentcenter manager may bid for the services of the various

personnel here quires. This bid price is then included in theinvestment base. The maximum bid price may go to theextent of the capitalized value of the extra profits likelyto be generated by the ability and competence of theexecutive.


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Suitable scarce employees only

All mangers will be encouraged to bid.Concept of opportunity cost is applied by establishingan internal labour market within an organisationthrough the process of competitive bidding.

The method does not show the true cost of humanresources in an organization because it excludes from its

purview the employees who are not being bid by otherdepartments of investment centers.

The method provides only a partial solutions as theemployees of the type that can easily be hired from

outside are not assets under this approach. To determine the bid price for an employee, a Manager

must make a judgmental estimate of that employeesvalue. Hence a low degree of objectivity can be expected

form the opportunity cost.To ensure growth and development of any organization,

the efficiency of people must be augmented in the rightperspective. Without human resources, the other resourcescannot be operationally effective. The success or otherwiseof an organization depends on how best the scarce

physical resources are utilized by the human resource.What is important here is that the physical resources arebeing activated by the human resources as the physical
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resources cannot act on their own. Therefore, the efficientand effective utilization of inanimate resources dependslargely on the quality, caliber, skills, perception and character of the people, that is, the human resourcesworking in it. The term Human resource at macro level indicates the sum of all the components such as skills,creative abilities, innovative thinking, intuitionimagination, knowledge and experience possessed by all the people.


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This model was developed in 1971.It determining thevalue of human capital embodied in a person of age I isthe present value of his remaining future earning fromemployment in the form of salaries, wages, etc. It is alsocalled Compensation Model.

(Vx) = T (t+1) t li Px (1+r) t-x

t=x i=x (Vx) = Expected human capital value of x years old.

Px (t) =Probability of a person dying at age tLi=Persons estimated future earnings per annum.r= Discount rate specific to the person.T=Retirement age of the person .


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This model ignores the possibility and probability ofan individual leaving the organisation for reasonsother than retirement and death.

The assumption of levSchwartzs model that humanbeings will not make role changes during their tenurein the organisation seems unrealistic .

Model also fail to accurately evaluate the group andteam work involved.This model ignore the security, bargaining capacity,

skill and experience which may affect the payment ofmore or low salaries .

A value of human being to the organisation is notdetermining future level of salaries even about

determination of discount rate.


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2)

This method determined an individuals value to anorganisation by the services he is expected to render to the

organisation during the period he is likely to remain withthe organisation in various position or services states. The

present value of human resource may be derived bydiscounting the realisable value of expected future

services at a specified rate.

Estimation of period.Identification of position or services.Estimation of probable period.Calculate the expected services.Calculation of present value at a predetermined rate.Flamholtz has given for calculation of expected

realisable value of an individualm Si P(Si)

n i=1

S= (1+r)tt=1

S=Expected realisable valueSi= The value S to be derived by the organisation in each

possible service state,i.P(Si)= probability that the organisation will obtained Si

t =time period m=state of exist


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(1+r)t = discount factor for money.

Skill

Activation

Level

Role Transferbility

Productability

Promotability

Individual

Conditionalvalue

Probability

of maintaining

oragnisational

membership

Role

Reward

Satisfaction

Individuals

Expected

Realisable

Value to a

Formal

organisation


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3.

Roger H. Hermanson has suggested two models for themeasurement of human resources. These are:-

HR is calculated by capitalising earnings in excess ofnormal earnings for the industry or the group of companiesof which the firm is a part

This model uses information from publishedstatements.

This model is based on a logical indication of thepresence of human resources in an organisation .

Model is easy to understand and easy to make humanbeings understand.

This model ignores the human resource base thatis required to carry out normal operations of theorganisation.

Model only uses the actual earnings of the mostrecent year as the basis for calculating human assets

which put restrictions on the scope of making very


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much discounts the reliability of forecasts of futureearnings that could be more relevant for managerialdecisions

This model uses compensation as a surrogate measure of a

Persons value to the firm. means the

present value of future stream of wages and salaries toemployees of the firm. The discounted future wage streamis adjusted byan efficiency ratio which isthe weighted average of the ratio of return on investmentof the given firm to all the firms in the economy for aspecified period, usually five years. The weights are

assigned in the reverse order, RF0 RF1 RF2 RF3 RF4

RE0 RE1 RE2 RE3 R E4Efficiency=Ratio 15

RF0=Rate of accounting income on owned assets for thefirm for the current year.RE0=Rate of accounting income on owned assets for theeconomy for the current year.RF4=Rate of accounting income on owned assets for the

firm for forth preceding year


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RE4=Rate of accounting income on owned assets for theeconomy for fourth preceding year

1. Estimation of annual salaries and wages for the nextfive years .2. Discount factor is applied to the annual wages. Thisdiscount factor is to be taken from discount table.3. Calculate efficiency ratio by using formuladiscussed above .

5.Present value of wages and salaries are multipliedwith efficiency ratio.


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The valuation is on a group basis rather on individualbasis. means a homogeneous group of employeeswho may not be necessarilyworking in the samedepartment. It might be difficult to predict an

Individuals future period stay and chances of promotion,

but on a group basis, it is easier to ascertain the futureperiod of services, chances of promotion and those who arelikely to leave the firm during each of the forthcoming

period. It assumed that the pattern of movement is likelyto remain constant overtime and the probabilitiesdetermined for one period can be extended to future

periods.

Based on homogeneous groupsA markov chain representation is usedDuration of employment is taken into consideration.Promotion paths are taken into cosidrationMultiple probabilities of future changes are takeninto consideration.

n nTv =(N) r (T) (V)Tv=Column vector indicating the number of

employees currently in each rank.


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(N)=Column vector indicating the number ofemployees currently in each rank.n = Time periodr =Discount rate

(T)= Rank of traditional matrix indicating theprobability that an employee will be in each rank withinthe organisation

STEPS:-1.The whole organisation is divided into varioushomogeneous groups.2.homogeneous may not belong to the same department ordivision .

3.A rank transitional matrix is to be derived on the basisof historical data using markovian analysis.4.The multiple probabilities of future changes aredetermined by assuming that the pattern of movement islikely to remain constant.5.The economic value of each employee of each rank isdetermined.6.Number of employees occupying each rank is to beascertained.7.The value of human resource of the group is determinedby carrying out matrix operations .Finaally by using appropriate discount rate present valueis calculated.


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Human Resources Accounting was introduced wayback in the 1980s, but it started gaining popularityin India after it was adopted and popularized byNLC. Human Resources accounting, also known asHuman Asset Accounting, involved identifying,

measuring, capturing, tracking and analyzing thepotential of the human resources of a company andcommunicating the resultant information to thestakeholders of the company.

A growing trend towards the measurement andreporting of human resources particularly in public

sector is noticeable during the past few years.


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Are some of the organizations, which have starteddisclosing some valuable information regarding

human resources in their financialstatements


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1 No legal binding and backing.2 Lack of initiative in private sector.3 India is trend follower not settler.4Lack of initiation from professional institutes5 No contribution from universities.5Families dominations in private Sector.

B. TO INVESTORS:-

1.Lack of awareness among investors.2.No Standard Model3.Difficulty in Comparisons.

C. TO WORKERS1.Workers are liabilities not assets.

High labour turnoverIlliteracy among working class.


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The issue is to be addressed is how to measure theeconomic value of the people to the organization andvarious cost based measures to be taken for humanresources. The two main components of Human Resources

Accounting were

investment related to employeesthe value generated by them.

aAfter analyzing the investment pattern in the humanresources of an organization the current cost of humanresources can be ascertained. Current cost consists of

salary and wages, Dearness allowance, overtime wages,bonus, house rent allowance, special pay and personal payHuman Resources accounting is used to measure the

performance of all the people in the organization, andwhen this was made available to the stakeholders in the

form of a report, it helped them to take critical investment

decisions. From the above discussions, it is felt that,Human resource accounting provides quantitativeinformation about the value of human asset, which helpsthe to4 management to take decisions regarding theadequacy of human res


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method.According to this method the present value of futureearning capacity of an employee, from the date of joiningtill retirement is estimated.The method was based on the following assumptions:

An employee salary package includes all the benefits ,whether direct or indirect.Additional earnings on the basis of age groups werealso taken into account.

All the employees of Infosys were divided into fivegroups, based on their averageage .Each groups

average compensation was calculated.Infosys also calculated the compensation of each

employee at retirement by using an average rate ofincrement.

The increments were based on industry standards,and the employeesperformance and productivity.

Finally the total compensation of each group wascalculated. This value was discounted at the ratepercent per annum which was the cost of capital atInfosys to arrive at the total human resources ofInfosys.


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Infosys could determine whether its human asset wasappreciating over the years or not.

The company could also use this informationinternally to compare the performance and

productivity of employees in various departments.

The company ensured that it compensated eachemployee according to his / her net worth.

HRA also helped Infosys in identifying and retainingvaluable employees.

When human resources gets quantified it gaveInfosys investors and other clients true insights into

the organization and its future potential. It restoredfaith amongst shareholders.

BY adopting HRS the following information could beobtained Cost per employee

Human capital investment ratioThe amount of wealth created by each employeeThe profit created by each employee.To sum up HRA in Infosys helped in identifying the right

person for the right job, based on the persons specializedskills, knowledge, capabilities ,experience.


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