HUMAN HUMAN RESOURCE RESOURCE

ACCOUNTINGACCOUNTING

UNIT IUNIT I

INTRODUCTONINTRODUCTON• The total The total growthgrowth of the organization depends of the organization depends

mainly on the skills of its mainly on the skills of its employeesemployees and the and the services they render. services they render.

• Hence, the Hence, the successsuccess of any organization is of any organization is contingent on the quality of their contingent on the quality of their HumanHuman Resource - Resource - its knowledge, skills, motivation its knowledge, skills, motivation and understanding of the organizational and understanding of the organizational cultureculture. .

• Therefore, it is imperative that the humans be Therefore, it is imperative that the humans be recognized as recognized as an integral part of the an integral part of the total total worth worth of an organization. of an organization.

Cont… Cont…

• HRA denotes just this process of HRA denotes just this process of quantification/quantification/measurementmeasurement of the of the Human Resource. Human Resource.

• HRA is basically an information HRA is basically an information system that tells management what system that tells management what changes are occurring over time to changes are occurring over time to the human resources of the the human resources of the business.business.

HR AS AN ASSETHR AS AN ASSET• Once organizations realize the actual benefit Once organizations realize the actual benefit

and take it as a growth process, it will only and take it as a growth process, it will only help them in increasing their shareholders’ help them in increasing their shareholders’ value. value.

• When a company is able to assess an When a company is able to assess an individual’s worth, it helps in increasing its individual’s worth, it helps in increasing its own worth.own worth.

• Basically HRA can be tracked through Basically HRA can be tracked through Two Two Methods Methods – Cost-based Analysis or Cost-based Analysis or HRCAHRCA and and – Value-based Analysis or Value-based Analysis or HRVA. HRVA.

HUMAN RESOURCE HUMAN RESOURCE ACCOUNTINGACCOUNTING

• Definition:-Definition:- The American Accounting Association’s The American Accounting Association’s

Committee on Human Resource Committee on Human Resource Accounting (1973) has defined Accounting (1973) has defined Human Human Resource Accounting Resource Accounting as as

“ “The process of identifying and The process of identifying and measuring data about human resources measuring data about human resources and communicating this information to and communicating this information to interested parties”.interested parties”.

OBJECTIVES/ADVANTAGES OF OBJECTIVES/ADVANTAGES OF HRAHRA

• To inform the general public how far enterprises are successful in fulfilling the human contributions also come to light through HRA.

• To facilitates effective and efficient management of human resources.

• To furnish cost value information for making management decision about acquiring, allocating, developing and maintaining human resources in order to obtain cost effective organizational objectives.

• To provide information of changes in the structure of manpower to the management.

Cont…Cont…• To provide To provide qualitative information qualitative information on on

human resources. human resources. • To provide more To provide more relevant and timely relevant and timely

information information to the interested parties.to the interested parties.• To provide a sound and effective basis of To provide a sound and effective basis of

asset control.asset control.• To knows whether the human resources To knows whether the human resources

are are properly utilized and allocatedproperly utilized and allocated..• To allow management personnel To allow management personnel to to

monitor monitor effectively the use of human effectively the use of human resources.resources.

• To evaluate the To evaluate the return on investment return on investment on on human capital.human capital.

MEASUREMENT IN MEASUREMENT IN HRA/ASPECTS HRA/ASPECTS HRVA & HRCAHRVA & HRCA

Human Resource Cost Accounting Human Resource Cost Accounting (HRCA)(HRCA)

• “ “ The Measurement and reporting of the The Measurement and reporting of the costscosts incurred incurred to acquire and develop people to acquire and develop people as as organizational resources”.organizational resources”.

• Deals with accounting for investments made by Deals with accounting for investments made by an organization in acquisition and developing an organization in acquisition and developing human resources as well as the human resources as well as the replacementreplacement of of people presently employed.people presently employed.

Cont…Cont…

• HRCA Includes:HRCA Includes:– Accounting for the Accounting for the costscosts of personnel of personnel

activities and functions such as activities and functions such as recruitment, selection, placement and recruitment, selection, placement and training.training.

– Accounting for costs of developing Accounting for costs of developing people as human assets, also termed as people as human assets, also termed as HRA.HRA.

APPROACHES OF HRCAAPPROACHES OF HRCA• The monetary approaches to the The monetary approaches to the

measurement of human resource cost measurement of human resource cost may be based upon either historical may be based upon either historical cost or replacement cost or cost or replacement cost or opportunity cost. opportunity cost.

• It can be classified as:It can be classified as:– Historical Cost ApproachHistorical Cost Approach– Replacement Cost ApproachReplacement Cost Approach– Opportunity Cost ApproachOpportunity Cost Approach

Historical Cost ApproachHistorical Cost ApproachBy Brummet, Flamholtz & PyleBy Brummet, Flamholtz & Pyle

• The Human Resources Accounted as The Human Resources Accounted as like as other physical assetslike as other physical assets

• Amortization (Pay Back) also Amortization (Pay Back) also calculated as usualcalculated as usual

• Actual cost incurred or recruiting, Actual cost incurred or recruiting, selecting, training, placing and selecting, training, placing and developing the HR of an enterprise are developing the HR of an enterprise are capitalized and written off over the capitalized and written off over the expected life of HR.expected life of HR.

MERITS/DEMERITSMERITS/DEMERITS• MERITSMERITS

– Simple to understandSimple to understand– Easy to workoutEasy to workout– Traditional Accounting conceptTraditional Accounting concept– Revenue will be calculatedRevenue will be calculated

• DEMERITSDEMERITS– Difficult to found life of the HR with the Difficult to found life of the HR with the

companycompany– Tough in Amortization calculation & Value Tough in Amortization calculation & Value

will decrease in that, but not in the hands of will decrease in that, but not in the hands of HR will IncreaseHR will Increase

REPLACEMENT COST REPLACEMENT COST APPROACHAPPROACH

By Rensis Likert & Eric By Rensis Likert & Eric G.FlamholtzG.Flamholtz• The cost of replacing the employee will The cost of replacing the employee will

reveal the valuereveal the value• The costs of recruiting, Selecting, Training, The costs of recruiting, Selecting, Training,

Developing etc of new employees to reach Developing etc of new employees to reach the level of competence of existing the level of competence of existing employees are measuredemployees are measured

• Also found that, the value of total Human Also found that, the value of total Human organization on the basis of the assumption organization on the basis of the assumption that a similar orgn. Is to be created from that a similar orgn. Is to be created from Scratch.Scratch.

MERITS/DEMERITSMERITS/DEMERITS• MERITSMERITS

– Indentify the human value of price Indentify the human value of price trends in the economy and thereby trends in the economy and thereby provide more realistic value in provide more realistic value in inflationary times.inflationary times.

– It is Present-orientedIt is Present-oriented• DEMERITSDEMERITS

– Difficult to measure for a particular Difficult to measure for a particular employee by replacementemployee by replacement

– Cant have exact replacementCant have exact replacement

OPPORTUNITY COST OPPORTUNITY COST APPROACHAPPROACH

By/Or Hekimian and Jone’s Competitive By/Or Hekimian and Jone’s Competitive Bidding MethodBidding Method

• Value basis of opportunity costValue basis of opportunity cost• Opportunity Cost is linked with scarcityOpportunity Cost is linked with scarcity• HR asset has a value only when it HR asset has a value only when it

ScarceScarce• Will it be considered as an Investment Will it be considered as an Investment

in HRin HR• Simply based on principle of Demand & Simply based on principle of Demand &

SupplySupply

HRVAHRVAIt is finding the Economic Values by It is finding the Economic Values by

Obtaining Present value of the future Obtaining Present value of the future earningsearnings• The Valuation models are The Valuation models are

• Lev & Schwartz Model (1971)Lev & Schwartz Model (1971)– Present Value of AgePresent Value of Age

• Flamholtz Model (1971)Flamholtz Model (1971)– Services rendered to the Organization at Services rendered to the Organization at

the various positionthe various position• Giles and Robinson’s Human Assets Giles and Robinson’s Human Assets

Multiplier Models (1974)Multiplier Models (1974) – Grade System (like A, B,C …)Grade System (like A, B,C …)– Total Value of Grade SystemTotal Value of Grade System

Cont…Cont…

• Hermonson’s Unpurchased Goodwill and Hermonson’s Unpurchased Goodwill and Adj. Discounted Future Wage ModelAdj. Discounted Future Wage Model– Individual’s extra efficiency/Ability Individual’s extra efficiency/Ability

• Jaggi & Lau’s ModelJaggi & Lau’s Model– Valuation on a group basis rather than on Valuation on a group basis rather than on

Individual basisIndividual basis• Morse Net Benefit Model (1973Morse Net Benefit Model (1973))

– Determine the basis of present value of net Determine the basis of present value of net benefits derived by the orgn. From the expected benefits derived by the orgn. From the expected future services of its employees.future services of its employees.

LIMITATIONSLIMITATIONS• There is a difference between of There is a difference between of

human resources and other assets.human resources and other assets.• Human value will differ one to anotherHuman value will differ one to another• HR assets are not recognized by tax HR assets are not recognized by tax

lawslaws• It remains only a theoretical conceptIt remains only a theoretical concept• Not precisely measurable in monetary Not precisely measurable in monetary

termsterms

HR AUDIT HR AUDIT • HRD audit is a comprehensive HRD audit is a comprehensive evaluationevaluation

of the of the existing human existing human resource resource development strategies, structure, development strategies, structure, systems, styles and skills in accordance systems, styles and skills in accordance with both short-term and long-term with both short-term and long-term business plans of the organization. business plans of the organization.

• In HRD In HRD AuditAudit the the skills, styles, systems, skills, styles, systems, strategies, structurestrategies, structure is studied and is studied and analyzed using a variety of methodologies analyzed using a variety of methodologies like interviews, questionnaires, available like interviews, questionnaires, available records, workshops etc.records, workshops etc.

Purpose of AuditPurpose of Audit

An HR audit can be used by an organization for An HR audit can be used by an organization for multiple purposes. These are: multiple purposes. These are:

• To identify and address HR-related problems. To identify and address HR-related problems. • To seek out HR-related opportunities.To seek out HR-related opportunities.• To get a clear judgment about the overall status To get a clear judgment about the overall status

of the organizationof the organization• To find out whether certain systems put in place To find out whether certain systems put in place

are yielding any resultsare yielding any results• ItIt helps companies to figure out any gaps or helps companies to figure out any gaps or

lapses and the reason for the samelapses and the reason for the same

THE AUDIT PROCESS THE AUDIT PROCESS • The HR audit process is conducted in The HR audit process is conducted in

different phases. Each phase is designed to different phases. Each phase is designed to build upon the preceding phase so that the build upon the preceding phase so that the organization will have a very strong overview organization will have a very strong overview of the health of the HR function, at the of the health of the HR function, at the conclusion of the audit. These phases include:conclusion of the audit. These phases include:

• Pre-Audit InformationPre-Audit Information • Pre-Audit Self-AssessmentPre-Audit Self-Assessment • On-site ReviewOn-site Review • Records ReviewRecords Review • Audit ReportAudit Report