INTRODUCTION

To ensure growth and development of any organization, the

efficiency of people must be augmented in the right perspective. Without
human resources, the other resources cannot be operationally effective. The
original health of the organization is indicated by the human behavior
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, otherwise known as the human resources, are considered to be
animate resources. Others, namely, materials, machines, 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 is that the physical resources are being activated by the 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, skills, perception and character of the people, that is, the
human resources working in it. The term Human resource at macro level
indicates the sum of all the components such as skills, creative abilities,
innovative thinking, intuition, imagination, knowledge and experience
possessed by all the people. An organization possessed with abundant
physical resources may sometimes miserably fail unless it has right people,
human resources, to manage its affairs. Thus, the importance of human
resources cannot be ignored

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Development of the concept of Human Resource Accounting:

Human Resource Accounting is the offshoot of various research studies
conducted in the areas of accounting and finance. Human resource is an
asset whose value gets appreciated over the period of time provided placed,
applied and developed in the right direction. Till the recent past,
organizations took few efforts to assign monetary value to human resource
in its accounting practice. Behavioral 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 traditional concept suggested that expenditure on human
resource is treated as a charge against revenue as it does not create any
physical asset. At present there is a change in this concept and the expenses
incurred on any asset (as human resources) should be treated as capital
expenditure as it yields benefits which can be derived for a long period

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The following are the reasons why Human Resources Accounting has been
receiving so much attention in the recent years.

Firstly, there is genuine need for reliable and complete management of

human resources.
Secondly, a traditional framework of Accounting is in the process to include
a much broader set of measurement than was possible in the past.
The people are the most important assets of an organization but the value of
this asset yet to appear in financial statements. It does not get included in
management information systems too. Conventional accounting of human
resources took note of all expenses of Human capital formation which does
not seem to be correct or meeting the actual needs.
Human Resource Accounting is the measurement of the cost and value of
people to the organization. It involves measuring costs incurred by the
organizations to recruit, select, hire, train and develop employees and judge
their economic value to the organization.
Historical Score Card of Human Resource Accounting:

The concept of considering the human beings as an asset is an old one. The
importance which Emperor Akbar gave to the nine jewels (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 Shri Motilal Nehru, Mahatma Gandhi, Sardar Vallabh Bhai
Patel and several others but no effort was made to assign any monetary
value to such individuals in the Balance Sheet of the Nation.
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Sir William Petty was the pioneer in this direction. The first attempt to
value the human beings in monetary terms was made by him in 1691. Petty
considered that labour was the father of wealth and it must be included in
any estimate of national wealth without fail. Further efforts were made by
William Far in 1853, Earnest Engle in 1883. The real work started only
when behavioural scientists vehemently criticized the conventional
accounting practice of not valuing the human resources along with other
resources. As 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. For a long period of time, a number of
experts have worked on it and produced certain models for evaluating
human resources. The important among them are Shultz, Flamholtz, Lav
and Schwartz, and Kennath Sinclare.
Human Resource Accounting was first started with simple measures of
trying to convert output data into contributions. When an HR programme
had effected a change in the output especially for organizations operating
on profit basis, its value was determined by calculating the profit
contribution.
Rensis Likert in the 1960s was the first to research in HR and emphasized
the importance of strong pressures on the HR's qualitative variables and on
its benefits in the long-run. According to Likert'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 job
satisfaction, costs, productivity and earnings.
Historically the first major systematic effort at evaluation was made by RG
Barry Corporation of Columbus in 1967. Their annual report detailed the
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inauguration of HRA procedures developed by the company to enable them

to
report accurate estimates of the worth of the organization's human assets.
Accumulated costs under the categories namely recruiting and acquisition;
formal training and familiarization; informal training and familiarization;
experience; and development were accounted. Costs for the expected
working lives of individuals (or sometimes shorter periods) were amortized,
and unamortized costs (for example, when an individual left the company)
were written off. That is, today, known as the Historical Cost Approach to
employee valuation. Improvement over the years has helped evolve other
bases of valuation, which have been providing supplemental information.
Today they fall under three major 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
Government of India with an initial outlay of Rs.l5OO crores infused a new
vigour into all human development programs of the nation. Creating such
portfolio by every company creates the necessity of accounting for the
same. Human 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. Computers, of course, may challenge the human resources but
computer is not a brain and it simply carries out human commands.
Therefore, Accounting for such human resources is very essential for the
organization.
Importance of Human Resource Accounting:

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Human Resource Accounting provides useful information to the

management, financial analysts and employees as stated below:

Human Resource Accounting helps the management in the

Employment, locating and utilization of human resources.

It helps in deciding the transfers, promotion, training and

retrenchment of human resources.

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

resources.

It assists in evaluating the expenditure incurred for imparting further

education and training in employees in terms of the benefits derived
by the firm.

It helps to identify the causes of high labour turnover at various

levels and taking preventive measures to contain it.

It helps in locating the real cause for low return on investment, like
improper or under-utilization of physical assets or human resource
or both.

It 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.

It provides valuable information for persons interested in making

long term investment in the firm.

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It helps employees in improving their performance and bargaining

power. It makes each of them to understand his contribution towards
the betterment of the firm vis--vis the expenditure incurred by the
firm on him.

HRA in Indian IT scenario

Success of corporate undertakings purely depends upon the quality of

human resources. It is accentuated that; Human 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. In this context, it is worth-while to
examine and human resource accounting practices in corporate sector in
India.
Human resource accounting is of recent origin and is struggling for
acceptance. .It is clearly said that, Human 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. At 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 Human Resources Accounting was introduced way back in the
1980s, it started gaining popularity in India after it was adopted and
popularized by NLC. Human Resources accounting, also known as Human
Asset Accounting, involved identifying, measuring, capturing, tracking and
analyzing the potential of the human resources of a company and
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communicating the resultant information to the stakeholders of the

company. It 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. Human Resource accounting reflected the potential of the human
resources of an organization in monetary terms, in its financial statements.
Even though the situation prevails, yet, a growing trend towards the
measurement and reporting of human resources particularly in public sector
is noticeable during the past few years. BHEL, Cement Corporation of
India, ONGC, Engineers India Ltd., National Thermal Corporation,
Minerals and Metals Trading Corporation, Madras Refineries, Oil India
Ltd., Associated Cement Companies, SPIC, Metallurgical and Engineering
consultants India Limited, Cochin Refineries Ltd. Etc. are some of the
organizations, which have started disclosing some valuable information
regarding human resources in their financial statements. It is needless to
mention here that, the importance of human resources in business
organization as productive resources was by and large ignored by the
accountants until two decades ago.
During the early and mid 1980s, behavioral scientists attacked the
conventional accounting system for its failure to value the human resources
of the organization along with its other material resources. In 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. Human Resource Accounting involves the dimension of cost
incurred by the organization for all the personnel function. Hence 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 Human Resources Accounting
were investment related to employees and the value generated by them.
Investment in human capital included all costs incurred in increasing and
upgrading the employees skill sets and knowledge of human resources. The
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output that an organization generated from human resources was regarded

as the value of its human resources. Human Resources 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. All the models stressed that
human capital was considered an investment for future earnings, and not
expenditure.
For valuing human resources, different models have been developed.
Some of them are opportunity cost Approach, standard cost approach,
current purchasing power Approach, Lev and Schwartz present value of
future earnings Model Flam holtzs stochastic rewards valuation Models
etc. Of these, the model suggested by Lev and Schwartz has become
popular. Under 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.
Human 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. It 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

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in relation to the human resource planning and control. Investment in

human resources can be highlighted under two heads, namely,
Investment pattern:
The human resource investment usually consists of the following items:1)

Expenditure on advertisement for recruitment

2)

Cost of selection

3)

Training cost

4)

On the job training cost

5)

Subsistence allowance

6)

Contribution to provident Fund

7)

Educational tour expenses

8)

Medical expenses

9)

Ex-gratia payments
10) Employees Welfare Fund

All these items influence directly or indirectly the human resources and the
productivity of the organization.
Investment in current costs
After analyzing the investment pattern in the human resources of an
organization the current cost of human resources can be ascertained. For
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
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future cost. Thus, the expenses incurred for the maintenance of human
resources are termed as current costs. Current cost consists of salary and
wages, Dearness allowance, overtime wages, bonus, house rent allowance,
special pay and personal pay.
Amidst this background, it is significant to mention that the importance
and value of human assets were recognized in the early 1990s when there
was a major increase in employment in firms in service, technology and
other knowledge-based sectors. In 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.Soon after, the
manufacturing industry also seemed to realize the importance of people and
started perceiving its employees as strategic assets. For instance, if two
manufacturing companies had similar capital and used similar technology,
then it was only their employees who were the major differentiating factor.
Due to the above development, the need for valuing human assets besides
traditional accounting of tangible assets was increasingly experienced.
From the above discussions, it is felt that, Human 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. Hence, It is Concluded that, the Human Resources are an
indispensable but often neglected element is thus to be fore grounded into
the industrial area for the betterment of the economy.

IT-BPO industry in India has today become a growth engine for the
economy, contributing substantially to increases in the GDP, urban
employment and exports, to achieve the vision of a young and resilient
India.

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While the effects of the economic crisis are expected to linger in the near
term future, the Indian IT-BPO industry has displayed resilience in
countering the unpredictable conditions and reiterating the viability of
Indias fundamental value proposition. Consequently, India has retained its
leadership position in the global sourcing market.

The Indian IT-BPO industry is estimated to achieve revenues of USD 71.7

billion in FY2009, with the IT software and services industry accounting
for USD 60 billion of revenues. During this period, direct employment is
expected to reach nearly 2.23 million, an addition of 226,000 employees,
while indirect job creation is estimated to touch 8 million.
Different approaches to evaluate the Human Resource

Lev and Schwartzs model

Behavioral Model

Myers & Flowers method

Jaggi and Laus method of HRA

Lev & Schwartzs Model:

Lev and Schwartzs 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.
In this model of accounting, human capital is treated like other forms of
earning assets and thus is an important factor explaining and predicting the
future economic growth of the company.
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Formula to calculate the value of Human Capital

H(Vi)=Aa(r+1)E(1+d)Pr-a
Where
H(Vi)- value of human capital of an employee
i- age of employee
E- employees annual earnings till retirement
r- age of retirement
Aa- probability of an employee aged a dying at age r
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. As the person reaches

retirement age, productivity declines as a result of technological
obsolescence and health deterioration.

This model postulated in 1971 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.

Behavioral Model:

Measure the key dimensions of human organization, using a Likert

scale at specified time periods. These are in non-monetary
measurements.

The scaled responses to questionnaire items called scores 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.

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The difference between two standardized scores from one period to

the next is then calculated. This difference (called delta) represents
the change in an index of specified dimensions of the human
organization.

From present changes in dimensions of the human organization, the

expected future change in end result variables is estimated.

Lastly, the standard scores are converted into the measuring

monetary units for the end result variables.

Likert points out those changes in the productive capability of a

firms 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

Earnings 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. According to Flamholtz, future research on this method is
necessary because its validity and feasibility have not yet been
established.

Likert, however, maintains that the method is feasible where

reliable and valid measurements of the coefficients are available.

Myers & Flowers method:

They suggest five dimensions in valuing human resource in an

organization they are knowledge, skills, health, availability and
attitude.

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The five dimensions are factorial and not additive : all are required
to for good performance.

Performance of the employee in relation to these dimensions

represent employee value in organization.

The major short coming is the attitude measurement.

The model suggest the use of attitude score and their respective
weights to arrive at an attitude index for a group of employees.

Based on the premise that employee attitude is the most important

factor that governs the productive behavior of employees on the job,
it has been considered that the employee attitude index 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 individuals value.

Attitude though important, may not be the only influencing factor.

In the final analysis it is the interplay of various other factors that
propels performance.

The model needs to be firmly established. In absence of an

acceptable measure of benefits against the cost of wages, the gain
concept as hypothesized may not reflect HR value.

According to Hermanson, the unpurchased goodwill notion is based

on the premise that the best available evidence of the present
existence of un owned resources is the fact that a given firm earned
a higher than normal rate of income for the most recent year. HR
value = Goodwill*Amount invested in HR/Total Investment. Weak
as does not consider the external variables.

Here Hermanson is proposing that supernormal earning are an

indication of resources not shown on the balance sheet, such as
human assets.

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Even though his method of valuing human resources is explicitly

intended for use in a companys published financial statements
rather than for internal consumption.

This would necessarily involve forecasting future earnings and

allocating any excess above normal expected earnings to human
resources of the organization. However, the assumptions would be
subject to the uncertainties involved in any forecast of future events.

Since the methods limits recognition of human resources to the

amount of earnings in excess of normal, the human resource base
that is required to carry out normal operations is totally ignored. As
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.

Jaggi and Laus method of HRA:

Based on valuation of groups than individuals.

Group Homogeneous set of employees who may be working

in different departments.

Information from group valuation provides basis for career

movements of employees within organization and chances of
their quitting.
Formula

[TV] = [N] . rn .
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TV =

column vector indicating the current value of all

current employees in each rank.

N =

column vector indicating the number of employees

currently in each rank.

n =

time period

r =

discount rate

rank transitional matrix indicating the probability

that an employee will be in each rank with the

organization or terminated in the next period given his
current rank.
V =

Column vector indicating the economic value of an

employee of rank i during each period.

ThemainobjectivesofaHRAccountingsystemareasfollows:

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
organizationalobjectives.

Tomonitoreffectivelytheuseofhumanresourcesbythemanagement.

Tohaveananalysisofthehumanasseti.e.,whethersuchassetsare
conserved,depletedorappreciated.

To aid in the development of management principles, and proper

decisionmakingforthefuturebyclassifyingfinancialconsequences,
ofvariouspractices.

In all, it facilitates valuation of human resources, recording the

valuationinthebooksofaccountanddisclosureoftheinformationin

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thefinancialstatement.

Further, it is to help the organization in decision making in the

followingareas:
o DirectRecruitmentVspromotion.
o TransferVs.Retention.
o RetrenchmentVs.Retention
o Impact on budgetary controls of human relations and
organizationalbehaviour.
o Decisiononreallocationofplants,closingdownexistingunits
anddevelopingoverseassubsidiariesetc.

LimitationsofHumanResourceAccounting:
HumanResourceAccountingisthetermusedtodescribetheaccountingmethods,
systemandtechniques,whichcoupledwithspecialknowledgeandability,assist
personnel management in the valuation of personnel in financial terms. It
presumesthatthereisgreatdifferenceamongthepersonnelintheirknowledge,
abilityandmotivationinthesameorganizationaswellasfromorganizationto
organization. It means that some become liability too instead of being human
assets.

Thereare manylimitationswhichmakethemanagementreluctanttointroduce

HRA.Someoftheattributesare:

Thereisnoproperclearcutandspecificprocedureorguidelinesfor
finding cost and value of human resources of an organization. The
systemswhicharebeingadoptedhavecertaindrawbacks.

The period of existence of human resource is uncertain and hence

valuingthemunderuncertaintyinfutureseemstobeunrealistic.

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ThereisafearthatHRAmaydehumanizeandmanipulateemployees.

For e.g., an employee with a comparatively low value may feel

discouraged and develop a complex which itself will affect his
competencytowork.

Themuchneededempiricalevidenceisyettobefoundtosupportthe
hypothesisthatHRAasatoolofthemanagementfacilitatesbetterand
effectivemanagementofhumanresources.

Inwhatformandmanner,theirvaluetobeincludedinthefinancial
statement is the question yet to be classified on which there is no
consensusintheaccountingprofession.

As human resources are not capable of being owned, retained and

utilized, unlike the physical assets, there is problem for the
managementtotreatthemasassetsinthestrictsense.

Thereisconstantfearofoppositionfromthetradeunionsasplacinga
value on employees would make them claim rewards and
compensationsbasedonsuchvaluation.

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