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Various Models of Human Resource Accounting: Chapter Three
Various Models of Human Resource Accounting: Chapter Three
VARIOUS MODELS OF
HUMAN RESOURCE
ACCOUNTING
VARIOUS ffiODE.LS OF HUmAn
RESOURCE. ACCOUnTinG
In India, there are few companies like BHEL, SAIL, lnfosys and
Reliance Industries, which have implemented HRA and some are working on
it. Infosys, which started showing human resource as an asset has been reaping
high market valuation . NIIT has been following a similar method called
Economic Value Addition (EVA).
[47]
~1
1
Recruitment cost
~~~S=e=le=c=ti=on==c=os=t======~ Magnitude of
Investment sub
~ ~~T=ra=i=n=in=q=c=o=st======~
Net Human
system Human Human
human Resource
.- resource ~ resource asset
resource Investment
,
~~'W==el=fa=r==ec=os=t======~
I \r Write off
Efficiency of
Human
~ Other cost Resource
Investment
Human resource I Human contribution ~ Effectiveness
accounting
system
Production
efficiency
~[
·I
.I
I Productivity factor
y
_J ~ of human
resource
system
'-------,-,-~
1-.
Magnitude of
L---~--~ 1-+ Human
~I Education Resource Value
~~Skill
lnternallovalt.v ~
Value
f---+1 Promotability Human Reliable Value
subsystem resource Organisational ~ human ~ reporting Relative
~ '--r-
e-so_u_r_ce-
value Efficiency of
membership
- value
'--------~ ~---+1 Productivity '------ Human
External Resource
prospects
~~ Manaqement style
r
F.rg. 1. 1 Sh·ows Human Resource Accounting System
(i) Lev And Schwartz Model
(ii) Hermanson's Models
(iii) Stochastic Rewards Valuation Model
(iv) Jaagi And Lau Model
(v) Morse Model
(vi) Chakraborty Model
(vii) Dasgupta Model
Human
Resource
Accounting
I
Hun1an
Resourc e Cost
•
Human
Resource Value
Accou nting Accounting
Personal Human
Cost Asset
Accounting Accounting
capitalized expenditure every year through thy profit and loss account and
adequately measured with the help of surrogates like salary/ earnings of the
human resources.
[49]
1. HISTORICAL COST MODEL :
and amortized over the expected useful life of the human resources. Fig. 1.3
shows the human resource investment sub system. The amounts so capitalized
net human asset value related to the expired employee is charged of against
MERITS:
[50]
Human Resource Investment
+ + +
Acquisition Training Welfare
Costs Costs Costs Othe r Costs
+ + +
Recruitment Formal Medical Sa fety
Cost Training Expenditure Expe nditure
Cost
+ + +
Selection On-the-job Canteen
Cost Training Expenditure Ex gratia
Cost
•
Placement
•
Special
•
Specific and
,
Multi -Trade
Cost Training General Ince ntives
Cost Allowances
+ + +
Development Other Other Costs
Other Costs Programmes Welfare
Expenditure
Cost of
human Hiring
Manager A Amortisation
resources
Training
Human
Total assets Manager B
costs of Familiarisation
the firm
expenses
Other Experience amortisation
Manager C Write offs
costs (Losses) and write
Development offs
[sl]
DEMERITS:
be amortized.
reach the level of competence of the existing employees . There are two
replacement cost.
someone with the substitute capable of performing to the same degree in the
same position.
[53]
POSITIONAL REPLACEMENT COST
I I
Acquisition Costs Learning Costs Separation Costs
I I I I I
t i i
I I I i I I
I Direct Costs
I I Indirect Costs I Direct Costs
I I Indirect Costs I I Direct Costs
I I Indirect Costs
an equivalent substitute rather than the cost of replaoing him with the best
The replacement cost method is similar to the historical cost method and
the same principles of amortization and write offs apply. The only difference is
that the replacement cost method takes into account the cunent cost of
historical costs of these items. Fig 1.5 shows the measurement of replacement
cost.
MERITS:
resources and thus takes into account the fluctuations of the job
cost.
DEMERITS:
[55]
b. In actual practice it is really difficult to find identical replacement
e. Replacement cost may not equal the value of human assets to the
asset.
Thus under this method the value of an employee in his alternative use is
determined. This value is taken as the basis for estimating the value of human
[56]
resources employed by the organization. Bidding takes place only for those
assets, which are scarce. Scarce human resources only have an opportunity
cost. A human asset possesses value if it is a scarce resource and the division or
department of the firm with the highest bid acquires the particular human
resource and includes its price in its investment base. The maximum bid price
may go to the extent of the capitalized value of the extra profits likely to be
generated by the ability and competence of scarce human asset. For example let
us assume that a firm has a capital base of Rs.1 0, 00,000 and it earned profits
the services of a particular engineer are acquired, it is expected that the profits
will rose by Rs.30, 000 over and above the target profit.
* 100 112 = Rs .250, OOO.The company may bid up to Rs.2 , 50,000 for an
engineer. The new capital base is Rs .12, 50,000(10, 00,000 + 2, 50,000). 12%
/ 12 = 4,16,667
MERITS:
[57]
b. When determining bid prices, management has personnel records
DEMERITS:
a) This method does not show the true cost of human resources in
opportunity cost
competitive process.
employees is developed and established and made up to date every year. The
standard cost calculated for all the employees is treated as the value of human
year basis. In the case of new recruitments the standard cost related to the grade
of employees is increased. If the actual cost is more or less the standard cost,
the difference is transformed to the related account as per the policy of the
firm. The variance produced can be analyzed and they fom1 a useful basis for
control.
[58]
5. CURRENT PURCHASING POWER METHOD:
cunent purchasing power of money with the help of index number. If the index
human resources, the argument being that the value of fim1 's employees is
organi zation in future. The following two different ways has been suggested for
this purpose :
to human resources.
[59]
Based on this concept various valuation models developed are as under-
(v i) Chakraborty Model
value to an organization.
human capital -
T = retirement age.
[60]
Because Yy is an expost value, gtven that I(t) is obtained only after
retirement and because Yy ignores the possibility of death before retirement age
According to Lev and Schwartz "the firm's labour force will be divided
staff etc. Average earnings profits, based on census data, will be constructed
for group and the present value of human capital calculated . The sum of
various employee groups will provide total human capital value associated with
the firms".
Let us assume a discount rate of 12%. The value of human capital of the
[ 61 ]
Let us assume that all the employment is 24 years old . Each perso n \viii
earn as follows-
manner-
Rs . 4 7, 9 3 1 * 50 0
MERITS:
[ 62]
b) Reporting the general and specific human resource values
DEMERITS:
Though this method was found to be most famous and bein g used
drawbacks:
placed.
c) The model does not take into acco unt th e possibility and
discount rate.
[63]
e) The degree of objectiv ity to be expected is to be low and a
3. HERMANSON'S MODEL:
companies of which the finn is a part. For instance, the investment in concern
is Rs.5 lakh s. The nom1al earnings are 10%. The particular concern under
The capitalized value of this value will be Rs .2, 08,333 (25,000 * 100
115). This value is called of human assets. It has been assumed by Hermanson
that the excess profit earned by the concern is due to the extra ability of
employees.
[ 64]
MERITS:
expensive to operate.
DEMERITS:
a. The method assumes that if a firm's actual rate of retum devi ates
earnmgs.
c. The method uses data from two sources such that from the firm
itself and from other firms in the same industry of economy, the
calculation cannot be completed until all the data are ava ilable .
( 65]
d. Eamings for the previous year are used as surrogate for future
the assu mption that a relationship ex ists between a person, salary and hi s va lu e
value of employee to a firm . Under thi s model compensation means the present
th e weighted ave rage of the ratio of the return of specific period, normall y the
current yea r and the preceding four years. The weights are ass igned in a reverse
order such that hi ghest to the current year and so on in th e descending order of
[ 66]
the average rate of accounting income on owned assets for
RF4 the rate of accounting income on owned assets for the fim1
The following steps are involved 111 calculating the estimated present
Estimate the annual eammgs (waged and salaries) for the next
five years.
taken together.
above.
For example:
[ 67] .
FUTURE WAGES PAYMENTS
%
Present
nse 2001 2002 2003 2004 2005
Grade No . salary
per Rs Rs. Rs. Rs. Rs.
Rs.
year
Senior Management 3 10,000 15. 0 11,500 13 ,22 5 15 ,208 17,490 20,114
Middle Manage ment 3 5,400 12.5 6,075 6,834 7,68 8 8,649 9,73 0
Supervi sory 13 19,900 10.0 21 ,890 24,079 26,487 29 , 136 32,050
Clerical and 60 70,100 10.0 77 , 110 84,82 1 93,303 1,02,663 1, 12 ,897
operative
79 1,05,400 1,16,575 1,28,959 1,42 ,686 1,57,938 1,74,791
DISCOUNTING AT 15%
15 13 _,12 10 10
=5-+4- +.)-+2-+-
12 11 10 8 9
18.188383
15
= 1.2125588
= 5, 40,549 8 * 1.2125588
= Rs.6, 55 ,447 (approx)
Journal entry:
[ 68]
Human resources Dr
If the . efficiency ratio is less than 1, the value of the human resources
would be less than the amount of the future wages payable. In this case, instead
MERITS:
greater than 1 indicates that the average rate of retum for is above
the average rate fo r all firms in the economy and vice versa.
entirely due to the efforts of empl oyees and not due to any other
extraneous cause.
DEMERITS:
[ 69]
3) Flamholtz's stochastic rewards valuation model: The Flamholtz's
different roles and renders services to the organi zation. The movement of
people from one organi zational role to another is a stoch astic process. As
people move and occupy different organizational roles they render service
the future rewards (services) a person is expected to render to the organi za tion
probability of his remaining in the organi zation . The mod e l suggests a five step
occupy and the time at which he will quit the organi zat ion.
period.
[ 70]
Prof. Flamholtz clarifies that an individual's expected realisable value is
> The probability that the individual shall maintain his expected
service life.
activation level (the extent to which that the person is affected by motivation) .
In addition to the personal factors the organizational factors also influence the
organization, and
Organizational rewards .
[ 71 ]
On the basis of the above concept a person expected realisable value
of all employees for the period of time. And the expected se rvic es can be
11 t 1RiP(Ri)
(R)=I - I
t=l (1 + r)
Where-
time period
m state of exit
[ 72]
MERITS:
because it takes into acco unt the probabi lity of a perso n 's career
retirement or death .
indiv idu al depends upon non mon etary variables . The model
links the competence of emplo yees w ith the reward system that
DEMERITS:
determined for all emplo yees for " n" periods on an indi v idu al
basis.
[ 73]
d. The predicting the stay or promotion chances of employees on an
operating as a group.
8
J aggi and Lau 's model is based on valuation of groups rather than
pa1iicular group likely either to leave the firm during each of the fmihcoming
and the expected quantities of services for each rank of service. The matrix can
employees that will be in each service state in that period by the value of the
[ 74]
The equation for the computation of value of human resources of an
[TV] = [N ]I
n=l
r n [T Y[v]
[TV] = (N) r
n Time period
r Discount rate
MERITS:
[ 75]
c. In this model, it has been assumed that the pattern of movement
DEMERITS:
decisions about individuals. This feature is lost in Jaggi and Lau 's
model .
5. MORSE MODEL :
minus the present value of future payments (direct and indirect) to human
beings.
Pekin and Ogan in 1976 gave an approach, which was the extension of
multiplied with net benefit of employees and then make the value of human
resource. According to him the value ofhuman resources is equal to the present
[ 76]
Under this method two things are calculated-
The net benefits mean the difference between expected benefits and total
costs. The product of his monetary value benefits potential and his individual
The certainty factor means the probability of the determined by assessing the
the employee. The total cost means the total of the maintenance cost such that
future salaries and wages stari up costs, recruiting and initial training costs at
their historical vale and the future training and development costs. The net
benefits for all employees thus calculated is multiplied by their cetiainty factor,
which give certainty equivalent net benefits, which form the value of hum an
10
resources.
6. CHAKRABORTY MODEL:
employee in that group. The value thus obtained is discounted at the expected
average after tax return on capital employed over the average tenure period, so
[ 77]
He further suggested that the recruitment, hiring, selection, development
and training costs of each employee should be recorded separately. They can be
average stay off the employee in the organization and the deferred potiion
then the balance on the defened revenue account for the year attributable to
that person should be written of against the income of the year of turnoff itself.
assets under fixed assets may cause problem of depreciation, capital gam or
losses etc.
7. DASGUPTA MODEL:
him total cost incurred by the individual up to that pmiion in the organization
intelligence level. The value thus calculated is revised from time to time on the
To clarify the concept of HRA, Prof Dasgupta has given the following
example -
Let us assume that a fim1 started a business with Rs.l, 00,000. It has
purchased fixed assets worth Rs.SO, 000 in cash. Rs.26, 000 is kept, as working
[ 78]
Balance sheet (including Human Resource)
OTHER MODELS:
variables model:
model has been developed by Rensis Likert and David G. Bow ers of th e
The model ass umes that the organizational produ ct ivity can be exp lained
in terms of the hum an organi zation. It is comprised of three classes of variab les
organization.
[ 79]
The intervening variables such as the loyalties, attitudes,
The end result variables such as its productivity, costs, scrap Joss ,
by that organization.
between the casual variables , the intervening variable and the end result
total productive efficiency. Time lag of two years or more often exists between
a change in casual in variables and the resultant changes in the end result
variables. The cycle is like this - casual variables affect intervening variables
technical proficiency.
[ 80]
The resulting motivation, loyalties and the behaviour of
MERITS:
on the other hand this model based on non monetary variables has
potray the results of the human resource utilization for the benefit
of the organization .
resource development.
DEMERITS:
[ 81 ]
b) On the completion of questionnaire the results require
and end result variables after allowance for time lag effects that
measurement procedures.
collected, used and presented. These may take the form as follows:
a. Recruitment cost
b. Selection cost
c. Training cost
b. Department wise
[ 82]
III . Periodical changes in human resources investment :
IV. Statement of contribution factor separately for officer, staff and workmen.
+ human resource current cost) separately for officers, staff and workmen.
VII. Statement of per capita human resource investment for all categories and
[ 83]
REFERENCES
1
Brummet, R.L., Flamholtz, E.G., Pyle, W.C., 1968, "Human Resource Measurement:
A Challenge for Accountants", Accounting Review, pp. 2 17-24 1.
2
Flamholtz, E., 1971 , "A Model for Human Resource Valuation: A Stochastic
Process with Service Rewards", the Accounting Review, pp. 253-67.
3
Hekimian,JamesS .amd Jone, CurtisH ., "Put people on your Balance Sheet",
Harward Business Review, I an- Feb., 1967 ,pp .1 05-113
4
Lev, B., Schwartz, A., 1971, "On the Use of the Economic Concept of Human
Capital in Financial Statements", The Accounting Review, pp. 103-12.
5
Hem1anson. R .H., 1964, "Accounting for Human Assets", Bureau of Business And
Economic Research, Michigan State University, East Lansing, Mi. pp.9-1 0.
r, Hem1anson . R.H. , 1964, "Accountin g for Human Assets", Bureau of Business And
Eco nomic Research, Michigan State University, East Lansing, Mi. pp. 9-10.
7
Flamholtz, E., 1971, "A Model for Human Resource Valuation: A Stochastic
Process with Service Rewards", the Accounting Review, pp . 253-67 .
8
Jaggi, B. , Lau , S., 1974, "Toward A Model for Human Resource Valuation" , the
Accounting Review, pp. 321-9.
9
Morse, W.J., 1973, "A Note on the Relationship between Human Assets And
Human Capital", The Accounting Review, pp. 589-93.
1
° Chakraborty, S .K., Topics in accountin g and finance, Oxford U ni versity press,
Delhi , 1976, pp. 397
11
Rensis Likert and William C. Pyle, "Human Resource Accounting: A Gunman
Organisation Measurement Approach", financial ana lyst Joumal , Jan.- Feb,
1971.
*****
[ 84]