HISTORY OF HRA

Definition
 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.
 Our country
 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.
 Early crusaders
 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.
Initial idea
 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.
Likert’s Model
 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.
First effort
 Historically the first major systematic effort at
evaluation was made by RG Barry Corporation of
Columbus in 1967.
 Their annual report detailed the inauguration of
HRA procedures developed by the company to
enable them to report accurate estimates of the
worth of the organization's human assets.
Ministry of HRD
 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 programmes 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.
Adoption of HRA
 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 (Neyveli Lignite Corporation Ltd)
 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
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.
Other companies valuing HRA
 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.
 The importance of human resources in business organization as
productive resources was by and large ignored by the accountants
until two decades ago. 
The stages in HRA
Stage I :
Derivation of basic HRA concepts

 Scott & Paton provided support for treating people

as assets and accounting for their value.
 Likert was concerned with leadership effectiveness
and the human resource perspective that was based
on the premise that people were valuable
organisational resources.
 Roger Hermanson described a model to measure
HR, which was instrumental in moving to the next
stage
Stage II:
Basic academic research

 The research was done at the University of

Michigan by Likert, Brummet, Pyle and Flamholtz.
 These people analyzed the deficiencies of treating
an employee costs as expenses rather than assets
and concluded that HRA should be used a
management tool.
 The first attempt to develop a model was on R G
Barry Corporation, an entrepreneurial public
company.
Stage III:
Significant academic research

 Period of rapid growth of interest

 Involved research in Western world, Australia &
Japan.
 R G Barry Co. published proforma financial
statements that included human assets for two
years.
 “Putting people on balance sheet”.
 “Management’s control of employees.”
 AAA (American Accounting Association)
established committees on HRA in 1971-73.
 Empirical studies suggested that HRA had an impact
on decision making.
 Elias’s experiments suggested that the decisions of
investors were affected.
 Hendericks found that investment decisions were
significantly affected by additional HRA cost
accounting.
 Inclusion of HRA details helped in the betterment of
firm’s net income.
 Financial analysts consider HRA as a value addition
for their analysis
Work done in stage III contd..

 Flamholtz found that human resource value

numbers made an impact, whether represented in
real numbers or with some value.
 Expected realizable value model.
 Certainty equivalent model.
 NPV model
Stage IV:
Declining Interest

 It was felt that the preliminary work is done and

further work can be done by specialists only.
 The study being complex and involving
transparency caused the interest to wane.
Stage V :
Resurgence of interest

 The US Office of Naval Research sponsored

research dealing with the feasibility of applying
HRA to Navy.
 More importance to intangible assets.
 Intellectual capital of an organisation.
 Talent management as an offshoot of HRA.
 Corporate Governance as an alternative tool.
 New marketing strategy
Human Resource Management
Activities
 Human Resource Management Activities:
 Attraction
 Selection
 Retention
 Development
 Utilization
 In the past, these activities were evaluated in
behavioral and statistical terms.
Behavioral Measures
 Measures of the reactions of various groups of
what individuals have learned or of how their
behaviors have changed on the job.
 These groups include:
 Top Management
 HR Specialists
 Applicants
 Trainees
Statistical Measures

 Statistical Measures Include:

 Ratios
 Percentages
 Measures of Central Tendency and Variability
 Measures of Correlation
Measuring Activities
 Today, because of rising costs, there is a need to
evaluate HR management activities in economic
terms.
 This requires gathering information from:
 Accounting
 Finance
 Economics
 Behavioral Science
Relevancy of Economic Measurements

These economic measurements are relevant to HR

programs because:
 They can help senior executives assess the extent to
which HR programs are consistent with and contribute
to the strategic direction of an organization.
 They give visibility to the HR department.
Human Resource Accounting
 No generally accepted accounting procedures for
employee valuation.
 The 1st major attempt at employee valuation was
made by R.G. Barry Corporation of Columbus, OH
in their 1967 annual report.
 This attempt has been described as a 1st step in
developing sophisticated measurement and
accounting procedures to enable the company to
report accurate estimates of the worth of the
organization’s human assets.
Historical Cost Approach to Employee Valuation

 Asset model of accounting

 Measures the organizations investment in employees.
 Viewed most appropriate when used for external
reporting.
 Objective
Historical Approach
 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.
 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.
Disadvantages of Historical Cost Approach

 This approach is based on the false assumption

that the dollar is stable.
 Deleting and writing off abortive expenditures
involve a great deal of subjectivity.
 Because the assets valued are not salable there is
no independent check of valuation.
 This approach measures only costs to the
organization. It ignores any measure of the value
of the employee to the organization.
Alternatives to the Historical Cost Approach

 Replacement Cost
 Present Value of Future Earnings
 Present Value to the Organization
Replacement Costs
 Measures only the cost of replacing the employee.
 Replacement Costs Include
 Recruitment
 Selection
 Compensation
 Training cost (income forgone during the training period)
 Biased estimates-an inefficient firm may incur
greater cost.
Present Value of Future Earnings
 The organization establishes what an employee’s
future contribution is worth to it today.
 The contribution can be measured by its cost or by
the wages the organization will pay the employee.
 Objective
 Census income returns
 Mortality tables
 This measure is limited because it assigns a value to
the average rather than any specific group or
individual.
3 Faulty Assumptions Using PVFE
1. Subject to any profit expectancy built into the
discount rate applied (Worth = Future Cost), the
employing organization is indifferent as to whether
it retains the employee, because in either case it
comes out even.
2. Earnings exclude fringe costs, the organization is
better off without this resource.
3. The value of past recruitment and employee
development is zero in (1) or is negative assuming
(2).
Value to the Organization
 Hekimian & Jones proposed that where an
organization had several divisions seeking the same
employee, the employee should be allocated to the
highest bidder, and the bid price should be
incorporated into that divisions investment base.
 This approach has merit, but the opportunities to
use it are rare.
Value to the Organization Continued

 Hermanson proposed an alternative approach

involving establishing the net present value of
expected wage payments and applying to this a
weighted efficiency ratio.
 However, use of such broadly based statistics appears
to diminish the precision of the calculations in
general and incorporates unrelated risk factors into
the efficiency-ratio calculation.
 Also, human resources so valued would subsume all
other intangible assets of a goodwill nature.
Limitations
 Dollar values cannot always be attached to the
information that is collected, which limits the
application of HRA.
 These approaches to HRA reflect only inputs and not
effectiveness.
 These approaches are human asset accounting
models that focus exclusively on investments in
people ignoring the output those resources produce.
Extension of HRA
 Pyle suggested that HRA be extended to compute
returns on assets and returns on investments.
 This approach properly compares input and output
measures but still fails to distinguish between
individual and group effects that produce
variability in output.
 The Search Continues
Costing Employee Behaviors
 The general idea of costing human resources is not
new.
 Standard cost accounting procedures are applied to
employee behavior
 To accomplish this, cost elements associated with
each behavior must be identified and their separate
& independent dollar values computed.
2 Ways to Conceptualize Cost
 Outlay Costs vs Time Costs
 Outlay – materials used in training new employees
 Time – Supervisors’ time spent orienting new employees
 Distinguishes among fixed, variable, and
opportunity costs.
 Variable Cost- sales commission
 Fixed Cost- Salaries
 Opportunity Cost- reflects what the organization might have earned had
it put the resources in question to another use.
Believe It or Not
All aspects of HRM can be measured and
quantified in the same manner as any operational
function.
Intellectual Capital
What is it?
 Knowledge
 Information
 Intellectual Property
 Experience
Microsoft
 Total Market Value
 $412 Billion
 Total Value of all Physical Assets (buildings,
equipment, and furniture)
 $24 Billion
 Where is the extra $388 Billion coming from?
Intellectual Capital vs Physical & Financial
Capital

5:1 & 16:1

Soft Assets
 Intangible Assets
 Brand Names
 Intellectual Capital
 Patents
 Copyrights
 Expenditures for R&D
 The shift to a knowledge based economy has
created a whole new category of assets which are
not recognized in financial statements.
 Information is the essence of these soft assets.
The Information Revolution
 Knowledge has become the fundamental
ingredient of what we make, do, buy, and sell.
 Managing Knowledge
 Finding & Growing Intellectual Capital
 Storing It
 Selling It
 Sharing It
 This new trend suggests a new way of strategic
thinking, rather than a technical approach about
“how to put people on the balance sheet.”
Valuing Intellectual Capital
 The first firm to attempt to account for its IC was
Skandia AFS in a supplement to its 1994 annual
report.
 Skandia developed a framework called the Skandia
Navigator.
The Navigator
 Intellectual capital in a company can be found in one
or more of three places:
 Its people
 Its structures
 Its customers
 Intellectual capital comprises:
 Human capital
 Structural capital
 Customer capital
Human Capital
The knowledge, skill, and capability of individual
employees to provide solutions to problems that
customers think are important.
Structural Capital
Consists of everything that remains when the
employees go home, including databases, customer
files, software manuals, trademarks, and
organizational structures.
Customer Capital
The value of an organization’s relationships with
the people with whom it does business, including
suppliers.
Three Principles for Measuring Intellectual Capital

1. Keep it simple.
2. Measure what is strategically important.
3. Measure activities that produce intellectual
wealth.
Human Capital Measures
 Measures of Innovation
 Measures of Employee Attitudes
 Measures of Tenure, Turnover, Experience, and
Learning
 Customer Capital Measures
 Structural Capital Measures