Human Resource Accounting

Current Purchasing Power

Method and Hermanson’s
Unpurchased Goodwill
method
Presented By: Group No. 3
What is human resource accounting?

According to AAA
HRA is the process of identifying and measuring Data about human
resources
And communicating this information to interested parties.
It also involves measuring the economic value of people to the
organization’.
Different types of models-

● Hermanson’s Unpurchased Goodwill Model

● Hermanson’s adjusted discounted future wages model
● Hekimian and Jones competitive bidding model
● Lev and Schwartz’s present value of future earnings model
● Brummet, Flamholtz, and Pyle’s economic value model
● Flamholtz’s Stocastic rewards valuation model:
● Myers and Flower’s five dimensional models
● Brummet and Taylor’s human resource value index model
Hermanson’s Unpurchased Goodwill Method

● The Unpurchased Goodwill method assumes that a business

will earn a normal rate of return on resources. If a business
shows a return that is different from the normal rate, it may
fairly be presumed that some resources must be existing that
have not been taken into account in preparing the Balance
Sheet. These unrecorded resources are assumed to represent
human assets.
Hermanson’s Unpurchased Goodwill Model

MERITS:
a) Uses information from published financial statements.
b) Based on a logical indication of the presence of human resources
in an organization.
c) Easy to understand and easy to make.
Demerits

a) It ignores human resource base that is required to carry out

normal operations of an organization.
b) It uses the actual earnings of most recent year as the basis for
calculating human assets which puts restriction on the scope of
making decisions. It discounts the reliability of forecasts of future
earnings that could be more relevant for managerial decisions.
Hermanson’s Model- Workings
The average rate of return on tangible asset in a particular industry over past
five years has been 12% and the firm has enjoyed 16% return on its tangible
assets of Rs. 30,00,000.

Calculation: Tangible assets=30,00,000

Profit of company= 16% Profit= 30,00,000 x 16 / 100 = 4,80,000
Rate of return in industry = 12% capital base = 4,80,000 / 12% = 40,00,000
Valuation of unowned assets= 40,00,000-30,00,000 Human
resources=10,00,000
Current purchasing power
method (CPPM)
 CPPM
• Under this method instead of taking the replacement cost to capitalize, the
capitalized historic cost of investment in human resources is converted into
current purchasing power of money with the help of index number.
• If the index number is doubled, the value of human resource is also
doubled.
• The converted value will be the value of human resources to be amortized
in rest of years as per policy of the firm.
• This method takes into account the changes in the general purchasing
power of money and ignores the actual rise or fall in the price of the given
item.
• CPPA was developed on the basis of a view that in times of rising prices,
if an entity were to distribute unadjusted profits based on historical costs,
the result could be a reduction in the real value of an entity – that is in real
terms the entity could otherwise distribute part of its capital.
MERITS
• Simplicity and Simpler Calculation
• Produces only approximate answers and approximately
correct data
• Less costly

DEMERITS
• The information generated under CPPA might actually be
confusing to users.
• Another potential limitation that no support of CPPA as it is
irrelevant for decision making.
• No change in the purchase power of entity is assumed to
arise as a result of holding non-monetary assets.
• Suffer from all the drawbacks of the replacement cost
 Calculation of Conversion
Factor
Historical figures are multiplied with conversion factor to know the
current purchasing power.

• Conversion factor = Price Index at the date of Conversion/Price

Index at the date of item arose

• Conversion factor at the beginning = Price Index at the

end/Price Index at the beginning

• Conversion factor at an average = Price Index at the

end/Average Price Index
• Conversion factor at the end = Price Index at the
end/Price Index at the end

• Average Price Index= Price Index at beginning + Price

Index at the end/2

• CPP Value = Historical value X Conversion factor