HUMAN RESOURCE

ACCOUNTING AT INFOSYS

SUBMITTED BY -:
2010035  PRATISH PRADEEP THALI
2010036  PRATULIKA SACHAN
2010037  RAHILA PINTO
2010038  RAHUL CHAUHAN
2010040  RAVI KUMAR AGRAWAL
2010041  RUCHIR KHANNA
2010042  SAFIYA KHAN
2010043  SARATH CHANDRA SHENOI
2010044  SHEENA PATHAK
2010045  SHRADDHA CHANDRAKANT THORAT
2010046  SHUKTI BASU
ECONOMIC VALUE APPROACH
•The value of an object, in economic terms, is the present value of
the services that it is expected to render in future.

•Similarly,
the economic value of human resources is the present
worth of the services that they are likely to render in future.

•Thismay be the value of individuals, groups or the total human

organization.

•Themethods for calculating the economic value of individuals

may be classified into monetary and non-monetary methods.
LEV AND SCHWARTZ’S MODEL

Lev and Schwartz’s 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.
 Lev & Schwartz model
• 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.

•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.
 BEHAVIORAL MODEL
•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

firm’s 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
 BEHAVIORAL MODEL
• 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 : knowledge, skills, health, availability and attitude.

• 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.
 MYERS & FLOWERS METHOD
• 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 individual’s
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.
JAGGI AND LAU’S 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.
 Why group basis?
 Easy to ascertain percentage of promotion/quitting
of a particular group of employees than individuals.
 Suggests the use of ‘Markov Chain Representation’ for
career movements and retirement/ death.
 Requires determination of Rank Transitional Matrix and the
expected quantities of services for each rank of service.
 Matrix-prepared from historical personnel records available in
the organization (i.e. past performance of the employee)
 Model includes data on:

- Historical movement of groups of employees into a Rank

transitional Matrix (probabilities of group’s career movements)
- Value of services an organization’s current employees
render in future period.
 Formula
[TV] = [N] . ∑rn . [T]n .
[v]

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
T = 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.
DRAWBACKS
 Does not suggest any guidelines to improve the validity of the
expected services measurement.

 Criticized on the ground that past performance is not an

indicator of the future and in the technology industry past
performance does not necessarily reflect the future potential.

 Does not consider the range of services provided by the

employees.
MYERS & FLOWERS METHOD
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.

Even though his method of valuing human resources is explicitly

intended for use in a company’s published financial statements
rather than for internal consumption,
MYERS & FLOWERS METHOD
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.
 NEED FOR HUMAN RESOURCE ACCOUNTING
1. To provide effective and efficient management within the
organization.
2. To provide information of changes in structure of manpower to
the Management.
3. To provide qualitative information.
4. To measure the cost incurred in personnel.
5. To provide factor for better decision making for future
investment.
6. To evaluate the Return on Investment as human capital.
7. To communicate to the organization and public about the
worth of human resources.
8. To know that human resources are properly allocated and used.
9. To know whether the human resources are giving a return
equivalent to their worth or not.