INTRODUCTION

 In order to estimate and project the worth of the

human capital, it is necessary that some method of
quantifying the worth of the knowledge, motivation,
skills, and contribution of the human element as well
as that of the organisational processes, like
recruitment, selection, training etc., which are used
to build and support these human aspects, is
developed.
 Human Resource accounting (HRA) denotes just this
process of quantification/measurement of the
Human Resource.
 Definition
The American Accounting Association’s Committee
on Human Resource Accounting (1973) has defined
Human Resource Accounting as “the process of
identifying and measuring data about human
resources and communicating this information to
interested parties”

• “the measurement and reporting of the cost

and value of people in organizational
resources”.
• There are a few organizations, however, that do recognize
the value of their human resources, and furnish the related
information in their annual reports.

• In India, some of these companies are : Infosys, Bharat Heavy

Electricals Ltd (BHEL); the Steel Authority of India Ltd. (SAIL),
the Minerals and Metals Trading Corporation of India Ltd.
(MMTC), the Southern Petrochemicals Industries Corporation
of India (SPIC), the Associated Cement Companies Ltd,
Madras Refineries Ltd. , the Hindustan Zinc Ltd. , Engineers
India Ltd, the Oil and Natural Gas Commission, Oil India Ltd.,
the Cement Corporation of India Ltd. etc.
 WHY HRA ?
According to Likert (1971), HRA serves the following purposes in an
organisation:

•It furnishes cost/value information for making management decisions about

acquiring, allocating, developing, and maintaining human resources in order
to attain cost-effectiveness;

•It allows management personnel to monitor effectively the use of human

resources;

•It provides a sound and effective basis of human asset control, that is,
whether the asset has appreciated, depleted or is conserved;

•It helps in the development of management principles by classifying the

financial consequences of various practices.
• Basically, HRA is a management tool which is
designed to assist senior management in
understanding the long term cost and benefit
implications of their HR decisions so that
better business decisions can be taken. If
such accounting is not done, then the
management runs the risk of taking
decisions that may improve profits in the
short run but may also have severe
repercussions in future.
 Three main aspects of HRA
• Evaluation of human resources.

• Recording the valuation in the books of accounts.

• Presenting the information in the financial

statements for communication to the interested
parties.

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 Basic Premises of Human Resources
Accounting

• People are valuable resources .

• Determining the usefulness of manpower as an

organization resource .
• Information on investment and value of human
resources

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 Significance of Human Resources
Accounting
The information generated through HRA is helpful in making
decisions in the following areas:
1. Decisions regarding cost reduction programmes.
2. Training and development.
3. Recruitment planning and selection.
4. Manpower planning and control.
5. Conservation and rewarding of human resources.
6. Making a choice between various types of human
investment, investment in other assets, etc.

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 Objectives of Human Resource Accounting
• Determining the return on investment on human
resources.
• Knowing about proper utilization of human
resources.
• Provides quantitative information on human
resources.
• To communicate the worth of human resources to
the organization and the society at large.

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Objectives of HRA, according to Likert
• To furnish cost value information for making management
decision.

• To allow management personnel to monitor effectively the

use of human resources.

• To provide a sound and effective basis for asset control.

• To aid in the development of management principles by

classifying the financial consequences of various practices.

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 Advantages of Human Resource
Accounting
• It helps in knowing whether human asset is being
built up in the business or not.

• It will give the cost of developing human

resources in the business.

• The investment on the development of human

resources can be compared with the benefits and
results derived.

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 Advantages of Human Resource
Accounting
• The return on investment can realistically be
calculated only when investment on human
resources is also taken into account.

• It will help management in planning and executing

personnel policies.

• Human resource accounting will help in improving

the efficiency of employees.

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 The biggest challenge in HRA is that of assigning monetary
values to different dimensions of HR costs, investments
and the worth of employees. The two main approaches
usually employed for this are:

1. The cost approach which involves methods based on the

costs incurred by the company, with regard to an
employee.

2. The economic value approach which includes methods

based on the economic value of the human resources and
their contribution to the company’s gains. This approach
looks at human resources as assets and tries to identify the
stream of benefits flowing from the asset.
Aspects / Methods of Human Resource
Accounting

• There are two major human resources

accounting methods:

• Human Resource Cost Accounting (HRCA)

• Human Resource Value Accounting (HRVA)

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 Human Resource Cost Accounting
(HRCA)
• It is the measurement and reporting of the costs
incurred to acquire and develop people as
organizational resources.
It includes:
• Accounting for the costs of personnel activities and
functions .

• Accounting for costs of development of people as

human assets, also termed as ‘Human Asset
Accounting’

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 THE COST APPROACH
(Brummet, Flamholtz and Pyle)
Cost is a sacrifice incurred to obtain some
anticipated benefit or service.
All costs have two portions, viz.,
1 the expense and
2 the asset portions.
The expense portion is that which provides benefits
during the current accounting period (usually the
current financial year), whereas the asset portion is
that which is expected to give rise to benefits in the
future.
Two types of costs are of special importance in HRA

• Historical cost, and

• replacement cost
 Historical cost
• The historical cost of human resources is the
sacrifice that was made to acquire and develop the
resource. These include the costs of recruiting,
selection, hiring, placement, orientation, and on the
job training.
• While some of the costs like salaries, for instance,
are direct costs, other costs like the time spent by
the supervisors during induction and training, are
indirect costs.
 Opportunity cost
by Hekimian and Jones.
Sometimes, opportunity cost method, that is, a
calculation of what would have been the returns if
the money spent on HR was spent on something
else, is also used. However, this method is seen to be
not as objective as desired. Hence its use is restricted
to internal reporting and not external reporting.
 Replacement cost
• The replacement cost of human resources is the cost that
would have to be incurred if present employees are to be
replaced. For instance, if an employee were to leave today,
several costs of recruiting, selection, hiring, placement,
orientation, and on the job training would have to be incurred
in order to replace him. Such costs have two dimensions-

• positional replacement costs or the costs incurred to replace

the services rendered by an employee only to a particular
position; and
• personal replacement cost
 What are the Benefits and Scope of HR
Audit?
• Understanding employee satisfaction levels and giving employees
input into the process
• Improving employee relations which then smoothens the
onboarding process and having new employees
• Identifying potential risks for your organization from both data
analytics and expert analysis
• Helping you stay compliant with the local laws and central
employment laws by identifying all necessary documentation
requirements (e.g., wage/hour) and making sure critical tasks like
payroll processing run in a seamless way, so there is no disruption
in HR operations if something goes wrong due to human error or
system failure. Non-compliance with the laws like Factories Act,
Industrial Disputes Act or any other may result in fines and a bad
reputation.
 What is an HR Audit?
• HR audits are reviews of documentation, HR
policies, and practices through which
organizations can identify gaps in HR compliance
and address them before they become
problematic or even unsafe for staff members.

• The process not only evaluates how compliant

companies are but also ensures they’re giving
employees all that satisfaction required while
being sensitive to cultural differences and
religious beliefs— leading to collective growth.
HR AUDIT PROCESS
 TYPES OF HR AUDIT
Some common types of audits include:
•Employee Engagement Survey – If the company has one, they should
review its questions
•Legal Compliance Audit – It is important to stay up-to-date with the
latest legislation and changes in the business environment. It also
checks whether the employers’ policies and practices are in
compliance with the labour laws
•HR Benchmarking Audit – There are many free benchmark tools
online used for comparison. If an organization has one, it will compare
its practices against those of other organizations.
•Employee Survey Audit – This type of assessment deals with how well
HR departments communicate their company’s mission, vision, values,
and goals
•Organization Culture Audit or Employee Engagement Strategies
Evaluation – This is a great way to gauge what improvements to make
within your own corporate culture
 Who is Responsible to Conduct HR Audit?
• HR audits are conducted by outside experts to provide insight into
the strengths and weaknesses of an organization’s human
resources policies. A well-designed audit should have a mix of
qualitative data from interviews with stakeholders, as well as
quantitative analysis such as employee happiness or absenteeism
rates to create a holistic view of organizational culture.

• An HR function is also reviewed by an internal audit team provided

by the organization as well.

• As far as an external audit is concerned, it is conducted by an

independent contractor or employee of the company outsourcing
their HR department to that outside specialist.
 What are the Objectives of HR Audit?
It is necessary to know beforehand the purpose and
objective of an HR audit. There are two basic
purposes to conduct an HR audit.
•Understanding the importance of implementing
HR practices that align with employees’ needs and
business objectives
•Assessing an organization’s performance in its
adoption of HR strategies that contribute to a
positive organizational culture among staff, as well
as employee engagement metrics
Processes that require HR Audit
 What is HR Audit Checklist?
The checklist is based on several questions that an organization has to answer to evaluate the
effectiveness of its HR practices.

It’s a way for organizations, in particular, SMEs (small and medium enterprises) feel like they’re on par
with other companies.
•How does a company measure performance?
•Do employees feel they are valued and respected by management, peers, and customers?
•Does the company have a culture aligned with its vision and mission statements?
•Is there an effective succession planning process in place to ensure leadership continuity?
•What percentage of women hold higher-level positions within an organization (and do not just focus
on female managers)?
•Are people from diverse backgrounds fairly treated in terms of hiring, promotions, pay raises, or
bonuses?
•Do you have formalities like dress codes that make sense for your industry but is also sensitive to
religious beliefs?
•Do you have policies against harassment so staff can work in a comfortable environment free from
violence or discrimination?
•What is the process for disciplinary action and appropriate conduct in the employee handbook? Is
there a set of rules that they need to follow?
•Do you have a set of job descriptions that specify what each HR personnel in the company does? Is it
easy to see who is responsible for which tasks based on their accountabilities and responsibilities?
The answers to these questions are vital to an organization’s long-term success.