Human resource Accounting is the process of identifying and reporting the Investments made in the Human Resources of an Organisation that are presently not accounted for in the conventional accounting practices. In simple terms, it is an extension of the Accounting Principles of matching the costs and revenues and of organising data to communicate relevant information in financial terms.
The Quantification of the value of Human Resources helps the management to cope up with the changes in its quantum and quality so that equilibrium can be achieved in between the required resources and the provided human resources.
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Human Resource Accounting provides useful information to the management, financial analysts and employees as stated below:-
Approaches to Human resource accounting was first developed 1691 the next stage was during 1691-1960 and third phase post-1960. There are two approaches to HRA. Under the cost approach, also called human resource cost accounting method or model, there is a) Acquisition cost model and b)replacement cost model. Under the value approach there are a) present value of future earnings method, b) discounted future wage model, c) competitive bidding model.
This approach is also called as acquisition cost model.This approach is developed by Brummet, Flamholmay tz and Pyle but the first attempt towards employee valuation made by a foot ware manufacturing company R. G. Barry Corporation of Columbus, Ohio with the help of Michigan University in the year 1967 . This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition; formal training and, familiarization; informal training, Informal familiarization; experience; and development. this model suggest instead of charging the costs to p&l accounting it should be capitalized in balance sheet.the process of giving an status of asset to the expenditure item is called as capitalization. in case of human resource it is necessary to amortize the capitalized amount over a period of time. so here one will take the age of the employee at the time of recruitment and at the time of retirement. out of these a few employee may leave the organization before attaining the superannuation. This is similar to a physical asset. e.g.:- If company spends one lakh on an employee recruited at 25 years, and he leaves the organization at the age 50, he serves the company for 25 years (his actual retirement age was 55 years). The company has recovered rupees 83333.33 so the unamortized amount of rupees 16666.66 should be charged to p&l account i.e.
100000\30=3333.33
3333.33*25=83333.33
100000-83333.33=16666.67
This method is the only method of human resource accounting which is based on sound accounting principals and policies.
It is too tedious to gather the related information regading the human values.
This approach measures the cost of replacing an employee. According to Likert (1985) replacement cost include recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.
Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees’ death/separation/retirement. This method helps in determining what an employee’s future contribution is worth today.
According to this model, the value of human capital embodied in a person who is ‘y’ years old, is the present value of his/her future earnings from employment and can be calculated by using the following formula:
E(Vy) = Σ Py(t+1) Σ I(T)/(I+R)t-y
T=Y Y
where E (Vy) = expected value of a ‘y’ year old person’s human capital T = the person’s retirement age Py (t) = probability of the person leaving the organisation I(t) = expected earnings of the person in period I r = discount rate
Hekimian and Jones (1967) 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 incorporated into that division’s investment base. For example a value of a professional athlete’s service is often determined by how much money a particular team, acting in an open competitive market is willing to pay him or her.
According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job performance are measured using traditional organizational tools, and then costs are estimated for each criterion. For example, in costing labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs.
Human Resource Accounting is the term used to describe the Accounting Methods, systems and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in their knowledge, ability and motivation in the same organisation as well as from organisation to organisation. It means that some employees become a liability instead of becoming a human resource. HRA facilitates decision making about the personnel i.e. either to keep or to dispense with their services or to provide training. There are many limitations which make the management reluctant to introduce HRA. Some of the Attributes are:-