Human Resource Accounting

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Information about Human Resource Accounting

Published on October 12, 2010



Prestige institute of management, Gwalior : Prestige institute of management, Gwalior Class presentation of strategic hrm on human resource accounting Presented by: Neha sharma Mba 4th sem Meaning of human resource accounting : Meaning of human resource accounting 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. Definitions of Human Resource Accounting : Definitions of Human Resource Accounting AAA Definition:   “ The process of identifying and measuring data about human resources and communicating this information to the interested parties ” Stephen Knauf (1983):   “ The measurement and quantification of human organizational inputs such as recruiting, training, experience and commitment ” Eric Flamholtz   “ Accounting for people as organizational resources. It is the measurement of the cost and value of people for the organization ” Why HRA? : Why HRA? 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 is appreciated, depleted or conserved; It helps in the development of management principles by classifying the financial consequences of various practices. Need for hra : Need for hra HR Accounting is very much needed to provide effective & efficient management within the organization.* If there is any change in the structure of manpower, it is HRA which provides information on it to the management. * HRA provides qualitative information & also assess the cost incurred in personnel.* It gives a platform to the management by providing factors for better decision-making for future investment.* The return on Investment on human capital is best evaluated through HRA.* HRA communicates to the organization & public about the worth of human resources & also its proper allocation within the organization.* HR helps the management in developing principles by classifying the financial consequences of the various practices. Valuation Approaches of Human Resource : Valuation Approaches of Human Resource Measurement is arbitrary and there are mainly 2 approaches; Cost based approaches Present Value of Future Earning Cost Based Approaches 1. Historical Cost Approach 2. Replacement Cost Approach 3. Opportunity Cost Approach Historical Cost Approach : Historical Cost Approach The cost of recruitment, selection, development are all capitalized and amortized over the useful life time of the employee. This amortization may be dealt according to the situation.  Benefits: Easy to operate, Conforms with the matching principle, Similar to the treatment of other fixed assets Shortcomings: Estimation of the useful life time may not be easy, The value of humans are generally increasing over time - but this method gives a declining picture, This method doesn’t actually measure the value but undermines it Replacement Cost Approach : Replacement Cost Approach The cost to replace the existing human resources are estimated. All costs incurred to attain the current level of competence of an existing employee. Created from scratch  Benefits: Is present/ future oriented Disadvantage: Not always possible to obtain such a measure (identical replacement), It is hence subjective Opportunity Cost Approach : Opportunity Cost Approach Is based on economic concept which overcomes the deficiency in replacement cost app. Measured through a competitive bidding process within the entity.   Steps: 1. The entity is divided in to investment centers 2. The investment centre managers bid for scarce employees they need within the entity   3. The maximum bid price may obtained by the capitalization of the excess profits generated by the employee Present Value of Future Earnings : Present Value of Future Earnings 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 Limitations The measure is an objective one because it uses widely based statistics such as census income return and mortality tables. The measure assigns more weight to averages than to the value of any specific group or individual Investment pattern : Investment pattern The human resource investment usually consists of the following items:- 1)      Expenditure on advertisement for recruitment 2)      Cost of selection 3)      Training cost 4)      On the job training cost 5)      Subsistence allowance 6)      Contribution to provident Fund 7)      Educational tour expenses 8)      Medical expenses 9)      Ex-gratia payments 10) Employee’s Welfare Fund All these items influence directly or indirectly the human resources and the productivity of the organization. Hra in india : Hra in india 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.  Even though the situation prevails, yet, 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. It is needless to mention here that, the importance of human resources in business organization as productive resources was by and large ignored by the accountants until two decades ago. conclusion : conclusion Thank You : Thank You

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