Human Resource Accounting

ByCA. Pramod Prabhu. S.H.,

B.Sc, P.G.D.B.A., A.C.A, C.I.S.A (U.S.A)

HRA - Meaning• Can be defined as the process of accounting which identifies, quantifies &

measures human resources for the use of management to cope up with the changes in its quantum & quality so that equilibrium could be achieved in between the required resources & the provided HR

• Thus, basically it is an information system that tells the management the changes taking place over time to the HR in the organisation. it also involves measuring the cost & value of the people in the organisation

• Some Indian PSUs using HRA:• BHEL, SAIL, ONGC, NTPC , Hindustan shipyard etc.

HRA – Basic Premise• People are valuable resources of an organisation• Usefulness of manpower is determined by the manner in which they are

managed• Info on investment & value of HR is useful for decision making for an

enterprise

HRA – Objectives• Provide info about earning potential of employees• Provide comparative info on costs & benefits associated with investment

in human assets• Measure efficiency of employee by finding productivity & profitability• Assist management in taking decisions on investment in human resources

HRA – Importance• Helps understand & assess inner strength of an organisation & helps

management to steer the company through trying situations• Helps management in proper utilisation of HR• Helps employees in improving their performance & bargaining power, as they

can assess their contribution against expense incurred on them• Helps decide on transfers, promotion, training & retrenchment of HR• Provides valuable info for persons interested in making LT investments in the

firm• Provides a basis for planning of HR• Helps locate the real cause for low ROI, like improper/under utilisation of

physical/human assets• Helps identify causes for high labour TO at various levels & take remedial

measures• Assists evaluate training expenses against corresponding benefits obtained

HRA Models• Historical cost method of valuation – Valuing at costs already incurred• Replacement cost method• Standard cost method• Opportunity cost method• NPV method:• a. Lev & Schwartz model• b. Morse model (Net benefit model)• c. Hermanson’s model• d. Flamholtz’s rewards valuation model• e. Pekin ogan model• f. Jaggi & Lau model

HRA - Objections• There is a difference between Hr & other assets. HR cannot be valued like

other assets• The different methods of valuation of HR vary & give varying results• Tax laws do not recognise HR asset. it remains only a theoretical concept• Factors for HR valuation are abstract & are not precisely measurable in

monetary terms• Uncertainty about continuance of employees• Lack of perfect knowledge about future earnings of HR

• THANK YOU