Unit- 2 Human resource Accounting.pptx

As per syllabus of Rani Channamma University, Belagavi

1. Unit-II: Human Resource Accounting Need and Development, Concept of Human Resource Accounting, Importance and objectives of HRA, Suggested Methods for Valuation of Human Resources, Financial Disclosure of Human Resources, HRA Practices in India. Mr. Vishwanath Bhanuse Teaching Assistant, Dept. of Studies in Commerce, Rani Channamma University P.G Center, Jamkhandi

2. Human:  refers to the skilled workforce in an organization. Resource:  refers to limited availability or scarce. Human resources  is the set of people who make up the  workforce  of an organization, business sector, industry, or economy. A narrower concept is human capital, the knowledge and skills which the individuals command. Similar terms include manpower, labor, personnel, associates or simply people. Human resource

3. Accounting is the processor keeping the accounting books of the financial transactions of the company. The accountants summarize the transactions in the form of journal entries. These entries are used in bookkeeping. The books of accounts are prepared by the accountants as per the regulation of the auditors and various regulating bodies. The accountants might follow the Generally Accepted Accounting Principles (GAAP) or the IFRS (International Financial Reporting Standards) principles Accounting

4. Human Resource Accounting (HRA) is a new branch of accounting. It is based on the traditional concept that all expenditure on human capital formation is treated as a charge against the revenue of the period as it does not create any physical asset. But now a days this concept has changed and the cost incurred on any asset (as human resources) should be capitalized as it yields benefits measurable in monetary terms. Human resource accounting means accounting for people as the organizational resources. It is the measurement of the cost and value of people to organizations. It involves measuring costs incurred by private firm and public sectors to recruit, select, hire, train and develop employees and judge their economic value to the organization. Human Resource Accounting

5. “Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.” - American Accounting Society Committee on HRA “Human Resource Accounting is an attempt to identify and report investments made in human resources of an organisation that are presently not accounted for in conventional accounting practice. Basically it is an information system that tells the management what changes over time are occurring to the human resource in the business.” - Woodruff “A term used to describe a variety of proposals that seek to report and emphasize the importance of human resources – knowledgeable, trained and loyal employees in a company earning process and total assets.” - Davidson and Roman L Weel “Human resource accounting is the measurement of the cost and value of the people for the organisation .” - Eric Flamholtz of university of California, Los Angeles Definitions of Human Resource Accounting

6. Formulating Policies and plans for human resources; Decisions regarding cost and benefits from human resources; Determining the training and development cost; Determine or ensure proper utilization of resources. Determine the value of human resources and benefits from it. Aid to top management regarding cost reduction and planning programs. Determining the value of critical employees and benefit from it. Need for the Human Resource Accounting

7. The concept of recognizing human being as an asset is an old one. The Indian history has evidences for this as Emperor Akbar gave importance to the nine jewels (courtiers). The names of freedom fighters like Shri Moti Lal Nehru, Mahatma Gandhi, Sardar Vallabh Bhai Patel, Pandit Jawahar Lal Nehru, Subash Chander Bose etc. cannot be forgotten in the history of freedom movement of India. But no one made efforts to assign any monetary value to such individuals in the Balance Sheet of the nation. William Petty (in 1991) made the first attempt to value the human beings in monetary terms. He was of the opinion that labour was the father of wealth and it must be taken into consideration while making an estimate of wealth. Efforts were further made by William Far (1853) and Earnest Engel (1883) in this connection. The real work was started by behavioural scientists from 1960 onward. The notable experts were Shultz (1960), William Pyle (1967), Flam Holtz (1971, 1972, 1975), Morese (1973), Jaggi and Lav (1974), Kenneth Sinclare (1978), N. Dasgupta (1978) and Dr. Rao (1983), etc. who developed appropriate methodology and procedures for finding out the cost and value of the people to the organisation . Development of Human resource Accounting

8. IMPORTANCE

9. Information of manpower planning-  It provides useful information about the cost and value of the human resource. Which helps in manpower planning. Information for making personnel policies-  Human resource accounting provides useful information that helps to create and implement personnel policies. personnel are the people who are working in the organization. Utilization of human resources – The efficient and effective utilization of human resources is necessary for the success of the business. Human resource accounting gives the data for proper Utilization of human resources. Proper placement – Human resource accounting provides data that helps to select the right person for the right job. Previous experience of the personnel and their behavior are responsible for there placement Increase Morale and motivation-  It helps the management for the beneficiary policies of workers and employees. Attract best human resource  – Human resource accounting helps to attract for the recruitment of the best quality of skilled personnel for the organization. Helps management in employment and utilization of human resources in a cost-effective manner; Helps management in deciding promotion, demotion, transfers, retrenchment, and VRS schemes. Provide a basis for planning about human resources. Helps in identifying key employees and their cost and benefits. Aid in making budgets or forecasts. Help management in directing employees in improving their performance. Importance of HRA

10. Measuring the expertise of the employees and management of the organization. Find out the true value of the assets and liabilities hold by the organization. As the expertise of the employees is considered as assets and value to be provided to the employees are considered as liabilities. Applying a strong monitoring process on the human resources of the organization. It provides the management a sound basis for controlling the human resource. Provide a better basis of determining organizational goal and ways of achieving these goals. Provide the investors of the organization, shareholders and debt holders, accurate information for better decision making. Find out the true picture of the future prospects of the organization, as the utilization of other resources are fully depending on the human resources. Giving the stakeholders information about, how much value addition is done by the organization to country's human resource as part of the corporate social responsibility.

11. Following are the main objectives of an HRA system : To furnish cost value information for making management decisions about acquiring, allocating, developing and maintaining human resources in order to attain cost effective organization objectives. To allow management personnel to monitor effectively the use of human resources. To provide a determination of asset control i.e., whether human assets are conserved, depleted or appreciated. To aid in the development of management principles by classifying the financial consequences of various practices. To recognize the nature of all resources used or cultivated by a firm and improvement of the management of human resources so that the quality and quantity of goods and services are increased. To facilitate the effective and efficient management of human resources. Objectives of HRA

12. 7. To evaluate the return on investment in human resources. 8. Measuring cost related to the human resource of the organization 9. Enabling management to properly plan and budget for training and other services for the human resource. 10. To ensure proper utilization of resources is done or not. 11. Increasing awareness and value about human resources. 12. To proper accounting of retiring benefits and other benefits over the service period 13. For efficient and better human resource planning. 14. For determining actual  cost incurred  by the organization on human resources. 15. To determine whether an organization has gained from inputs put on human resources, training, recruitment, and other facilities. 16. To aid top management on human resource analysis.

13. Methods for Valuation of Human Resources Methods

14. 1. Historical Cost Model: This approach is also called an acquisition cost model. This approach was developed by Brummet , Flamholtz and Pyle. But the first attempt towards employee valuation was made by a with the help of Michigan footwear manufacturing company, R. G. Barry Corporation of Columbus, Ohio University in 1967. This method measures the organization’s investment in employees using the five parameters: recruiting, acquisition, formal training and familiarization, informal training and informal familiarization, and experience and development . This model suggests that instead of charging the costs to profit and loss statement, it should be capitalized in the balance sheet. The process of giving a status of asset to the expenditure item is called capitalization. In human resource accounting, it is necessary to amortize the capitalized amount over a period of time. The unamortized cost is shown as investments in the human assets. If an employee leaves the firm (i.e. human assets expire) before the expected service life period, then the net value to that extent is charged to the current revenue. A. Cost Based Models

15. This model is very simple to understand and easy to work out. It meets the traditional accounting concept of matching cost with revenue. It provides a basis for evaluating a company’s return on its investments in human resources. Merits of Historical Cost Model

16. The valuation method is based on the false assumption that the rupee is stable. This method measures only the costs to the organization, but ignores completely any measure of the value of the employee to the organization. It takes only the cost of acquisition of employees and thus ignores the aggregate value of their potential services. It is too tedious(boring) to gather the related information regarding the human values. It is difficult to determine the number of years over which the capitalized expenditure is to be amortized. Limitations of Historical Cost Model

17. The historical cost model was highly criticized as it only considers the sunk costs which are irrelevant for decision making. Thus a new model for HRA was conceptualized which took into the account, the costs that would be incurred to replace its existing human resources by an identical one. In other words this model considers the costs of replacing its human resources from scratch. Suppose the business were to lose a key player (or any player). In that case, the costs a replacement cost model considers are those required to find another suitable, equally qualified, and proficient team member. This model measures the cost of replacing an employee. According to Rensis Likert , replacement cost includes 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. Replacement cost considers the notional cost that may be required to acquire a new employee to replace the present one. In calculating the replacement cost, different types of expenses are taken into account which may be in the form of acquisition and learning cost. Replacement cost is generally much higher than the historical cost. 2. Replacement Cost Model

18. This model is more realistic as it considers the current value of human resources in a company. Thus, the financial statements prepared according to this approach are more realistic as compared to those prepared under historical cost approach. It is more representative and logical. It is almost impossible to ascertain correct replacement cost of existing human resources, since there can be no complete replacement for them. This method may also lead to an upwardly biased estimate because an inefficient firm may incur a greater cost to replace an employee There may be no similar replacement for a similar certain existing asset. No two people will have exactly the same qualities and performance levels, showing the model can't truly value people as physical assets as conventional accounting methods would Merits of Replacement Cost Model Limitations of Replacement Cost Model

19. This model was advocated by Hekiman and Jones in 1967. This model is also called as Market Value Model. This model of measuring human resources is based on the concept of opportunity cost (i.e. the value of an employee in its alternative best use, as a basis of estimating the value of human resources). The opportunity cost value may be established by competitive bidding within the firm, so that in effect, managers bid for any scarce employee. A human asset therefore will have a value, only if it is a scarce resource. the bid price is arrived at calculating actual or expected rate for capitalization of the supposed earnings to be earned by such employees. Limitations of Opportunity Cost Model This model excludes the employees who are not scarce. Under this model, valuation on the basis of opportunity cost is restricted to alternative use within the organization. 3. Opportunity Cost Model

20. This model was developed by David Watson. This model envisages establishment of a standard cost per grade of employee updated every year. Replacement costs can be used to develop standard costs of recruitment, selection, training and developing individuals. Such standards can be used to compare result with those planned. Variance should be analysed and would form a suitable basis for control. But under this model, determination of standard cost for each grade of employee is a difficult process. 4. Standard Cost Model

21. Improved cost control. More useful information for managerial planning and decision making. More reasonable and easier inventory measurements. Cost savings in record-keeping. Possible reductions in production costs. Standard cost is fixed for each category of employees and their value is calculated Controversial materiality limits for variances. Non reporting of certain variances. Low morale for some workers. This method is simple but does not consider difference s in employees put in the same group In many cases, these differences may be quite large. Advantages of Standard Costing Disadvantages of Standard Costing

22. This method is based on the assumption that there is no direct relationship between cost incurred on an employee and his value for the organization. This is because the value of an employee depends on factors like motivations, working conditions and their attitude towards work and organization. In this method, all employees working in an organisation are broadly classified into four categories; viz., top management, middle management, supervisory management and operative and clerical staff. The salary bill of each category is multiplied with appropriate multiplier to ascertain the total value of each category for the organization at a given point of time. Here, multiplier is an instrument that relates the personal worth of employees with the total asset values of the organization. As per principal, the value of human asset should match with the value of goodwill. Asset Multiplier Method

23. Present Value of Future Earnings Model or Lev and Schwartz Model: In 1971, Lev and Schwartz proposed an economic valuation of employees, based on the present value of future earnings, adjusted for the probability of employees’ death, separation or retirement. This method helps in determining what an employee’s future contribution is worth today. Present value of future earnings Method In this method, the future earnings of various groups of employees are estimated up to the age of their retirement and are discounted at a predetermined rate of return to obtain the present value of such earnings. This method is similar to the present value of future earnings used in the case of financial assets. According to this model, the value of human capital embodied in a person who is ‘r’ years old, is the present value of his or her future earnings from employment and can be calculated by using the following formula: Where, Vr = expected value of a ‘r’ year old person’s human capital I(t) = expected annual earnings of the person up to the retirement t = the person’s retirement age r = present age of the employee R = discount rate. B. Value Based Models

24.  This model doesn’t suggest how value of human resource should be recorded in Books of Accounts  This model takes wages & salary as a basis of value of human resource but value of human resource is not limited only to the extent of cost incurred on them.  It ignores the probability that people may make role changes during the career. For example Assistant Manager will not remain in the same position throughout his expected service life in an organization.  The Model ignores the possibility and probability that individual may leave an organization for reasons other than death or retirement. The model’s expected value of human capital is actually a measure of expected ‘conditional value’ of a person’s human capital-The implicit condition is that the person will remain in organization until death or retirement. This assumption is not practical. Limitations P V of Future Earnings Model

25.  The model is an objective one because it is widely based on statistics such as census income return and mortality tables.  A person’s value to organization is determined not only by the characteristics of the person himself (as suggested by Lev and Schwartz) but also by the organizational role in which the individual is utilized. An individual’s knowledge and skill is valuable only if these are expected to serve as a means to given organizational ends.  The measure assigns more weight to averages than to the value of any specific group or individual.

26. Problems and solutions Ex:

27. FLAMHOLTZ’S STOCHASTIC REWARD VALUATION MODEL Stochastic means- having random probability This model is also known as stochastic model and introduced in 1971 This model was published in an article ‘ A MODEL FOR HUMAN RESOURCE VALUATION’ This model is improvement on LEV & SCHWARTZ’s present value of future earnings model. It takes into account the possibility of an EMPLOYEE MOVEMENT FROM ONE ORGANISATION TO ANOTHER ORGANISATION. And his leaving the organisation DUE To DEATH or RETIREMENT Rewards Valuation Model or Flamholtz Model

28. FLAMHOLTZ was of the view that human being CANNOT BE PURCHASED or OWNED by the organisation like other physical assets. They are FREE TO EITHER SERVE or TURNOVER He emphasized on dual aspect of an individual value 1. The amount that organization Could potentially realize from his services if he stays in the organization. 2. The other aspect refers to the amount actually expected to be derived taking into account the personal likelihood of leaving.

29. Steps for Valuation 1. Estimate the TIME PERIOD during which an individual can be expected to render HIS Services to the organisation Basically expected Realizable value His conditional value Promotability Productivity Transferability X Probability of maintaining organization membership Satisfaction with organization

30. 2. Identify various services states that an individual may occupy during his stay in the organization 3. Measure the Value derived by the organization if an Individual occupies the various services states for specified time periods 4. Estimate the Probability that the individual will in fact occupy each service state at the specified future time.

31. This model was developed by Flamholtz . He advocated that an individual’s value to an organisation is determined by the services he is expected to render. This model is an improvement to the Present Value of Future Earnings Model. The model is based on the presumption that a person’s value to an organisation depends upon the positions to be occupied by him in the organisation . The movement of people from one organisational role to another is a stochastic process with rewards. As people move and occupy different organisational roles, they render services (i.e. rewards) to the organisation . However, the roles they will occupy in future will have to be determined probabilistically for each individual. This model suggests a five steps approach for assessing the value of an individual to the organisation . Forecasting the period a person will remain in the organisation , i.e. his expected service life. Identifying the service states, i.e. the roles that he might occupy, of course, the time at which he will leave organisation . Estimating the value derived by the organisation when a person occupies a particular position for a specified time period. Estimation of the probability of occupying each possible mutually exclusive state at specified future times. Discounting the value at a predetermined rate to get the present value of human resources. Rewards Valuation Model or Flamholtz Model

32. It is difficult to estimate the probabilities of likely service states of each employee. Determining the monetary equivalent of service states is also very difficult and costly affair. Since the analysis is restricted to individuals, it ignores the value added element of individuals working as groups. the value of a service state, the individual’s expected tenure, and the probabilities of occupying each defined state at specified times – although Flamholtz continues to explore the various possibilities of measuring these dimensions. Limitations of Rewards Valuation Model

33. Roger H. Hermanson has given this model in Michigan 1964 in his paper “ Accounting for Human Assets ”. This model is based on the assumption that it is possible to establish a relationship between the “Employee’s Salary” and his “Value to the Organization” . The present value (PV) of  Discounted Salaries  of future is calculated for each year for the upcoming five years. The PV calculated is further adjusted by an  Efficiency Ratio . ------------------------------------------------------------------------- 15 Hermanson’s Model

34. Where, RF0=Rate of accounting income on owned assets for the FIRM for current year RE0=Rate of accounting income on owned assets for the ECONOMY for the current year. Steps involved in process of evaluation: First of all estimation is to be done about annual salaries and wages for the next 5 year Secondly discount factor is applied to the annual wages. Present value of wages and salaries is calculated by multiplying wages with discount factor Calculate efficiency ratio by using formula discussed above. Present value of wages and salaries are multiplied with efficiency ratio. Hence value of human resource is calculated

35. Illustrated Example 1: The estimated annual salaries and wages for next 5 years of NIPPON CHEMICAL COMPANY are 3,4,5,6 and 7 lakhs respectively. The ARR (Average rate of return) of the company for the current year and preceding 4 years is 20,15,12,12 and 10 Lakhs respectively. The ARR for all the firms in the chemical industry for the current year and preceding 4 years is 15,10,8,6 and 5 respectively. Assume the discount rate to be 10%. Calculate the adjusted present value (Value of Human Resources).All the values are in Lakhs and currency in INR.

36. Solution: Advantages: This method uses information from published financial statements. Very easy to understand. Disadvantages: model only uses the actual earnings of the most recent year as the basis for calculating human assets.

37. Morse ( 1973 ) suggested this approach . Under it the value of human resources is equivalent to the present value of the net benefits derived by the enterprise from the service of its employees. Following steps are involved under this approach : The gross value of the services to be rendered in future by the employees in their individual and collective capacity . The value of direct and indirect future payments to the employees is determined. The excess of the value of future human resources (as per (a) above) over the value of future payments (as per (b) above) is ascertained. This represents the net benefit to the enterprise because of human resources. By applying a predetermined discount rate (usually the cost of capital) to the net benefit , the present value is determined. This amount represents the value of human resources to the enterprise. Net Benefit Model

38. This model was suggested by Pekin Ogan in 1976. is, in fact, an extension of net benefit approach of Morse. Under this model, the value of human resources is determined by taking into consideration the certainty with which the net benefits in future will accrue to the enterprise. The model involves the following steps: Net benefit from each employee. Certainty factor at which the benefits will be available in future. The certainty equivalent benefits will be calculated by multiplying the certainty factor with the net benefits from all employees. This will be the value of human resources of the enterprise. Certainty Equivalent Net Benefit Model

39. Certainty equivalent approach is one of the risk analysis techniques under which risk is incorporated by discounting the riskless cash flows at risk free rate. It incorporated the risk by converting the risky (or uncertain) cash flows into riskless (or certain) cash flows. Riskless cash flows = Risky Cash Flow X Certainty equivalent coefficient

40. This model was suggested by Prof. S.K. Chakraborty in 1976 . He was the first Indian to suggest a model on human resources of an enterprise. Under this model the value of human resources can be calculated by dividing the employees into two groups – Managerial and non-managerial, and then multiplying average tenure of group of employees with their average salary. The value thus obtained is discounted at the expected average after tax return on investment (ROI) over the average tenure period, so that value of human asset does not fluctuate frequently. He has further suggested that the recruitment , hiring , selection , development and training cost of each employee can be recorded separately . These could be treated as deferred revenue expenditure to be written off over the expected average stay of the employee in the organisation . The deferred portion should be shown in the position statement of the organisation . If there is a permanent exist on account of death , retrenchment etc. then the balance on deferred revenue expenditure for that year attributable to that person should be written off against the income in the year of exist itself . Aggregate Payment Model or Chakraborty Model

41. Prof. N. Dasgupta suggested this model in 1978. According to this model the total cost incurred by the individual up to that position in the organisation should be taken as the value of a person which is further adjusted by his intelligence level. The value thus calculated is revised time to time on the basis of age, performance, experience and other capabilities. Total Cost Model or Dasgupta Model

42. The various approaches take into account only those persons who are employed and ignore those who are unemployed . According to him both employed and unemployed persons should be brought in its purview for determination of the value of human resources of the nation . Thus , for the preparation of the balance sheet of the nation , the system should be such so that it fits and shows the human resources not only a firm but also of the whole nation. According to him , the total cost incurred by an individual , the state and the organisation to bring that individual upto the present position should be taken as the value of a person on the day when he starts serving the organisation or becomes fit for appropriate employment . It will include not only all expenses incurred by the individual for his education and training but also by the organisation on recruitment training , familiarizing and development human beings employed in the organisation . The valuation can be done group wise , if the number of employees is large . The value thus , determined should be further adjusted at the end of each year by organisation on the basis of his age , seniority , status , performance , experience leadership , managerial capabilities etc. The psychologists and other concerned experts will be helpful for such measurement . The revised value would be the value of the employee at the end of the year . Human resources valued according to this model should be shown both on the assets and liabilities sides of the balance sheet . On the assets side it should be shown after the fixed assets as Human Assets classified into two parts : ( i ) value of individual ( ii ) value of firm's investment . On the liabilities side , it should be shown after the capital as Human Assets by the amount at which it has been shown on the assets side against the value of individuals.

43. Name of the Model Author Effect 1. Historical Cost Approach Brumnut , Flamholtz , Pyle Expenses on T/D/S/R are considered 2. Replacement Cost Approach Rennis Likert Eric. G.Flamholtz Present exp. On T/D/S/R on another are considered. 3. Standard Cost Approach David Watson Std. cost of employee of each grade is determined. 4. Present Value of future earnings model Lev & Schwartz. Total earnings of employee is determined & Discount with present value factor. 5. Reward Valuation Model Flamholtz . Employee movement from one role to another role is considered. ( earning to org. would be taken) 6. Net benefit model Morse. Net benefit (i.e., earning for firm-paid to employee) would be taken.

44. S.L No Basis Historical cost method Replacement Cost Method Opportunity Cost Method Standard Cost Method 01 Base It is based on the cost already incurred. Only a prediction is made on the cost to be incurred if the existing employees are to be replaced. Only a prediction is made on the benefits to be derived if the scarce employees are put to alternate use. Under this method, employees of an organization are categorized into different groups based on their hierarchical positions and then costs on each groups are collectively calculated Differences among Historical Cost Method, Replacement Cost Method, Opportunity Cost Method and Standard Cost Method

45. S.L No Basis Historical cost method Replacement Cost Method Opportunity Cost Method Standard Cost Method 02 Parameters Cost of recruitment, Training, Salaries, Wages, Employee benefits etc. are considered only on cost already incurred basis. Cost of recruitment, Training, Salaries, Wages and Employee benefits etc. are considered but only on replacement basis. Only value of benefits derived out of scarce employees are considered. Cost of recruitment, Training, Salaries, Wages Employee benefits etc. are considered only on cost already incurred basis but only on group basis. 03 Type of calculation Original cost basis Prediction basis Prediction basis Original cost basis 04 Individual/ Group Wise Individual basis Individual basis Individual basis Group basis 05 Level of efficiency Level of efficiency is not considered. Level of efficiency is considered. Level of efficiency is not considered. Level of efficiency is considered.

46. S.L No Basis Lev and Schwartz Model Flamholtz Model Mors Model / Net benefit model 01 Role changes of the employees Role changes of employees is not taken into account. Role changes of employees is taken into account. Role changes of employees is taken into account. 02 Death/Retirement of the employees It does not take into account the probability of death or retirement of the employees. It takes into account the probability of death or retirement factor of the employees. It does not take into account the probability of death or retirement of the employees. 03 Group/Individual basis It calculates the cost on group basis It calculates the cost on individual basis. It calculates the cost on the basis of individual as well as collective basis. Difference among Lev and Schwartz, Flamholtz and Morse mode

47. S.L No Basis Ogan Mode/Certainty Equivalent Net Benefit Model Chakraborty Model/ Aggregate Payment Model 01 Group/Individual basis It calculates the cost on individual basis. It calculates the cost on the basis of managerial and non-managerial groups. 02 Variables Net benefit from each employee and certainty variables. Managerial and Non managerial man power are evaluated separately 03 Accounting Treatment Net Benefit from each employee Under ‘Net Benefit Approach’ is multiplied by Certainty factor The recruitment, including selection, development and training costs of each employee should be recorded separately and considered as deferred revenue expenditure to be written off over the expected average tenure of the employee in the organization. The deferred portion should be shown in the financial statement of the organization. Difference among Likert , Ogan and Chakraborty model

48. The “present value of future earning” model, as suggested by Lav and Schwartz (1971), has been found to be most popular model on account of convenience and objectivity. The exponent of human resources valuation models in most cases have not dealt with the mode of recording and disclosure of the accounting information relating to human resources in the books of account or financial statements of the organization. This has been left to the discretion of the accounting bodies who are yet to develop a generally accepted basis for valuation, recording and disclosure of human resources accounting information in the financial statements of an organization. In most cases, the human resource accounting information is given in the form of supplementary information attached to the financial statements. Financial Disclosure of Human Resources,

49. 2. Dasgupta (1978) has suggested in his total cost approach the following mode for disclosure of human resources in the balance sheet of an organization. According to him, the human resources valued as per his model should be shown both in the “asset” as well as “liabilities” sides of the balance sheet. On the assets side, it should be shown after the fixed assets as Human Assets classified into two parts. Value of individuals, Value of firm’s investment According to him, if human resources are accepted as assets they should be taken out of expenses items from the profit and loss account and brought to the balance sheet. It should be shown after the capital as Human Assets Capital by that amount at which it has been shown on the asset side against “value of individuals”.

50. Despite, many favors have contributed by HRA, yet its development and application in different industries have not been encouraging. Because Indian companies act 1956, does not provide any scope for showing any information about human resources in a financial statement. Due to the development of business and industries, some of the Indian companies, both public and private, value their human resources and report this information in their annual report. The companies, who are presently reporting human assets valuation, include: (A) The popular public sector companies  Bharat Heavy Electricals Limited (BHEL)  Cochin Refineries Limited (CRL)  Cement Corporation of India Limited (CCI)  Electrical India Limited (EIL)  Engineers India Limited (EIL)  Hindustan Petroleum Corporation Limited (HPCL)  Hindustan Shipyard Limited (HSL)  Hindustan Machines Tool Limited (HMT) HRA Practices in India.

51.  Madras Refineries Limited (MRL)  Maruti Udyog Limited (MUL)  Minerals and Metals Trading Corporation of India Limited (MMTC)  National Thermal Power Corporation Limited (NTPC)  Oil and Natural Gas Corporation Limited (ONGC)  Oil India Limited (OIL)  Project and Equipment Corporation of India (PEC)  Steel Authority of India Limited (SAIL) (B) The popular private sector companies  Associated Cement Companies Limited (ACC)  Southern Petro-Chemical Industries Corporation (SPIC)  Infosys Technologies Limited (ITL)  Tata Engineering and Locomotive Works (TELCO)  Satyam Computer Services Ltd.  Reliance Industries Ltd.  D.S.Q Software Ltd.

52. None of the methods fulfills the overall requirements of an acceptable model. The service tenure of the existence of an employee is uncertain and hence valuation of them in such circumstances in the future seems to be unreal. There is no appropriate method which insists on the division of human resource as to the value of them. As human resources are not capable of being owned, retained, and utilized unlike other assets there may be the problem of effective cost. The concept of human resource accounting is not yet accepted by tax authorities and laws Inappropriate HRA information in financial statements distorts the financial picture and also computation of rate of return on capital employed. Methods for the valuation of HRA based on certain assumptions may prove wrong any time in the future. HRA leads to dehumanization manipulation of human resources in the organization. Yet discussions are going on the topic like human resource is an organization’s liability, not an asset. Measurement of human resources is subjective as different firms use different a method for this purpose till is no method widely accepted model for HRA. Rate at which prospective stream of contribution is to be discontinued and compounded to calculate present value and future value. The charge of the amortization rate is not solved. Trade union may bargain their value. Lack of initiative from the private sector. Challenges and Issues of HRA Practices

53. There are no specific and clear-cut guidelines for finding cost and 'value' of human resources of an organization. The existing valuation system suffers from many drawbacks. The life of human resources is uncertain and, therefore, valuing them under uncertainty seems unrealistic. There is a possibility that HRA may lead to dehumanizing and manipulations in employees. For example, a person having a low value may feel discouraged and thus, in itself, may affect his competency in work. The much needed empirical evidence is yet to be found to support the hypothesis that HRA, as a managerial tool, facilitates better and effective management of human resources. Human resources, unlike physical assets, are not capable of being owned, retained and utilized at the pleasure of the organization. Hence, treating them as 'asset' in the strict sense of the term, could not be appropriate. There is a constant fear of opposition from the trade unions. Placing the value on employees would prompt them to seek rewards and compensation based on such valuation. Limitations of HRA

54. In what form and manner, should their value be included in the financial statements ? Is another question on which there is no consensus in the accounting profession. If a valuation has to be placed on human resources how should it be amortized ? Should the rate of amortization be decreasing, constant or increasing ? Should it be the same or different for different categories of personnel ? Tax laws do not recognize human beings as assets. So human resource accounting has been reduced to a merely theoretical concept. Accountants have been severely criticized by the Behavioral Scientists for their failure to value human resource as this has come out as a handicap for effective management

55. Thank You