Human Resource Accounting is very important topic and following presentation is a brief out of what actually goes into human resource accounting. Human Resource is considered to be an Asset of the firm and hence computing its value and showing it in the balance sheet is also important. That is why Human Resource Accounting came into being and is being widely used.

1. Human Resource Management
Human Resource Accounting
Submitted to:-
Prof. Shyam Lal Kaushal
Submitted by:-
Akshay Sood
MBA 2nd Semester
Roll No. 3671

2. Human Resource Accounting:
An Introduction
Human Resource Accounting is a tool designed to assist
in the effective and efficient use of human resource. It
may be defined as the measurement and reporting of
the cost and value of people as organizational
resources. In simple words it is the process of
identifying and measuring data about human resources
and communicating this data to interested parties.

3. Some Key Definitions
1. The American Association of Accountants (AAA) defines HRA as
follows: ‘HRA is a process of identifying and measuring data about
human resources and communicating this information to interested
parties’.
2. Flamhoitz defines HRA as ‘accounting for people as an
organizational resource. It involves measuring the costs incurred
by organizations to recruit, select, hire, train, and develop human
assets. It also involves measuring the economic value of people to
the organization’.
3. According to Stephen Knauf, ‘ HRA is the measurement and
quantification of human organizational inputs such as recruiting,
training, experience and commitment’.

4. Need For Human Resource Accounting
1. Under conventional accounting, no information is made available about the human
resources employed in an organization, and without people the financial and physical
resources cannot be operationally effective.
2. The expenses related to the human organization are charged to current revenue instead
of being treated as investments, to be amortized over a period of time, with the result
that magnitude of net income is significantly distorted. This makes the assessment of
firm and inter-firm comparison difficult.
3. The productivity and profitability of a firm largely depends on the contribution of human
assets. Two firms having identical physical assets and operating in the same market may
have different returns due to differences in human assets. If the value of human assets is
ignored, the total valuation of the firm becomes difficult.
4. If the value of human resources is not duly reported in profit and loss account and
balance sheet, the important act of management on human assets cannot be perceived.
5. Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting. All expenses on human resources are to be
treated as investments, since the benefits are accrued over a period of time.

5. Historical Development of Human Resource Accounting
The development of HRA as a systematic and detailed academic activity,
according to Eric G Flamholtz (1999) began in the sixties. He divided the
development into the following 5 stages;
• FIRST STAGE (1960-66)- This stage marked the beginning of academic
interest in the area of HRA. However, focus was primarily on deriving HRA
concepts from other studies like the economic theory of capital,
psychological theories of leadership effectiveness etc.
• SECOND STAGE (1966-71)- The focus during this stage was more on
developing and validating different models of HRA. One of the earliest
studies was that of Roger Hermanson, who studied the problem of
measuring the value of human assets as an element of goodwill.

6. • THIRD STAGE (1971-76) - This period saw a widespread interest in the area
of HRA leading to rapid research in this area. The focus mainly lied on the
issues of application of HRA in business organizations.
• FOURTH STAGE (1976-80) - This period saw a decline of interest in this
area primarily because the complex issues to be explored required much
deeper empirical research than was needed in the earlier simple models.
The organizations, however, were not prepared to sponsor such research.
• FIFTH STAGE (1980 onwards) - There was a sudden renewal in the interest
in the field of HRA partly because most of the developed economies had
shifted from being manufacturing to service economies and realized the
criticality of human asset for their organizations.

7. Assumptions of Human Resource Accounting
 Human Resource provide benefits to an organization in a fashion similar to
the manner in which financial and physical resources provide benefits
 The benefits associated with both conventional assets and human resource
have value to the organization because these benefits contribute in some
way to the accomplishment of organizational goals
 The acquisition of human resources typically involves an economic cost and
the benefits associated with such resources can personally be expected to
contribute to economic effectiveness. These benefits are economic in
nature and are subject to measurement in financial terms.
 Human assets are appropriately classified as accounting assets.
 It is theoretically possible to identify and measure human resource cost and
benefits within an organization.
 Information with respect to human resource costs and benefits should be
useful in the process of Planning, Controlling, Evaluating and Predicting
organizational performance.

8. Objectives of Human Resource Accounting
 Providing cost value information about acquiring, developing,
allocating and maintaining human resources.
 Enabling management to monitor the use of human resources.
 Finding depreciation or appreciation among human resources.
 Assisting in developing effective management practices.
 Increasing managerial awareness of the value of human resources.
 For better human resource planning.
 For better decisions about people, based on improved information
system.
 Assisting in effective utilization of manpower.

9. Advantages of Human Resource Accounting
 The system of HRA discloses the value of human resources, which helps in
proper interpretation of return on capital employed.
 Managerial decision-making can be improved with the help of HRA.
 The implementation of human resource accounting clearly identifies
human resources as valuable assets, which helps in preventing misuse of
human resources by the superiors as well as the management.
 It helps in efficient utilization of human resources and understanding the
evil effects of labour unrest on the quality of human resources.
 This system can increase productivity because the human talent,
devotion, and skills are considered valuable assets, which can boost the
morale of the employees.
 It can assist the management for implementing best methods of wages
and salary administration.

12. Acquisition Costs refer to the cost incurred in acquiring the right man
for the right job at the right time in a right quantity.
 Recruitment Costs: It includes the
following;
• Cost of Recruiting Material
• Administrative Expenses
• Advertising Costs
• Agency Fees
• Recruiters Salary
• Travel & Outside Cost
 Selection Costs: It includes the
following;
• Cost of Application Banks
• Administrative Costs of
Processing Applications
• Conducting Tests and
Interviews
• Medical Examination & Salaries
 Placement Costs: It depends upon the
placement, individual ability and
attitude.

14. Training & Development Costs refer to the
sacrifice that must be made to train a person
either to provide expected level of
performance or to enrich individual skills
Formal Training Costs: It simply refers to the cost incurred in
conventional training for the orientation of an individual.
On The Job Training Costs: Once the employee is placed on
the job, he must be trained to do job effectively and efficiently.
Costs involved in this process is known as on the job training costs.

15. Special Training Costs
Special Training Costs are those costs which are
incurred in order to achieve various
performance standards. For this various
Special Training Programs may be advised.

16. Development Programs
Employees may be allowed to
participate in development
programs which may range from
ordinary lectures to international
conferences and seminars. It
involves costs such as Delegated
Fees, Travel Cost, Loss Output
etc.

18. A vital function of an employer is to provide an atmosphere to
the employees so that they perform their work in a healthy,
congenial climate conductive to good health and high morale.
Welfare costs involves the maintenance of such an atmosphere
 Welfare Amenities within the
Organization: It includes the
following;
• Rest shelters and canteens
• Washing and bathing facilities
• Drinking water
• Occupational Safety etc…
 Welfare Amenities outside the
Organization: It includes the
following;
• Social Insurance Measures
• Maternity Benefits
• Medical facilities
• Educational Facilities
• Housing
• Holiday Homes
• Travel Facilities etc…

20. In India, The Factories Act, 1948 has made statutory
provisions with regard to employees health, safety and
welfare. These are as follows;
 Health Of Workers
• Cleanliness
• Disposal of Waste
• Over Crowding
• Lighting
• Drinking Water
• Dust and Fumes
• Toilets
 Safety Of Workers
• Fencing of Machine
• Hoist and Lifts
• Pressure Plant
• Precaution against
dangerous fumes
Welfare of Workers
•Welfare Officers
•Washing Facility
•Canteens
•First Aid Kits

21. Human Resource Accounting Models
In 1960‟s it was the behavioral “scientists attacked the conventional
accounting practice for its failure to value the human resource of the
organization along with other productive resource and released that
this was a serious gaps for effective management. As a consequence,
valuation of human resource has received extensive recognition. In
the course of time so many accounting models have been developed
to value and report human resource of an organization. Most models
involve capitalization of human resource and recording them as
investments.
“A few models have been developed from time to time for the valuation
of human resource.” Approaches to the human resource valuation may
be broadly divided into two categories:
 Approaches to monetary model
 Approaches to non-monetary model

23. Monetary Models of Human Resource Accounting
The major task in HRA is that of handing over monetary value to
diverse dimensions of HRA rates, investment and the value of
personnel. In monetary model, the two core methods usually
employed for this are:
Human Resource Cost
Accounting: It includes the
following;
•Accounting for the cost of
personnel activities and
“functions such as recruitment,
selection, placement and
training.
•Accounting for cost of developing
people as human assets, also
termed as human asset
Accounting‟
Human Resource Value
Accounting:
Human resource value bases model
which includes methods based on
the economic value of the human
resource and their involvement to
the business gains. This method is
also known as present value
method. Present value model try to
calculate economic value rather
than purely record investment
human resource at historic or
replacement cost. This approach
looks at human resource as assets.

24. Historical Cost
Model
Replacement
Cost Model
Opportunity Cost
Model
Standard Cost
Model
Human Resource Cost Accounting Models

25. Historical Cost Model: In this model cost of acquisition is capitalized
and written off for useful expected life of employees and in case of
unwritten off value of the acquisition cost has been shown in profit
and loss account in particular years.

26. Replacement Cost Model: This model developed by Eric G. Flamholty. In this model, value of
existing hand is equals to projected cost of new employee with the same ability. This model consists
of two types of cost which are known as:
1. Individual Replacement cost
The current projected “cost of hiring, training and developing individuals up to the standard level
of efficiency of the current individuals.”
2. Positional replacement cost
In addition to the valuation of replacement cost of individuals, such a cost item may be projected
with reference to different places in an organization rather than exact individuals to be mentioned
to as positional replacement cost.

27. Opportunity Cost Model
This model is developed by Hekimian & Johns which is also known as
market value technique and comparative bid method. This model
is used by companies when the resources of employees are
limited. Before the appointment of employee the estimated profit
is calculated. For achieving the estimated profit the capital is
added to old capital than calculated the new capital. Thus the
capitalization value of old and new capital profit is equal to HR
value. In other words, from this model limited employee profit is
calculated at normal rate of return and this profit is capitalized
through required rate of return. And the new capital which is
calculated is added to old capital.

28. Standard Cost Model
• This model was given by David Watson. In this
method the standard cost of recruiting, hiring,
training and development is accumulated every
year for each grade of employees. However,
this method is found to be suitable for control
purposes and variance analysis, it has also
disadvantage of amortization etc

29. Hermanson‟s
un-purchased
goodwill
model
Flamholtz
stochastic
Rewards
valuation model
The Likert and
Bowers Model
Human
Organization
Dimensions
Model
Human Resource Value Accounting Models
Lev and
Schwartz
model
Chankraborty
model
Dasgupta
model

30.  Hermanson’s Unpurchased Goodwill Model: According to Hermanson, the unpurchased
goodwill notion is based on the premise that ‘the best available evidence of the present
existence of un-owned resources is the fact that a given firm earned a higher than
normal rate of income for the most recent year. Here he is proposing that supernormal
earnings are an indication of resources not shown on the balance sheet such as Human
Assets.
 Flamholtz Stochastic Rewards Valuation Model Under this model the limitations of Lav
and schwarts is try to remove. In this model organization calculated the probability of
the changes in the position of employees and leave of employees than after calculated
the value of Human resources.
 Chankraborty model Professor S.K. Chankraborty suggest to calculate value of human
resource by dividing the employee two groups, managerial and non-managerial , and
then multiplying average tuner of group of employee with average salary of them. The
value thus obtained is discounted at the expected average after tax return on capital
employed over the average turner period, so that value of human assets does not
fluctuate frequently. Professor Chankraborty suggests considering the recruitment,
hiring, selection, development and training cost as deferred revenue expenditure. For
disclosure he suggested that the balance sheet of the organization consists of the
different portion of above expenditure, not written off and human assets under the head
investment, consideration of human asset under fixed asset may cause problem of
depreciation, capital gain and losses etc.

31.  The Likert and Bowres Model: Likert and Bowers propose casual, intervening, and
end result vcariables, which determine the groups value to an organization. Casual
Variables are those which can be controlled by an organization. These variables
include managerial behaviour and organisational structure. Intervening variables
affect the organisational capabilities and involve group processes,peer leadership,
organisation climate and subordinates satisfaction.
 Dasgupta model In this model popularly known as „total cost concept‟ professor
M. Dasgupta has taken somewhat different and broad canvas. According to him the
total cost incurred by the individual up to that position in the organization should
be taken as the value of person which is further adjusted by his intelligence level.
The value thus calculated is revised to time on the basis of age performance,
experience and capabilities.
 Human Organisational Dimensions Model: Like the Likert and Bowers model of
group’s value to an organisation, tgis method is based on the relationship among
casual, intervening and end-result variables. The Casual Variables influence the
intervening variables, which in turn, determine the organisation’s end result
variables.
 Lev and Schwartz Model This model is built on present value upcoming earnings.
Under this model calculated the value of human resource as per the present value
of estimated future earning discounted by the return of investment (cost of
capital).”

32. HRA MODELS AND HUMAN RESOURCE DEVELOPMENT
The usefulness of a HRA model in the process of HRD would
depend upon how best it meets certain basic requirements.
These requirements are:
 The model should identify the factors which determine the
value of human resources.
The model should identify the factors which can improve
the value of human resources.
The model should be capable of measuring the value of
human resources operationally. A model can be made
operational only if the data which it requires can be made
available. Very often, a model can be theoretically sound
but, if the required data are not available its usefulness
shall be greatly reduced.