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Human Resources Accounting Issues and Challenges
From: Prof. Puttu Guru Prasad, M.Com, P.G.D.F.T.M, LL.B, M.Phil, {M.B.A, PhD} School of Management Sciences, K L University, Green Fields, Buckingham Canal Road, Vaddeswaram, Guntur – 522502 Andhra Pradesh, India. Abstract Introduction:
- Human resource is the prime mover of any organization, as it

directs and drives all other physical and financial resources towards the achievement of organizational goals. Traditionally financial assets are accounted in the books of accounts as the generally accepted principles of accounting except human asset. Even though efforts have been made by many thinkers in this field, a suitable and fully tested model in Indian context based on the performance is not available. In order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skill, and contribution of the human elements as well as that of the organizational processes, like recruitment, selection, training etc., which are used to build and support these human aspects, is developed. Human resources accounting (HRA) denotes just this process of quantification/measurement of the Human Resources Therefore, an effort is made to develop a new model based on the practical applications and be useful to the management on regular basis as a system for effective monitoring of the employee‟s contribution. The present paper deals with the contribution and valuation o human assets, accounting and utilization of the same. The physical assets like land, building, plant and machinery are recorded in the books of accounts at their purchase price. Depreciation on these assets is considered as the cost o for the particular year and debited to profit and loss accounts and the remaining balance is shown the balance sheet as written down value of the assets. Hence, on similar lines the human resources should also evaluated, recorded in the books, operated and disclosed in the financial statements Even though attempts were made by researchers in this field over four decades, the real work regarding consideration of human resource as an asset had started only after the evolution of behavioral approach that is after 1960. Many models are available under5 the title Human Resource Accounting (HRA).

Some of the prominent approaches developed by different authors are presented in the below table Basis Cost Based Approach The historical cost The replacement cost The opportunity cost Monitory value Based Proponents Year

Pyle,& Flamholtz, 1969 Brummet Flamholtz 1973 Hekimian and Jones 1967 1964 1971 1971

Adjusted discount future Herman son wages model Present value of future Lev and Schwartz earnings model. Stochastic rewards Flamholtz valuation Model Human resources valuation model Net benefit Model Certainty equivalent Net benefit model Human resources valuation model Economic value method of group valuation Human resources accounting Jaggy and Lau Morse Oghan S.K. Chakraborthy Brummet Dr. Prabhakar Rao

1974 1973 1976 1976 1968 1983

Non-monetary value based

Casual intervening and 1969 End- result variable Rensis Likert and David model Bowers Statistical based model

The cost based approach suggests that the actual cost incurred on recruiting, selecting, hiring, training and developing the human resources of an organization are capitalized and amortized over the executed useful life of the human resources. In India above type of expenses are not large enough to maintain separate records on yearly basis and so these expenses are merged in other heads of accounts such as telephone , postage, labor, welfare, and miscellaneous expenses, etc., Monetary value based Models suggest that the future salaries and wages are to be projected considering the promotional policies, annual increments, periodical agreements, etc., and the present value of such projected salaries and wages are to be calculated. This calculated present value of future earnings is called as the value of Human Resources.

In order to calculate the value of human resources different models use different formulae. The methods of calcualt9n and duration of valuation are different in different models. It is observed from the available literature that at present in India 14 organizations in the Public sector and 5 organizations in private sector and I joint sector organization are adapting the HRA. The companies following HRA, spare a separate section in their Annual Reports for a detailed account if their human resources. Objectives of the Study:1. to study the Human Resources accounting 2. to Identify the Issues and Challenges 3. to understand the Human Recourses Accounting 4. to Examine the Issues and Challenges 5. to give suggestions based on the findings of the study
To: The Conference Convener ICIMP-2009 Department of Business Administration Annamalai University Annamalainagar - 608 002. Tamilnadu, INDIA Respected sir, This is Guru Prasad Puttu, Lecturer from KL University, Andhra Pradesh. Hereby I am submitting the abstract copy of my seminar paper. I am ready to pay the registration fees with your permission. Some of my colleagues are planning to visit Annamalai University to present their papers. If you give me your assent on Monday, it will be convenient for me to book railway reservation at an early date. With Regards Thanking you very much for permitting me to write abstract Guru Prasad Puttu KL University INDIA

Full Paper ICIMP-2009

Human Resources Accounting Issues and Challenges
Guru Prasad Puttu, School of Management Sciences, K L University (The author of the article can be reached by the e-mail – Introduction: Until recently, the “value” of an enterprise as measured with in traditional balance sheet, eg, buildings, production plant, etc., was viewed as a sufficient reflection of the enterprise‟s assets. However, with the growing emergence of the knowledge economy, this traditional valuation has been called into question due to the recognition that human capital is an increasingly important part of an enterprise‟s total value. This has led to two important questions:  How to assess the value of human capital in addition to an enterprise‟s tangible assets and  How to improve the development of human capital in enterprises.

Human Resource Accounting has been defined by the American Accounting Association‟s committee as “a process of identifying and measuring data about HR and communicating this information to interested parties. This definition implies three major objectives of HRA, viz, 1. Identification of Human Resource values, 2. Measurement of cost and value of people to the organization, and 3. Investigation of the cognitive and behavioral impact of such information.

In simple words, HRA is an art of evaluating the worth of human resources of an organization and the society and recording them for presenting the information in a significant manner in the financial segments to communicate their worth with changes over the period and results obtained from their utilization to the readers of financial

statements. The primary purpose of HRA is to facilitate the management of people as organizational resources.

Human resource is the prime contributor of any organization, as it directs and drives all other physical and financial resources towards the achievement of organizational goals. The present paper deals with the issues and challenges of valuation of Human Assets, accounting and utilization of the same.

The accounting standards neglected in recognizing the Human Resource as the Asset of the organization. The physical assets like land and building, plant and machinery are reordered in the books of accounts at their purchase price. Depreciation on these assets is considered as the cost for the particular year and debited to profit and loss account, the remaining balance is shown in the balance sheet, as the written down value of the assets.

Objections against the treatment of people as Assets
There are several objections to the treatment of people as assets in the accounting sense but they have been by and large over-ruled. They are: 1. The first objection is that the people are not owned by the organization like other physical properties. It is true that pole cannot be regarded as slaves or chattels in a modern society. 2. Another argument is that there is no assurance of future benefits from human resources. This argument also not tenable 3. One more objection to human resource accounting is that it may not be recognized by tax laws.

4. The current accounting practice, as it related to Human Resources, generally treats all cost related to HR as of Revenue Nature. Typical balance sheet of any business concern does not disclose Human Assets. All expenses related to Human Resources are charged against the revenue of the relevant accounting period in which they are actually incurred. This is done despite the fact that the benefits accruing from such expenses relate to several accounting periods. Even though this is an obvious violation of the Accrual concept, the traditional Accounting justifies it stand with the concept of Conservatism 5. The Human Resources are recognized in the process of valuation of goodwill along with several other factors. The value of Human Resources is Written Off or Amortized, when they are actually getting more value or actually increasing their value by lot of Practical Human Experience. Hence on similar lines the Human resource should also be evaluated, recorded in the books, executed and disclosed in the financial statements.

Objectives of the Study
1. To study the Human Resources accounting 2. To Identify the Issues and Challenges 3. To understand the Human Recourses Accounting 4. To Examine the Issues and Challenges 5. To give suggestions based on the findings of the study

According to R.L. Woodruff Jr, Vice President of R.G. Barry Corporation, that “HRA is an attempt to identify and report investment made in resources of an

organization that are not presently accounted-for under conventional accounting practices”.

Basically it is an information system that tells management, what changes over time are occurring to the HR of the business. It must be considered as an element of total system of management- not as a separate „device‟ or „gimmick‟ to focus attention on HR.

The human resource is capable of either annihilating an organization which other wise is doing well or putting it on the even keel which otherwise is on the way to extinction. Though the importance attached to it and its dominance and greatness the entire industrial world has not accorded the Assets status to HR until year 2000. The problem, in fact, starts when it comes to assessing the real value of human assets, while most organizations can readily give detailed information about their Tangible assets, there is no formal record of investments in employees.

The current accounting system is not able to provide the actual value of employee capabilities and knowledge. This indirectly affects future investments of a company, as each year, the cost on human resource development and recruitment increases.

The human resource accounting system generates information on various aspects of human resources (such as acquisition, development, allocation, utilization and replacement) in the same manner the financial accounting system is for physical assets.

Human resource accounting identifies, quantifies and reports the amount of expenditure incurred and the capital employed to recruit, train and familiarize and develop the human resources. It also measures the value of human resources to the organization in terms of monetary units.

The intended goal of H R Accounting
HRA helps in providing financial assessment for the people with in the organization; the objectives are listed below, 1. To furnish cost volume information for making management decisions about acquiring, allocating, developing and marinating HR in order to attain cost effective organizational objectives. 2. To aid in the development of management principles by classifying the financial consequences of various practices 3. To develop methods of measuring HR cost and value 4. To monitor the effectiveness of management utilization of HR 5. To test the valuation of human resources varies in proportion with their contribution to the organization.

The Need for H R Accounting
There is a need for establishing a system which can generate monetary and non-monetary information about human elements in the organization, Identifying, measuring, recording, and reporting HR form an integral part of accounting because of the following reasons.

1. HRA plays an important role in labor based production units like service centers, scientific investigation centers, etc., because in these institutions, physical resource are secondary and HR is the real resources. 2. the information generated through HRA can help the management in formulating plans and programs in the following areas: Man power planning Appraisal of HR Department Programs Identification of training needs Usefulness of cost Reduction Programs Studying the impact of budgetary control on motivation and morale of employees Facilitating allocation, conservation and reward of HR.

3. It helps the information seekers to know whether HR is giving adequate returns in comparison to payment made to them and whether they are over paid or under paid. 4. Accounting information regarding HR and changes there of may provide valuable aid to management for developing employers, regulating organizational behavior, monitoring efficiency of performance, reducing absenteeism and turn over and improving human relations, participation of employees in the decision making process can be more fruitful if the value of it is explicitly brought into the accounting records. 5. HR constitutes a vital part of the total investments of business firms and their productivity and profitability largely depend on the contribution of HR. Hence, real assessment of the total value of a firm can only be made if the value of its HR is accounted for.

6. The balance sheet of a business concern cannot represent a “true and fair value of its financial affairs as long as all the assets, including the HR, are not properly disclosed. The return on investment can not be computed properly unless the investment in HR is taken into consideration.

Approaches to H R Accounting
Sir William Petty was, perhaps, the first person to make an attempt to signify the HR accounting in around 1691. He treated the labor as the generators of wealth. Even Adam Smith has recognized the investment on human resources. The post 1960‟s witnessed a significant development of business people joining hands with the academics to evolve suitable methods to account for human resources.

Consequently, a number of models or approaches have been developed and suggested for the measurement and valuation of Human Resources. These approaches may broadly classify into two types. They are Cost approaches and Value approaches. 1. HR Cost accounting: - (HRCA) it may be defined as the measurement and reporting of the costs, incurred to acquire and develop people as organizational resources. It deals with accounting for investments made by an organization to the acquisition of and developing human resource as well as the replacement cost of the people presently employed. The monetary approaches to the measurement of human resources cost may be based upon Historical cost method Replacement cost method Opportunity cost method Competitive bidding method

The Cost Approach
Positional replacement cost

Acquisition costs

Learning costs

Separation costs

Direct Cost

Indirect Cost Cost of Promotion Or transfer From within

Direct Cost

Indirect Cost Cost of Trainers‟ Time Separation

Direct Cost

Indirect Cost

Separ ation Pay

Loss of Cost of Efficiency vacant Prior to position research

2. HR Value accounting: - (HRVA) the concept is based on the view that difference in present and future earnings of two similar firms is due to the difference in their human Capital or Assets. The economic value of the firm can be determined by obtaining the present value of future earnings. A number of valuation models have been developed for determining the present value of future earnings.

Economic Value Approach


Promotability Individual‟s Conditional Value

Productivity The Issues of H R Accounting Activation Level

Individuals‟ Expected Transferability Realizable Value to a 1. Lack of Symmetry: - The traditional accounting procedures, which have been formal Organization Probability of practiced since long have come to stay as acceptable norms. As a result, when maintaining Satisfaction Organizational ever a new accounting system is developed, it is pitted against the strengths of Membership Role the traditional system, which is considered to be comparatively objective and Hypothesized determinant free from any bias. Similarly, in the case of HRAInteractionargued that it lacks Hypothesized also, it is Rewards Possible Determinant

The Issues of H R Accounting
1. Lack of Symmetry: - The traditional accounting procedures, which have been practiced since long have come to stay as acceptable norms. As a result, when ever a new accounting system is developed, it is pitted against the strengths of the traditional system, which is considered to be comparatively objective and free from any bias. Similarly, in the case of HRA also, it is argued that it lacks symmetry with traditional resource cannot be included with in the traditional definition of an asset that the human 2. Lack of Agreement: - There is little agreement concerning the procedure in accounting for human assets. There are proponents and critics of the various approaches like cost and value approaches. This factor has become responsible for the slow development of the concept o HRA. 3. Amortization: - The historical cost approach to develop measures of HRA uses an amortization rate, which provides the figure of amortization to be charged to the profit and loss account every year. But it is very difficult to develop norms in this regard. Physically and mentally, individuals grow and deteriorate at different rates. Some grow more capable as a result of their work experience, others do not. Given the difficulty of predicting such changes, it is even more difficult to develop a means of writing off an individual‟s value. So far, precise measures for amortization the human assets have not been developed. 4. Contribution Measurement: - In the recent past, it has been observed that the value – based measures of HRA are finding more acceptances with Flamholtz approach being progressively used. However, this approach depends heavily on the measurement of an individual‟s or a group‟s contribution of valuation. But measurement of contribution, especially at the managerial levels, is quite a

difficult task. As a result, this factor proves to be a hindrance in the development of concept of HRA. 5. Present and future values: - Another issue which has not been settled so far is about the rate at which the prospective stream of contribution is to be discounted of compounded to calculate its present and future value to the organization. A number of applications are available in this process. 6. Career plan: - if an individual is to be valued normatively, the model given by Flamholtz expects that the career path of individuals should be plotted over the span of his probable stay with the organization in the light of the current promotion, and retirement policies of the organization. But such exercise is tedious. 7. Behavioral Impact: - It is possible that apprehension regarding the effect of HRA on Human behavior may have forced the organization to be reluctant to use this system. HR accounting may lead to alienation as the people might feel that they have been reduced to as industrial input commodity. Publicizing of human resource data could have disastrous effect on the attitudes of employees whose values are declining over times as people evaluate themselves how they perform based on their comprehension to others. 8. Non-Tradability of HR Assets: - The physical assets can be owned and traded by an organization but the human assets cannot and can be only used. The physical assets have some realizable value of retirement but the human resources do not have any such value. They may involve payment of retrenchment, compensation, gratuity and other retirement benefits. Human resources is an appreciating asset since manpower improves with time, with due regard to their ageing constraint, but for physical asset its increasing value at the time of its installation, starts immediately depreciating.

The Challenges of H R Accounting
The following are the major challenges of Human Resource Accounting. 1. The owner ship of Human resources is practically impossible, therefore, it cannot be considered at par with other assets. 2. The measurement of Human Resources is subjective as different firms will use different methods for this purpose. Till date there is no model for valuation of Human Assets, which is widely accepted and use world wide. 3. It is not economical for small business units as it involves heavy costs. The firms, if desires to install the HR accounting Package in their organization, they have to appoint the experience ERP Experts to maintain the data and application of different packages. The ERP Packages are very costly to purchase and maintain by SME‟s 4. The concept of human resource accounting is not recognized by Tax authorities and therefore, it has only academic utility. If the accounting standards Board make it as mandatory to disclose the values of Human Capital or Human Assets, then only the Direct or Indirect Tax Authorities will take into concern of HRA. 5. There are ten specific objective procedures for the selection of the factors to be included in the valuation of human resources. There fore the subjective approach of the value in their regard makes it less reliable. 6. Employees and unions may not like the idea, because HRA may lead to division among the ranks of employees. A group of employees may be valued lower than their real worth owing to reasons beyond the control of management. The employees may resist the idea of treated like second class citizens, despite their useful contribution over a period of time

7. There is no empirical evidence to support the idea that HRA is an effective tool to measure the economic value of people to the organization. There is very little data to support the contention that it facilitates better and effective management of human resource. 8. Measuring Intellectual Capital: - 1. Keep it simple 2.Measure what is strategically important 3.Measure activities that produce intellectual wealth. Measurement of intellectual capital can help managers and investors by providing a more accurate estimate of the true value of the company than would a single accounting of its physical holdings. 9. Put People on the Balance Sheet:-“Every country, every company, and every individual depends increasingly on knowledge – patents, processes, skills, and technologies, information about customers and suppliers, and experience”.This has brought up a new way of strategic thinking about “how to put people on the balance sheet.” 10. Intellectual Capital: - Traditional financial statements are less illuminating with respect to the assets that create wealth than they were in the past. Intangible assets such as brand names, intellectual capital, patents, copyrights, and expenditures for research and development now generate an increasing amount of wealth for firms. “Soft” assets – not recognized in financial statements. 11. Endless Search:-The search continues for a single, limited-criterion measure for HRA but it is unrealistic to expect that such a measure will be developed. We judge the value of athletes by measuring how much a particular Team is willing to pay him.

The Consequences
The consequences of the current accounting practice relating t human resources are deep and wide. It‟s behavioral and policy impacts are too significant ot be dismissed lightly. They may be listed as under: 1. By charging expenses of recruitment, training and development of human resources to current period‟s profit and loss account, profits during that period are understated or losses are overstated. By doing so the boundaries of principles of conservatism are stretched beyond its logical limits and even at the cost of ignoring ate tenet of accrual concept 2. By not capitalizing expenses relating to Human resources as mentioned above, even when they are substantial, the assets are concealed and net worth is understated to that extent. 3. The combined effect of the foregoing two points would be a blatant negation of the cardinal principle of true and fair disclosure in published accounts. 4. By writing off goodwill when profits are rising, accountants create secret profits and reserves. 5. Though physical assets are fully recorded under the existing system, human assets are ignored in the internal as well as external reports. This leads to faulty evaluation and decisions. By not valuing human resources, depreciation of human resource is also ignored. It is a stark reality that human resource deteriorates in terms of its efficiency and productivity due to several indigenous and exogenous man made factors.

Valuation Models
The basis of valuation is quite complicated. It requires use of assumptions regarding probable stay of the employee with the firm at different stages of his service. Three important models have been developed in this respect. a. Lev and Schwartz Model - it is based on the assumption that the employee will stay with the firm till retirement. b. Eric Flamholtz Model - it is based on the unrealistic assumption and the probability of expected stay with the firm at different stages of services of each employee is computed for this purpose c. Jaggi-Lau‟s Model- This model introduces “Group” as the basis of such calculation based on historical data regarding employee turnover patterns

Present Practice of Human Resource Accounting in Indian Corporate Sector
The ICAI has so far has not formulated any specific accounting standard on measurement and reporting of cost and value of HR. The Indian companies act1956, also not explicitly provide for disclosure of HR values in the financial statements of the companies. In spite of an absolute unfavorable environment in India in the method of introducing the reporting on HRA, some of the Public limited companies like all Navaratnas following the HR Accounting Practices now in India. The Lev and Schwartz model was the most popular and adopted with a little modifications by some Indian companies. However, companies like SAIL adopted Flamholtz‟s replacement cost model.

The Common Criticism on the above Mentioned Models of H R Accounting
1. These models are based on the assumption of continuity of services by the employers till retirement, which may not be true in reality. 2. All models are based in projection of future earnings. 3. No model is related with the contribution of an employee to the organization. 4. The fact is that out of 13 organizations which have the Lev and Schwartz model based HRA system, none put its out put to any managerial use. 5. Under the Lev and Schwartz model, the value of the human resources will be more or less increasing, even if the organizations continuously incurring losses. 6. The attitude and morale of the employees, the contribution of employees to the organization, and such other factors are not in the purview of the Lev and Schwartz model.

The concept of HRA has been appreciated by the accounting profession and by and large its usefulness has also been acclaimed in the literature but unfortunately, its application has not flourished through out the world. The International Accounting Standards Board (IASB), and the Accounting standard Boards (ASB), have not been able to formulate any specific accounting standards on measurement and reporting of cost and value of HR of an organization. Hence, considering the great significance of HRA, proper initiation should be taken by the governments as well as professional boards at the national and international levels in respect of formation of specific accounting standard and suitable valuation models on the measurement and reporting of value of HR.

Is any body can deny the significance of – Mr. Narayan Murthy of Infosys Mr. Arun Sarin of Vodafone Mr. Rama Dorai of TCS Mr. Ravikanth of Tata Motors Mr. Muthu Raman of Tata Steel Mr. Asim Premji of Wipro Mr. Bharathi Mittal of Air Tel Mr. Vijay Mallya of UB Group Ms. Kiran Mazoomdar of Bio-Con

The above mentioned personalities are the creators and industry leaders in their respective fields. They are the intangible and non corporeal assets of the organizations, which they are created and leading. With out such personalities, is it possible for the organizations to run the business efficiently and effectively? To recognize their services, we need HR accounting. The world wide researcher have to develop a harmonious and most accepted model or method should me promulgated for the due recognition of their valuable service to the development and well being of the industry and as well as the employees , who are working with the companies for the past decade, happily living with there families. The IASB should draft an accounting standard for HRA and made it mandatory for all companies.

Keywords: Models for Human Resource Accounting, Performance Improvement,
Human Resource Management, Human Resources, Accounting for Human Resources, Modern Accounting Concepts, Challenges of Human Resource Accounting, Need for

Human Resource Accounting, Prime Goal of Human Resource Accounting, The Common Criticism on the above Mentioned Models of HRA, The Issues of H R Accounting, HR Value accounting: - (HRVA), HR Cost accounting: - (HRCA),

References of Journals:-

1. Human Resource Accounting: The Key Issues Graham Grundy, B.Com, M.B.A., A.A.S.A. Department of Commerce, University of Queensland Vic Dobinson University of Queensland 2. Human Resource accounting – a New Dimension Amtabh Deo Kodwani Ravindra Tiwari Canadian accounting Association (CAAA) 2006 Annual Conference 3. Human resource accounting policies and practices: a case study of Bharat Heavy Electricals Limited, Bhopal, India. Author: Ramakantha Parta, S.K.Karthik. International Journal of Human Resources Development and Management 2003 Vol. 3, No.4 pp. 285 - 296. 4. Title: Measuring Personnel through Human Resources Accounting Reports: A Procedure for Management of Learning. The Hospital Sector in Northwest Stockholm, Author: BIRGITTA OLSSON, Journal: Journal of Human Resource Costing & Accounting, Year: 1999 Volume: 4 Issue: 1 Page: 49 – 56,ISSN: 1401338X, DOI: 10.1108/eb029053,Publisher: MCB UP Ltd
5. Article: When people are the bottom line: no longer a place for has-beens, human

resources moves to the cutting edge of strategic business planning. (includes

related articles on human resource management salaries and opportunities for blacks in human resources) (Cover Story) Article from: Black Enterprise Article date: February 1, 1994 Author: Solomon, Charlene Marmer | Copyright information COPYRIGHT 1994 Earl G. Graves Publishing Co., Inc. 6. Role and Significance of Human Resource Accounting in the Era of Economic Recession., By Anita Mishra Faculty, Monalika Rat, faculty, Global Institute of Management, Bhubaneswar

Books of Reference:

1. Dr. Mukesh Chauhan & Ms Shivani Gupta, Human Resource Accountingconcepts & practices in India; The management accountant, january2009; vol-44 2. American Accounting Association Committee of Accounting for Human Resources, Report of the committee on Human Resource Accounting,1973, The Accounting Review Supplement to vol. XLVIII. 3. D. Prabhakar Rao 1993, Human Asset Accounting: An Evaluation of the Indian Practices, ASCI Journal of Management, Vol. 22. 4. Eric G. Flamholtz (1999; Third edition): Human Resource Accounting: Advances in Concepts, Methods & Applications; Kulwer Academic Publishers. 5. Journal of Accounting Review, Jaipur, Vol.2, 1991. 6. VSP Rao: Human Resource Management Text & Cases; Second Ends; .Excel Book Publications.2006 7. P.subba Rao, Essential of Human Resource Management and Industrial Relations, text cases and games, Himalaya Publications, second revised and enlarged version (2007).

8. The Accounting World, The Icfai University Press, Financial Reporting and emerging issues, July 2008, 9. Case Folio , The Icfai journal of Management Case Studies, The Icfai University Press, May 2009,

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