Human Resource Accounting

Human Resource Accounting First we need to look at any business in a profit motive and of course in a society prosperous kind as well. When we talking about any entity first thing that one can ask is about the output of that firm in terms of production. Resources to that particular organisation provided will have an intention in yielding some kind of output. Human resources in particularly will have a kind of criteria that should only satisfy with their skills and capabilities. Though skills and capabilities are not quite easy to design and anticipate in a desirable context but can draw some equators to expect. In doing this professionals need elaborated information with a measurable set of ends that possibly design the role and responsibilities of individuals in the organisation. When things can measure will evidently get managed. It is always important to set some standards and giving targets to the individuals such will helps in creating organisational structure with more ease and straight. Thus intellectu al capital all set to have advanced significance in valuing the firm value. Where human capital also get place in it. Organisations have got to control over the human resources in order to get more rigid and assist organisation carry further efficiency. Human resource management functions thus got more prominence in evaluating; measuring and managing human resources like any other divisions attain control over their relevant functions. Human Resource Accounting (HRA) is part of function of accounting and Human Resources as well. Much attention laid on human resource accounting in many years ago as research began in the 1960s by Rensis Likert [Bowers, 1973]. The importance which Emperor Akbar gave to the nine jewels (courtiers) is a strong evidence of this in the sixteenth century only. Many critics, researchers, scholars and many others perceived human resource accounting in different ways as a part of financial accounting, management accounting view and as a human resource function. Organisations must estimate the value arising out of employees then only it will make advantage to the stakeholders in terms of financial and managerial perspectives. Having a same kind of resources in terms of technology, tangible assets and even in number of human resources will still makes lot of difference between one to another. The bridge among the difference would be skills and capabilities of human resources. With the same technology, a solid human resource team makes all the difference [Archel, 1995]. Human resource accounting involves assigning; budgeting, measuring costs expend on (employees) human resources while recruit, select, hire, train and develop employees and judge their economic value to the organisation. Human resource accounting is an effort to recognize and report investments made on the human resources of an organisation which are not currently accounted under conventional accounting practice. In essence, it acts like an information system that advice the management what changes took place overtime to the human resources of the business, and cost and value of the human factor in particular organisation. The process may well furnish both the internal and external users; strengthen human resource management function (internal users) providing with relevant data which supports recruiting, training and other development decisions in and supplying investors, lenders and other external users of financial statement make presented information as to the investment in and utilisation of human resources in the organisation. Enhance the skills and capabilities of employees, setting some standards and to schedule the training and development programs by this practice. Exhibiting comprehensible strength of the organisation by exploring more information about potentialities of the organisation and to overcome the missing scarce of balance sheet for the investors by means of providing necessary adequate information. â€Å"Human Resource Accounting is mainly an information system that informs management what changes are occurring over time to the human resources of the business. HRA also involves a ccounting forinvestmentin people and their replacement costs, and also the economic value of people in an organization,† says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India. HRA is primarily an information system, which update the management about the changes that are taking place in the human resource of an organisation. It is the art of valuing, recording and presenting methodically about the human resources in the books of accounts of an organisation. Definition: â€Å"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 â€Å"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 IT, hospital, sports club, research oriented and many organisations mostly depends on human capital rather physical capital. When we have a look at service oriented organisations which are creating more wealth to the society typically have greater significance to the human resources as the value of the knowledge and skills of its personnel more than that of physical assets of the organisation. Should HR accounting be rejuvenated at the present time? The answer lies in the level of consensus which presently exists about the crucial role that employee plays in all organisations (1992: 312).Most of the works on HRA focused primarily on validation and development of accounting the human resources. The treatment of human resource capital in final accounts and also on methodologies approaching in computing HRA and there are some researchers like Robinson (2009) questioning about the need of HRA. Though this study may/could not provide answers to these questions but can make a sense about HRA prevalence India and how they are handling in the books of accounts. However, in order to assess the value of the human capital, method of quantifying the significance of the knowledge, skills, capabilities and contribution of the human element as well as that of the organizational processes, like recruitment, selection, training etc., which are used to form and carry these human aspects, is developed. No particular HR accounting model is accepted by the accounting bodies all over the world. However, many organisations in India using the application ofLev Schwartz modelin both public and private sectors as well. Models for measurement of knowledge capital in monetary terms:- Cost modelsare based on the acquisition cost, including replacement and training costs and opportunity cost of human asset. The supporters of this model are Burmment, Flamholtz and Pyle. TheLev Schwartz model, more monetary-centric, is based on the likely future earnings of an employee till his retirement. Methods for Valuation: Historical Cost Method This method was proposed by Brummet to measure a firms investment in human resources. The current scarifies for obtaining future benefits is the cost of human resource. The method suggests capitalizing the firms expenditure on recruitment, selection, training and development of employees and treats them as assets for the purpose of human resource accounting. Capitalization of costs is contrary to traditional accounting norms and does not reflect value. Moreover the accumulated costs of human resource acquisition and development may not reflect its proper worth. Instead of this, the total performance needs should be assessed in relation to the total cost associated with human resource to reflect their value. Replacement Cost Method This method involves assessment of replacement cost of individuals, and rebuilding cost of the organization to reflect human resourceasset value of both the individuals and the organization. However, the replacement cost may not reflect either the actual costs or the contribution associated with human resource. Opportunity Cost Method According to this method the computation of monetary value and allocation of people to the most promising activity and thereby to assess the opportunity costs of key employees through competitive bidding among investment centers. Behavioural Method In this method a set of casual variables through psycho-social test results reflecting the appreciating or depreciating condition of human organization as reflected by a set of intervening variables, which in turn, are likely to result in the achievement of the end result variables. The investment in human resource value has been proposed to be amortized over the years in tune with the condition of the human organization. Economic Method Lev Schwartz advocated the estimation of future earnings during the remaining life of the employee and then arriving at the present value by discounting the estimated earnings at the employees cost of capital. The formula adopted for computation of the present value of the future earnings in an extension to the formula propounded by Lev Schwartz. Flamhlotz value human resource on the basis of the roles which the employees are to perform. The method also considers the present value of the future services at different service states and takes into consideration the migration of an employee from one service state to the other. However, the estimates of the employees occupying different service states in his career in the organization can be highly probabilistic and unreliable. Harmonson advocated the human resource value as the present value of the future wages payable for the next five years discounted at the adjusted rate of return. The adjusted rate of return is the average rate of return on the owned assets of all firms in the economy multiplied by efficiency ratio of the organization. This method attempts to bring into question the effectiveness of return on investment of the industry on the assumption that there are no extraneous factors and that the results were due to efforts of the employees. Each model has its own negatives and positive when it comes to practical application. In an Indian context, the Lev Schwartz model has an edge over the other models. Since the method has been widely adopted by Indian companies such as Infosys, DSQ Software Ltd., Satyam Computers, BHEL and SPIC, it enables the company to benchmark the performance and efficiency of their human resources with others. The assumptions in this model are realistic and scientific. The method has practical applicability when availability of quantifiable and analyzable data is concerned. Organisations which are undertaking this HRA process in India and some other global companies as well are as follows: Bharat Heavy Electrical Limited, India Infosys Technologies, India Reliance Industries, India NIIT Limited, India HCL Technologies, India Cadence Systems, India Legato Systems, India SBI, India Novo Nordisk, Denmark Frederiksborg County, Denmark Skandia, Sweden Environmental Protection Agency, Denmark The Body Shop, London, UK Xerox Mitsubishi Whitbread Ford Motors Esso And the some human resource accounting softwares: ADP, Kronos, Ceredian, Lawson, TempWare, Empact, SAP, UltiPro, Stromberg. [SOURCE : secondary] Interesting points to come across in this study are; o Book representation of HRA o Methodologies to adopt in computing HRA o The present importance given to HRA in different countries, organisations and in perspective of many scholars, researchers. o Is HRA more advantage in accounting perspective or HR perspective? And the belief of people involved in it through some sort of interviewing the professionals. o More focus on Infosys and BHEL where two organisations has different mode of industries. o And the value of HRA in recession timings.