Human Resource Accounting
Definition (2 Mark)
“It is the dynamics of the organization. It is the assessment of condition of human resources within an
organization and the measurement of the changes in the condition through time.”
Basic Premises



Value
Usefulness
Information

People are Valuable Resources

Usefulness of Manpower in the way it is managed

Information is useful for Decision Making
SIGNIFICANCE OF HRA (8 Mark)
Accounting now a day’s regarded as a services activity, a descriptive analytical discipline. Primary role of
accounting is to provide an effective measurement and reporting system for decision making.
 Formulations of policies
 Decision regarding cost reduction
 Training and development
 Recruitment and selection
 Manpower planning and control
 Conservation and reward of human resources.
Objectives of HRA (8 Mark)
 Determine the return on investment
 Determine the human resource management
 Determine the worth of human resource
 Provide a sound and effective basis for asset control
 Allows management personnel to monitor effectively the use of human resource
ADVANTAGES OF HRA (2 Mark)
Human resource accounting helps in knowing whether human asset is being built up in the business or
not.
 Ascertain the cost of labour turnover.
 Development of human resources.
 Planning and execution of personnel policies.
 Return on investment on human resources.
 Improve the efficiency of employees.
ASPECTS/METHODS OF HUMAN RESOURCE ACCOUNTING (16 Mark)
I.
HUMAN RESOURCE COST ACCOUNTING (HRCA)
II.
HUMAN RESOURCE VALUE ACCOUNTING (HRVA)
I. HUMAN RESOURCE COST ACCOUNTING (HRCA)
DefinitionIt is the measurement and reporting of the costs incurred to acquire and develop people as
organizational resources.
HRCA INCLUDES accounting for the costs of→personnel activities and functions such as recruitment, selection, placement and training.
→Developing people as human assets. Also called ‘HUMAN ASSET ACCOUNTING’
Approaches of Human Resource Cost Accounting:
 Historical Cost Approach
 Replacement Cost Approach
 Opportunity Cost Approach
HISTORICAL COST APPROACH

The actual cost incurred on recruiting, selecting, training, placing and developing the human
resources of an enterprise are capitalized and written off over the expected useful life of human
resources.
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Any amount spent on training and developing human resource increases its efficiency, hence
capitalized.
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The amortization of human resource assets is done in the same way as that of other physical
assets.

If the asset is liquidated prematurely then it’s underwritten off amount is charged to revenue
account.
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On the other hand, if it has a longer life than expected, its amortization is rescheduled.
REPLACEMENT COST APPROACH
 The cost of replacing employees is used as the measure of company’s human resources.
 The human resources of a company are to be valued on the assumption as to what it will cost the
concern if existing human resources are required to be replaced with other persons of equivalent
experience and talent.
 In this the cost of recruiting, selecting, training, etc. of new employees to reach the level of
competence of existing employees are measured.
OPPORTUNITY COST APPROACH
 It is based on economic concept of opportunity cost which removes the deficiency in replacement
cost approach.
 Measured through a competitive bidding process within the entity.
II. HUMAN RESOURCE VALUE ACCOUNTING
1) THE LEV AND SCHWARTZ MODEL
This model was developed in 1971.It determining the value of human capital embodied in a
person of age t is the present value of his remaining future earning from employment in the form of
salaries, wages, etc.
2) FLAMHOLTZ MODEL (1971)
This method determined an individual’s value to an organization by the services he is expected to
render to the organization during the period he is likely to remain with the organization in various
position or services states. The present value of human resource may be derived by discounting the
realizable value of expected future services at a specified rate.
3. GILES AND ROBINSON’S HUMAN ASSEST MULTIPLIER METHOD
This method is developed in 1972 & it was sponsored by ICMA and IPM. The valuation of
human resource should be made in the same way as other business assets on a GOING
CONCERN BASIS.
4. HERMANSON’S MODEL
Roger H. Hermanson has suggested two models for the measurement of
Human resources. These are: UNPURCHASED GOODWILL MODEL
HR is calculated by capitalizing earnings in excess of normal earnings for the industry or the
group of companies of which the firm is a part.
 ADJUSTED DISCOUNTED FUTURE WAGE MODEL
This model uses compensation as a surrogate measure of a person’s value to the firm.
Compensation means the present value of future stream of wages and salaries to employees of the
firm. The discounted future wage stream is adjusted by an “efficiency ratio” which is the
weighted average of the ratio of return on investment of the given firm to all the firms in the
economy for a specified period, usually five years. The weights are assigned in the reverse order,
i.e. 5 to the current year.
5) JAGGI AND LAU MODEL
The valuation is on a group basis rather on individual basis. GROUP means a homogeneous
group of employees who may not be necessarily working in the same department. It might be difficult to
predict an individual’s future period stay and chances of promotion, but on a group basis, it is easier to
ascertain the future period of services, chances of promotion and those who are likely to leave the firm
during each of the forthcoming period. It assumed that the pattern of movement is likely to remain
constant overtime and the probabilities determined for one period
can be extended to future periods.
6) MORSE NET BENEFIT MODEL (1973)
Calculation is on the basis of the present value of net benefits derived by the organization from the
expected future services of its employees.
Human Resource Audit:
Meaning/Definition: (2 Mark)
A Human Resources Audit is a comprehensive method (or means) to review current human
resources policies, procedures, documentation and systems to identify needs for improvement and
enhancement of the HR function as well as to ensure compliance with ever-changing rules and
regulations. An Audit involves systematically reviewing all aspects of human resources, usually
in a checklist fashion.
HR Audit Significance
1. Essential for Organization success.
2. It Provides Required Feedback.
3. Managing Rising Labor Costs.
4. Increasing Opportunities for Competitive Advantage of HRM.
5. HR Audit can avoid Government intervention
6. HRP protect Employees interests
Need for HR Audit:
Though, to audit HR- Policies & Practices no legal obligation exists, some Modern Organizations
chase to:
1. Increase size of Organization & Personnel
2. Change Philosophy of Management towards HR
3. Increase Strength & Influence of Unions
Scope of Audit(8 Mark)
Use of HR Audit: (2 Mark)
Basic purpose of HR-Audit is to find:
1. How various units are functioning?
2. How they met policies & guidelines Pre-agreed upon?
3. To assist Rest of Organization locating gaps between Objectives & Results.
4. Formulate Plan for corrections
Objectives: (8 Mark)
 Effectiveness: To review performance of Human resource Department and its activities to
determine effectiveness.
 Implementation: To locate gaps, lapses, failings in applying Polices,
Procedures, Practices &
HR-directives. Also to see areas of wrong/ non- implementation that hindered the planned
programs & activities.
 Rectification: To take corrective steps to rectify mistakes, shortcomings contesting
effective
work performance of HR Department.
 Evaluation: To evaluate HR Staff & employees.
 To evaluate the extent to which Line Managers Applied Policies Programmes &
 Directives initiated by Top Management & HR Department.
 Modify: To review HR System and Modify to meet challenges in comparison
with
other
organizations.
 Questioning: To seek answers to ‘What, Why ‘When Happened while implementing Policies,
Practices & Directives in managing HRs
Benefits of HR Audit: (8 Mark)
1. Identifies contribution of HR Department.
2. Improves HR Department’s Professional Image.
3. Fosters greater Responsibility & Professionalism amongst HR Staff.
4. Classifies HR Department’s Responsibilities & Duties.
5. Stimulates Uniformity of Personnel Policies & Practices.
6. Identifies Critical personnel problems.
7. Ensures Timely Legal Compliance Requirements.
8. Reduces HR Costs
Pitfalls of HR Audit(2 Mark)
1. Full audit may be time consuming
2. May not be as objective and impartial as desired
3. Impact of certain actions may not be clear
Special Areas of HR Audit(8 Mark)
Audit of HR Function: (8Mark)
Involves all activities of HR Functions, From HRP to IR
Major Areas:
1. Planning - Forecasting,
2. Scheduling;
3. Staffing & Development,
4. Organizing;
5. Motivation & commitment ;
6. Administration ;
7. Research & Innovation.
Auditor’s Role(8 Mark)
For each activity in the HR Audit functions Auditors must:
 Determine objective of activity.
 Identify who is responsible for its performance.
 Review the performance.
 Develop action plan to correct deviation, between Results & Goal.
 Follow up action plan. HR Evaluation must justify existence of
 Department & its expenses. Department has no reason to function if fails to
 Contribute to Company’s bottom-line, Prune expenses to make department viable.
FIVE Approaches to HR Audit: (8 Mark)
Auditors may choose any of the five approaches for the purpose of Evaluation.
 Comparative Approach.
 Outside Authority Approach.
 Statistical Approach.
 Compliance Approach.
 MBO Approach
Comparative Approach –
 Auditors Identify another Company as a MODEL. Result of their
 Organization compared with those of Model Company.
Outside Authority Approach –
 Often, Auditors use standard set by Outside Consultant as
 BENCHMARK for comparison of own Results
Compliance Approach –
 Auditors review Past Actions to determine if those activities comply with legal
 Requirements and Company Policies & Procedures. A Final approach is for
 Specialists & Operating Managers to set objectives in their areas of responsibility.
Management By Objectives Approach –
 Creates Specific Goals against which performance can be measured. Then the
 Audit Team Researches ACTUAL PEERFORMANCE and COMPARES
 WITH THE OBJECTIVES.
Period of Audit:
Naturally any audit will be done annually. Though it is preferred to conduct Human Resource Audit
annually, but it is advisable to conduct audit once in three years or five years, keeping in view the fact
that the realization of the Organizational goals may not be identified within a year.
Audit Report:
The Programmes comes to end with preparation of Report. Report may be Clean or Qualified. It is
Qualified if HR Performance contains Gaps for which remedies suggested. Report is clean where
Performance is fairly Satisfactory.