HR ACCOUNTING AND AUDIT

RESOURCE• A resource is defined as an object which can provide expected future

services. Hence, objects which do not have expected future service potential, cannot by definition, be resources. People being capable of rendering future services, such potential services constitute a form of capital.

Human Resource Accounting• It is the process of identifying, measuring and communicating data

about human resources.• Flamhoitz(1974) defined HRA as:“Accounting for people as an organizational resource. It involves

measuring the costs incurred by business firms and other organization to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organization”

HRA • HRA shows how organization makes investment in its people and how the of the

people changes over time.• Value of the employees increases by training( the core HRD activity) and

experience over time period.• Such information on HR facilitates effective management within an organization.• Certain information on the human capital can be reported by an organization in

their annual reports.• Information pertaining to employees can be listed under the following broad

heads:• Basic information about HR:

• Number of employees • Categories • Grades • Total value of HR• Value per employee

(Continued)• HR acquisition:

• Number of employees acquired during the year • Cost of acquisition• Levels for which they were acquired • HR development• HR Information pertaining to HRD activities of the organization• HR maintenance• HR separation• Cost related to HR separation, attrition rate• Details of benefits provided to the employees

• For example, Engineers India Ltd widely disclosed information on its human capital on all the areas mentioned above and reported the human valuation during 1998-99 as in the next slide:

Category No. of employees as

Senior Manager and above executives upto the manager level

613

Technical 2097

Non-technical 295

Supporting staff 719

Total 3724

Category Human Valuation during 1998-99(rupees in lakhs)

Category-wise total HR value Value per employee

Senior Manager and above executives upto the manager level

24151 39.39

Technical 65007 31.00

Non-technical 9145 -

Supporting staff 16264 22.62

Methods For Valuation Of Human Resource

Non-monetary measurement1. Such methods involve the classification of HR in terms of skills(skills

inventory),performance evaluation, potentially for development and promotion, attitude surveys and subjective value. Skill is a coordinated series of actions to attain some goal.

2. Operationally, skills are defined widely as overt responses and controlled stimulation. Overt responses may either be verbal, motor or perceptual. Verbal responses typically stress on speaking(which requires memorization of words), Motor responses stress on movements of limbs and body while perceptual responses stress on understanding of sensory responses.

3. Controlled stimulation, on the other hand, are energy inputs to the workers which we express in units of frequency, length, time and weight. Basic concepts of rest of the methods except for ‘subjective value have already been introduced in relevant chapters. ‘Subjective value’ method indicates a subjective evaluation of approximation of the likelihood of an event.

Monetary MeasurementThere are number of monetary measurement techniques:• Capitalization of Historical cost method: This method was

developed by Likert. It capitalizes all costs of recruitment, hiring, training and other initial costs involved in the development of HR, i.e., employees. The amount so capitalized is written off over the period an employee remains with the organization. If he leaves before the expected service period, the amount remaining as an asset is written off in its entirety in the year of leaving.

Monetary Measurement• Capitalization of Historical cost method: If the human assets are liquidated

prematurely the whole of the amount not written off is charged to the income of the year in which such liquidation takes place. If the useful life is recongnised to be longer than originally expected, revisions are effected in the amortisation schedule. The historical cost of human resources is very similar to the book value of the other physical assets. When an employee is recruited by a firm, he is employed with the obvious expectation that the returns from him will far exceed the cost involved in selecting, developing and training in the same manner as the value of fixed assets is increased by making additions to them. Such additional costs incurred in training and developing is also capitalised and are amortised over the remaining life. The unexpired value is investment in human assets. This method is simple to understand and easy to work out. It meets the traditional accounting concept of matching cost with revenue. It can provide a basis of evaluating a company’s return on its investment in human resources.

• But it suffers from the following limitations:

It takes into account a part of the employees acquisition costs and thus ignores the aggregate value of their potential services.• It is difficult to estimate the number of years over which the

capitalised expenditure is to be amortised.• It is difficult to determine the rate of amortisation. Should it be

increasing, constant or decreasing one?• The economic value of human resources increases over time as the

people gain experience. But in this approach, the capital cost decreases through amortisation.•

Monetary Measurement• Replacement Cost method: This method measures the cost to replace an

organization’s existing human resources. It indicates what it would cost the concern to recruit, hire, train and develop human resources to match the present level of efficiency.• This approach is more realistic as it incorporates the current value of

company’s human resources in its financial statements prepared at the end of the year. It is more representative and logical. But it suffers from the following limitations:• This method is at variance with the conventional accounting practice of

valuing assets.• There may be no similar replacement for a similar certain existing asset. It is

really difficult to find identical replacement of the existing human resource in actual practice.• The determination of a replacement value is affected by the subjective

considerations to a marked extent and therefore, the value is likely to differ from man to man

Monetary Measurement•Opportunity Cost Method: Under this method, the value of Human resources is determined on the basis of the value of an individual employee in an alternative use. If an employee can be hired externally, there is no opportunity for him.Opportunity cost is the value of an asset when there is an alternative use of it. There is no opportunity cost for those employees that are not scarce and also those at the top will not be available for auction. As such, only scarce people should comprise the value of human resources.

This method can work for some of the people at shop floor and middle order management. Moreover, the authors of this approach believe that a bidding process such as this is a promising approach towards more optional allocation or personnel and a quantitative base for planning, evaluating and developing human assets of the firm. But this approach suffers from the following limitations:•It has specifically excluded from its preview the employees scarce or not being ‘bid’ by the other departments. This is likely to result in lowering the morale and productivity of the employees who are not covered by the competitive process.

Monetary Measurement•The total valuation of human resources on the competitive bid price may be misleading or inaccurate. It may be due to the reason that a person may be an expert for one department and not so for the other department. He may be valuable person for the department in which he is working and thus command a high value but may have a lower price in the bid by the other department.•Under this method, valuation on the basis of opportunity cost is restricted to alternative use within the organisation. In real life such alternative use may not be identifiable on account of the constraints in an organisational environment.

Monetary Measurement• Economic Value Method: Under this method, human

resources are valued on the basis of the contribution they are likely to make to the organization during the period of their employment. The remuneration to be paid to an employee is estimated and discounted appropriately to arrive at the current estimated value.• Present Value Method: This method measures the value

of human resources as per present value of estimated future earnings discounted by the rate of return on investment(Cost of Capital)

Advantages of HR Accounting Human Resource Planning anticipates not only the required kind and

number of employees but also determines the action plan. The major benefits of HR accounting are:It checks the corporate plan of the organisation. The corporate plan aiming for expansion, diversification, changes in technological growth etc. has to be worked out with the availability of human resources for such placements or key positions. If such manpower is not likely to be available, HR accounting suggests modification of the entire corporate plan.• It offsets uncertainty and change, as it enables the organization to have

the right person for the right job at the right time and place.• It provides scope for advancement and development of employees by

effective training and development.• It helps individual employee to aspire for promotion and better benefits.

Advantages of HR Accounting • It aims to see that the human involvement in the organisation is not

wasted and brings high returns to the organisation.• It helps to take steps to improve employee contribution in the form

of increased productivity.• It provides different methods of testing to be used, interview

techniques to be adopted in the selection process based on the level of skill, qualifications and experience of future human resources.• It can foresee the change in value, aptitude and attitude of human

resources and accordingly change the techniques of interpersonal management

Objectives of HR Accounting The objective of HRA is not merely the recognition of the value of all

resources used by the organisation, but it also includes the management of human resource which will ultimately enhance the quantity and quality of goods and services. The main objectives of HR Accounting system are as follows:• To furnish cost value information for making proper and effective

management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost effective organisational objectives.• To monitor effectively the use of human resources by the management.• To have an analysis of the human assets i.e. whether such assets are

conserved, depleted or appreciated.

Objectives of HR Accounting • To aid in the development of management principles. and proper decision

making for the future by classifying financial consequences of various practices.• In all, it facilitates valuation of human resources recording the valuation in

the books of account and disclosure of the information in the financial statement.• It helps the organisation in decision making in the following areas:• Direct Recruitment vs. promotion, transfer vs. retention, impact on

budgetary controls of human relations and organisational behaviour, decision on reallocation of plants closing down existing units and developing overseas subsidiaries etc.

HRD AUDIT• HRD audit is a systematic survey and analysis of different

HRD functions with a summarised statement of findings and recommendations for correction of deficiencies. • It examines and evaluates policies, procedures and practices

to determine the effectiveness of HRD function in an organization. • HRD audit ensures that sound and cost-effective policies are

implemented.

Objectives of HRD audit 1. To determine the effectiveness of management programmes which

facilitate the development, allocation and monitoring of human resources.

2. To analyse the factors involved in HRD and develop a statement of findings with recommendations for correcting deviations, if an, on the following issues:a. The extent of deviation from HRD policies,b. To what extent objectives are spelt out,c. To what extent performance standards have been established.

Objectives of HRD audit 3. To seek explanations and information and answers to all such

above questions as: What happened? Why did it happen?4. To study the extent to which line managers have complied with

HRD policies and as such the operational problems in implementing the existing HRD policies.

5. To study the current manpower inventory and identify shortfall or excess, if any.

Role of HRD Auditor• From above discussed objectives, the job of the HRD auditor can be

enumerated as follows:1. To get the current facts.2. To study the effectiveness of the present system by answering the

following issues:a. Why was the practice introduced?b. What would be the result if the practice is discontinued?c. What needs were intended to be fulfilled and have those been fulfilled or not?d. What could be the best possible alternative for fulfilling such needs?e. What changes can improve effectiveness of the existing practice?f. Are such intended changes economically and operationally viable?g. Are such changes sustainable from the Unions point of view? h. What should be the time frame for introducing the change?

Importance of HRD AUDIT1. Technological changes, inter alia, are calling for renewal of

knowledge and skills of existing manpower. Training function, therefore, has assumed importance. Periodic HRD audit can help to identify the changing training needs and development of new training modules for effective utilization of manpower.

2. To keep pace with the environmental changes, management philosophy and practices at the organizational level also need to be changed, like participative management( through quality cicles and value engineering team), employee empowerment, total employee investment, etc. Need for all these can be understood only when we periodically undertake HRD audit.

HRD From World Perspective:Impact on resources in developing

countriesa. The need for effective workers’ participation for enhancing

productivity.b. The need for adopting employment policy in congruence with the

national economic and social development policy.c. The need for education and training of workers and buiding

economically valuable stock of technicians, scientists, technologists and management specialists by increasing access to education, making it equitable and affordable.

d. Need for vocational guidance and counselling.

HRD From World Perspective:Impact on resources in developing

countriese. Need for promotion of self-employment.f. Need for striking a balance between labour protection through

state intervention and market flexibility.g. Need for eliminating gender discrimination and enhanced

participation of women in all economic activities.h. Need for elimination of child labour.i. Need for safeguarding the interest of international migrant

workers.j. Need for establishing internal labour standards.

Human resources and skill development

a. To establish policies and practices to secure investment requisite, proportion of the Gross National Income as govt. expenditure in education and training.

b. To study sub-sectoral priorities (between primary, secondary and tertiary levels of education), and analyse investment ratios between the sub-sectors and maximise the rate of return on investment.

c. To enhance access to and retention in education and training and thereby avert wastage of educational investments.

Summary• HRA helps in quantifying HR values in an organization. • Subjective skill assessment helps in one way to understand the skill

inventory, quantified HRA data further reinforce it for successful HRP. Whether HR initiatives are correct or not or whether HRA values appreciating or depreciating need to be periodically valuated through a systematic HRD audit. • Similarly, such assessment at the national level also helps us to

understand the macro-level trend. Periodic research initiatives augment the total process.