SUBMITTED BY -:2010035  PRATISH PRADEEP THALI2010036  PRATULIKA SACHAN2010037  RAHILA PINTO2010038  RAHUL CHAUHAN2010040  RAVI KUMAR AGRAWAL2010041  RUCHIR KHANNA2010042  SAFIYA KHAN2010043  SARATH CHANDRA SHENOI2010044  SHEENA PATHAK2010045  SHRADDHA CHANDRAKANT THORAT2010046  SHUKTI BASU

HUMAN RESOURCE ACCOUNTING AT

INFOSYS

ECONOMIC VALUE APPROACH•The value of an object, in economic terms, is the present value of the services that it is expected to render in future.

•Similarly, the economic value of human resources is the present worth of the services that they are likely to render in future.

•This may be the value of individuals, groups or the total human organization.

•The methods for calculating the economic value of individuals may be classified into monetary and non-monetary methods.

LEV AND SCHWARTZ’S MODEL

Lev and Schwartz’s model is based on human capital theory which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital.

In this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor explaining and predicting the future economic growth of the company.

Lev & Schwartz model

• Formula to calculate the value of Human Capital

H(Vi)=Aa(r+1)E(1+d)Pr-a

Where

H(Vi)- value of human capital of an employee

i- age of employee

E- employees annual earnings till retirement

r- age of retirement

Aa®- probability of an employee aged ‘a’ dying at age ‘r’

d - discount rate

The formula uses an earnings profile, which is a graphic mathematicalrepresentation of the income stream generated by a person.

Typically, earnings increase with age. As the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.

This model postulated in 1971 remains largely unused as a result of criticism from Accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset.

BEHAVIORAL MODEL• Measure the key dimensions of human organization, using a Likert scale at specified time periods. These are in non-monetary measurements.

•The scaled responses to questionnaire items called ‘scores’ are then standardized by statistical methods to take into account the degree of variability of the set of responses. This is done for responses in each time period.

•The difference between two standardized scores from one period to the next is then calculated. This difference (called delta) represents the change in an index of specified dimensions of the human organization.

BEHAVIORAL MODEL•From present changes in dimensions of the human organization, the expected future change in end result variables is estimated.

• Lastly, the standard scores are converted into the measuring monetary units for the end result variables.

• Likert points out those changes in the productive capability of a firm’s human organization cannot be assessed correctly unless periodic measurements of causal and intervening dimensions of that organization are taken regularly.

• When profits increase, it is often assumed that the human organization has become more productive, but steps taken to maintain•earnings or prevent losses may actually result in a decrease in the productive capability of the human organization.

BEHAVIORAL MODEL• There is some controversy about the validity and reliability of this method. According to Flamholtz, future research on this method is necessary because its validity and feasibility have not yet been established.

• Likert, however, maintains that the method is feasible where reliable and valid measurements of the coefficients are available.

MYERS & FLOWERS METHOD• They suggest five dimensions in valuing human resource in an organization : knowledge, skills, health, availability and attitude.

• The five dimensions are factorial and not additive : all are required to for good performance.

• Performance of the employee in relation to these dimensions represent employee value in organization.

• The major short coming is the attitude measurement.

• The model suggest the use of attitude score and their respective weights to arrive at an attitude index for a group of employees.

MYERS & FLOWERS METHOD• Based on the premise that employee attitude is the most important factor that governs the productive behavior of employees on the job, it has been considered that the employee attitude index multiplied by the wages payable should reflect the likely benefits as against wages payable as the cost and the gap between the benefits and the cost should reflect an individual’s value.

• Attitude though important, may not be the only influencing factor. In the final analysis it is the interplay of various other factors that propels performance.

• The model needs to be firmly established. In absence of an acceptable measure of benefits against the cost of wages, the gain concept as hypothesized may not reflect HR value.

JAGGI AND LAU’S METHOD OF HRA Based on valuation of groups than individuals. Group – Homogeneous set of employees who

may be working in different departments. Information from group valuation provides basis

for career movements of employees within organization and chances of their quitting.

Why group basis? Easy to ascertain percentage of

promotion/quitting of a particular group of employees than individuals.

Suggests the use of ‘Markov Chain Representation’ for career movements and retirement/ death.

Requires determination of Rank Transitional Matrix and the expected quantities of services for each rank of service.

Matrix-prepared from historical personnel records available in the organization (i.e. past performance of the employee)

Model includes data on: - Historical movement of groups of employees

into a Rank transitional Matrix (probabilities of group’s career movements)

- Value of services an organization’s current employees render in future period.

Formula

TV = column vector indicating the current value of all current employees in each rank.

N = column vector indicating the number of employees currently in each rank.

n = time periodr = discount rateT = rank transitional matrix indicating the probability

that an employee will be in each rank with the organization or terminated in the next period given his current rank.

V = Column vector indicating the economic value of an employee of rank ‘i’ during each period.

[TV] = [N] . ∑rn . [T]n . [v]

DRAWBACKS

Does not suggest any guidelines to improve the validity of the expected services measurement.

Criticized on the ground that past performance is not an indicator of the future and in the technology industry past performance does not necessarily reflect the future potential.

Does not consider the range of services provided by the employees.

MYERS & FLOWERS METHODAccording 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. HR value = Goodwill*Amount invested in HR/Total Investment. Weak as does not consider the external variables.

Here Hermanson is proposing that supernormal earning are an indication of resources not shown on the balance sheet, such as human assets.

Even though his method of valuing human resources is explicitly intended for use in a company’s published financial statements rather than for internal consumption,

MYERS & FLOWERS METHODThis would necessarily involve forecasting future earnings and allocating any excess above normal expected earnings to human resources of the organization. However, the assumptions would be subject to the uncertainties involved in any forecast of future events.

Since the methods limits recognition of human resources to the amount of earnings in excess of normal, the human resource base that is required to carry out normal operations is totally ignored. As a result, the value of human assets will be an underestimation.

The method only uses the actual earnings of the most recent year as the basis for thereby, ignoring the forecasts of future earnings that are equally relevant for managerial decision making.

NEED FOR HUMAN RESOURCE ACCOUNTING1. To provide effective and efficient management within the organization.

2. To provide information of changes in structure of manpower to the Management.

3. To provide qualitative information.

4. To measure the cost incurred in personnel.

5. To provide factor for better decision making for future investment.

6. To evaluate the Return on Investment as human capital.

7. To communicate to the organization and public about the worth of human resources.

8. To know that human resources are properly allocated and used.

9. To know whether the human resources are giving a return

equivalent to their worth or not.