HR Accounting

The Accounting World

Oct-2009            pub : The Icfai University Press

-- KVV Raju

Man-made accounting is the only way to assess and evaluate the financial performance of an organization. However, there does not seem to be an accounting procedure or rule for evaluating human resources which is the principal generator of all the development and growth. In the present day world, Human Resource Accounting (HRA) has been identified as a necessity and is gaining importance every day in the corporate world. The main objectives of HRA are: identification and protection of the employees and their skills and motivating them towards the achievement of goals. Neglected people are hurdles in the process of achievement of organizational goals and so should be given due importance. This article explains the need and ways of HRA.

Human resource accounting comprises real accounting, life accounting, new accounting and intangible assets accounting. The concept of HRA is old and not a new one. In 1970, HRA was introduced by BHEL and SAIL but it did not gain much popularity. Later, it was also introduced by Satyam and Infosys.

Human Resource Managers have presently recognized the importance of HRA because the growth, development and ultimate result depends only on the people or workers. The main power is nothing but the real power. A lot depends on the efforts put in by the people. While investing, if a list of employees is prepared, it will help the investors in deciding how much and what to invest.

It is common knowledge that man-devised accounting plays an important role in calculating the financial performance of organizations. However, the people who organize and strive for the production and profits are not yet recognized due to these accounting systems. The use of financial accounting is generally focused on material objects. Hence, there is a need for calculation of human skills, which is nothing but HRA. For financial accounting, certain principles need to be followed but for HRA, what principles are to be followed? One such principle is to categorize the people who work. The categorization may be done taking age, earnings, skill, intelligence, education, experience, production, gender, hours of work, etc., into consideration. To this list, we can also add the investment and returns.

The total progress of an institution and its returns are because of the people who work. The recent financial crisis across the globe has affected the economies of the people. It clearly reflects the sad plight of the affected masses. This has happened because there is no space for HRA. With HRA, it would have been easier to do the following:

• Retain the skilled employees,
• Consider human resources as an asset or a liability,
• To prove that an organization is, not only for profits, but also for people,
• To identify human skills,
• To protect the morals,
• To have an idea about the people who work with the organization,
• To achieve success through people who work with the organization,
• To protect the organization through identifying the skills of its employees, and
• How to evaluate the employee's worth based on the `value' he provides to the organization.

The cost incurred for recruitment, selection, training and salaries is considered as an investment. However, the returns on this investment are production, profits, assets, market value and goodwill. Earnings per employee, production per employee, contribution per employee, and all the materialistic things such as money, working hours, and outcome can also be seen as returns.

Now what is the procedure that has to be followed? The total production has to be divided by the number of employees to get the amount per employee. Otherwise, the total profits have to be divided by the number of employees to get the income generated through each employee. At the same time, the total cost incurred by the organization, when divided by the number of employees, will give `per cost' of an employee.

Similar to profit and loss account, which shows the profit or loss, we have to prepare a profit and loss account of the HR, based on cost and results. So, when it is surplus, it shows the credibility or HR power of the organization. If it is deficit, it shows the negative side of the HR power. When the balance sheet is prepared, the manpower is shown as assets and, at the same time, the people who are willing to leave the organization as liabilities.

While assessing an organization, it is very important to consider the number of people working in the organization. Depending on the number of employees, it can be categorized as either a big or small organization. So, based on this, we can say that the HR is an important criterion for evaluating the performance of an organization.

Since in the present accounting system, the conversion of transactions into monetary terms is possible, it should be possible to convert human activities and people into monetary terms.

BHEL was the first organization to show human resources in its balance sheet. Infosys and Reliance Industries were close at its heels in enlisting the HRA. NIIT followed the method of EVA (Economic Value Addition). Nowadays, primary importance is given to knowledge. Objectives of any organization can be achieved only through effective human resource management.

However, the main objective of HRA is identifying the HR contributions to the organization or to the results as the loss of an employee is as bad as securing loss to the organization. To avoid such things, you must consider HRA as a practice.

Neither the Companies Act, 1956, nor the Chartered accountants of India have clarified any significant method or rule in the preparation of HRA. However, the existing Accounting Standards reveal or support the importance of HRA.

Infosys

Based on the present values, Infosys prepared its HRA. Its main themes were: salary (with all benefits, earned in India and abroad) and additional earnings on the basis of age.

MMTC Attempt

While attempting HRA accounting, MMTC considered the internal people and not the external ones, i.e., the customers. Further, it considered all types of employees along with their potential services. The employees, in fact, are categorized into: executives, supervisors, supporting technical staff, skilled artisans, unskilled and semiskilled workers and clerical staff.

Methods of Valuation of Human Resources

• Historical Cost Method,
• Replacement Cost Method,
• Standard Cost Method,
• Present Value Method,
• Current Purchase Power Method (CPPM),
• Opportunity Cost Method,
• Economic Value Method, and
• Statistical-Based Method.

Valuation Models

• Present Value of Future Earnings Model – Lev and Schwartz, 1971
• Net Benefit Model – Morse, 1973
• Reward Evaluation Model – Eric Flamholtz, 1974
• Group Basis Valuation Model – Jaggi-Lau, 1974
• Aggregate Payment Approach – Prof. SK Chakraborty, 1976
• Total Cost Concept – Prof. N Dasgupta, 1978.

HRA Ratios

To analyze HRA information and to relate to other variables, ratio analysis can be used:

• Human Resources to Total Resources,
• Human Resources to Capital Assets,
• Human Resources to Salaries and Allowances,
• Human Resources to Profit before tax, and
• Human Resources to Value Added.

Benefits of HRA

• Helps in proper understanding of Return on Capital Employed (ROCE).
• HRA helps in the decision-making process like recruitment versus elevations, relocating versus withholding, economizing versus withholding.
• Provides social function and prevents anticipation of exploitation and under utilization of human resources due to selfish or irresponsible transfers, relegation, layoffs and day-to-day mistreatment by higher authorities.
• Heightens the self-confidence, trustworthiness and initiative of employees, generating in them, a sense of belongingness towards the firm, leading to increased efficiency.
• Cost per employee.
• Human capital investment ratio.
• Amount of wealth created by each employee.
• Profit created by each employee.
• Ratio of salary paid to total revenue generated.
• Average salary of each employee.
• Employee absenteeism rate.
• Employee turnover rate.

Disadvantages of HRA

• The Companies Act did not have a provision,
• There is no lawful requirement,
• There is no agreed format or guiding principle,
• Awareness about this concept seems to be very low, and
• Many companies in India did not know the utility of this concept.

It is criticized that assessing human assets on the present value is immoral. Since people are treated as goods, criticism of the individuals will occur with this type of accounting. Evaluating the values of individuals is also not possible and comparison with others is also not possible. Different companies follow different methods. There is no single method or procedure. So when a comparison is to be made, it becomes difficult for the analyst to do so.

Relation Between Human Resource and Finance

• Under the constraints in which the financial statements are prepared as per the Companies Law in India, there is no scope for showing any significant information about human resources in financial statements.
• However, there is nothing to forbid the companies to connect information about the merit of human resources and the consequence of their presentation during the bookkeeping period in remarks or programming.

Accounting Standards in India

• The Council of the Institute of Chartered Accountants of India (ICAI) has constituted the Accounting Standards Board (ASB) in April 1977.
• ICAI is one of the members of the International Accounting Standards Committee (IASC).
• Accounting Standards are projected to appropriate items that are material.
• However, the ICAI has not been able to transport any definitive accounting standards on the dimension and coverage of human resources price and worth.

Implementation of HRA in India

In India, the concept of HRA is yet to gain momentum. BHEL has been a pioneer in this direction. Minerals and Metals Trading Corporation of India (MMTC), Southern Petrochemical Industries Corporation (SPIC), Oil and Natural Gas Commission (ONGC) and Neyvell Lignite Corporation (NLC) are adopting this concept. However, the concept has only been adopted as additional information.

Companies Which Practiced HRA

• Public Sector Enterprises:

– Bharat Heavy Electrical Ltd.

– Cement Corporation Ltd.

– Project and Equipment Corporation of India.

– Engineers India Ltd.

– Minerals and Metals Trading Corporation of India.

– Electrical India Ltd.

– Oil and Natural Gas Commission.

– Hindustan Shipyard Ltd.

– Steel Authority of India.

– Oil India Ltd.

• Private Sector Enterprises:

– Tata Engineering and Locomotive Works (TELCO)

– Associated Cement Company (ACC)

– Southern Petro Chemical Industries Corporation.

Why is HRA Neglected?

In our day-to-day world, everything depends on supply/demand. Across the globe, HRA is neglected even where there is the problem of unemployment, which indicates the availability of people. There is hardly any system that has been formulated to account for human resources. The ongoing research in the field of HRA is still insufficient. Due importance is not given to human resources, when compared to the aspect of money. However, people have identified the importance of HRA and a lot of research is now being done in this area.

Importance of HRA

Presently, the whole world has identified and realized the importance of HRA. People are concentrating, not only on the Return on Income, but also on the Return on Knowledge. In Denmark, the Danish Ministry of Business and Industry has issued instructions that with effect from the trading year 2005, all companies registered in Denmark will be required to include in their annual reports information on customers, processes and human capital. HRA is gradually gaining importance and research is going on at a fast pace to find out an authorized procedure for the implementation of HRA.

Research

The government and the Institute of Chartered Accountants of India are doing some research activities in this area. Human resource is the base for the success of any organization. A procedure should be identified to calculate the human skills and capabilities. The skilled and the worthy should be identified and protected. All the accounting related people should concentrate on this area and should develop amicable solutions. The main purpose of this research is to protect and encourage people and not to neglect or isolate them. Some motivating factor should be there to encourage their skills and activities.

About the Author

KVV Raju, Academic Coordinator, INC, Vijayawada. The author can be reached at raju8187@gmail.com

Conclusion

India, the second most populous nation in the world, also outsources human resources. It is a clear indication that we should go for research to adopt an authentic procedure to implement HRA. In olden days, importance was given to man but today even with innumerable scientific development, the importance of the human resource is on the wane.