Human resources accounting aims to identify, measure, and report on the value of a company's employees. It treats expenditures on human resources as investments in assets rather than expenses. The document discusses various models for valuing human capital, including historical cost, replacement cost, and economic value models. It also examines the benefits of human resources accounting in providing information to managers and investors about the value of a company's workforce.

1. Human Resources Accounting
and valuation
Management has come to accept that people,
not cash, buildings, or equipment, are the
critical differentiators of a business enterprise.”
Jac Fitz-enz,
The ROI of Human Capital (2000)

2. Questions
• How the organization makes investment in its
people?
• How the value of the people changes over
time?

3. Human Resources Accounting
• It is the process of identifying ,measuring and communicating data
about HR to the interested parties.
• It includes assigning, budgeting, and reporting the cost of human
resources in an organization.
• It involves measuring the costs incurred by business firms and other
organizations to recruit , select, hire, train and develop human assets.
• Involves measuring the economic value of people to the organization.
• Such information facilitates effective management within an
organization
• It is an attempt to identify and report the Investments made in Human
Resources of an organisation that are currently not accounted for in the
Conventional Accounting Practices.
• Thus, Human Resource Accounting is a term applied by the
Accountancy Profession to quantify the cost and value of employees of
their employing organisation.

4. AIM
• To depict the Potential of the Employees in
Monetary Terms.
• This concept can be examined from two
directions :
• Cost of Human Resources i.e. the expenditure
incurred for recruiting, staffing and training
the Quality of the Employees and
• Value of Human Resources i.e. the yield which
the above investment can yield in the future.

5. Importance of Human Resource
Accounting
• For any Company operating in the Manufacturing Sector, its
core assets are its Machinery and Fixed Assets but for a
Company operating in the Service Sector, its core assets are
its employees which are Intangible Assets.
• For a Service Sector Company, the value of employees gains
importance as earnings are based on the per-employee per
hour billing model and profitability is linked to the value
added by the workforce.
• The Concept of Human Resource Accounting was
established primarily for the service sector has now started
gaining so much relevance that now Companies in all
Sectors have applying HR Accounting and a good weightage
is given to these reports when making any Company
Analysis.

6. Objectives
• To furnish cost value information for making management
decisions about acquiring , allocating, developing &
maintaining HR in order to attain cost effectiveness.
• To allow management to monitor effectively the use of HRA.
• To provide a sound & effective basis of asset control ,i.e
whether assets are conserved ,depleted or appreciated.
• To aid in the development of management principles by
classifying the financial & consequences of various practices.
• To influence external decision making – investors
• It adds value to key transformational processes that covert
the raw inputs (individuals , groups , org) to outputs in the
form of goods & services.

7. HR Cost
• Traditionally, the human resource department has been regarded as a cost
center, or fee burner. For this reason, there’s always a lot of emphasis on cost
reduction within HR. This is where Human Resource costing comes in.
• According to Flamholtz (1999), cost is a sacrifice incurred to obtain some
anticipated benefit or service. This means that all cost has an “expense” and an
“asset” component.
• When increased Human Resource cost shows an increased positive return, the
business will be happy to invest more in HR. In this case, investing in HR leads
to more productive people
• Fixed costs are the costs that remain constant, regardless of the activities in
the project. Variable costs change as activities change.
• Opportunity cost refers to the potential gains that might have been realized if
resources were directed to other ends
• The value of money fluctuates over time due to inflation and interest
• Indirect costs stem from knowledge lost when employees leave, the time spent
finding a replacement and the time new hires need to become fully functional.

8. Why measure Human Resource costs?
• Monitor departmental costs
• Measure impact and overall success
• Predict future costs
• Calculate a return of investment (ROI)

9. Classifying Human Resource costs
• Fixed and variable cost
• Opportunity cost
• The value of money over time
• Estimated value of employee time
• Cost-benefit and cost-effectiveness analysis
• Conjoint analysis
• Sensitivity and break-even analysis

10. Human capital asset
• “the collective sum of the attributes, life experience,
knowledge, inventiveness, energy, and enthusiasm that
its people choose to invest in their work”
• In the HRA approach, expenditures related to HR are
reported as assets on the balance sheet as opposed to
the traditional accounting approach which treats costs
related to a company’s HR as expenses on the income
statement that reduce profit”
• Exposure to accounting also helps an HR manager
appreciate corporate cash flow in the budgeting
process. Employee vacation costs, for example, might
be charged monthly rather than when actually incurred
for quarterly financial reporting.

11. Background
• In 1691, Sir William Petty began to place values on
laborers and estimated the value of human capital. He
did so to estimate the cost of lives, mainly those that
resulted from war.
• In 1776, Adam Smith popularized the idea that human
beings were investments that generate returns.
• William Farr expanded upon the idea of human capital
in 1853.
• He theorized that the present value of a person’s net
future earnings represented wealth and that it should
be taxed. He calculated it by taking the difference of a
person’s earnings and their living expenses, or what
would today be called net income.

12. Continued
• Rensis Likert, an organizational psychologist at
the University of Michigan, was one of the
prominent scholars of human resource
accounting.
• Likert worked with R. Lee Brummet, William C.
Pyle, and Eric Flamholtz on projects to
cultivate ideas and methods of accounting for
human capital (Bullen & Eyler, 2010).

13. Benefits of Human Resource Accounting
1. HR Accounting helps the company ascertain how
much Investment it has made on its Employees and how
much return it can expect from this Investment.
2. The Ratio of Human Capital to Non-Human Capital
computed as per the HR Accounting Concept indicates
the degree of Labor Intensity of an Organization.
3. HR Accounting provides a basis for planning of
physical assets vis-a-vis Human Resources.
4. HR Accounting provides valuable information to
Investors interested in making long term investments in
Service Sector Companies

14. • The American Accounting Association's
Committee (1973) has defined Human
Resource Accounting as “the process of
identifying and measuring data about human
resources and communicating this information
to interested parties”.

15. HR valuation and disclosure practices in India
1. Variables related to valuation practices
• Valuation model
• Discount rate
• Cataloguing of employees
• 2.Variables related to reporting practices
• Disclosure of HR value
• Disclosures related to productivity and
efficiency

16. Flamholtz (1999)
• Efforts to determine the relationship between
human resource investment information and the
reflected value, as depicted in stock prices, have
suggested that information regarding human
resources is becoming more critical for accurate
investment decisions, particularly in knowledge-
based firms.
• The use of more complicated calculations and
the growing importance of intangible assets
demonstrate that financial accounting is heading
in a direction where understanding and capturing
the value of human capital is becoming
increasingly important.

17. Tangible and Intangible assets
• A tangible asset is an asset that has a physical
form. Tangible assets include both fixed
assets, such as machinery, buildings and land,
and current assets, such as inventory.
• Intangible assets include both human capital
& structure –Non physical assets, such as
patents, trademarks, copyrights, goodwill and
brand recognition,

18. Methods of Human Resource Accounting
Cost Based Models
Capitalization of Historical Costs Model
Replacement Costs Model
Opportunity Cost Model
Value Based Model
Present Value of Future Earnings Model/ Lev and
Schwartz Model
Reward Valuation Model/ Flamholtz Model
Valuation on Group Basis

19. Costs to consider
• Number of employees acquired during the year
• Cost of acquisition
• Levels for which they are acquired
• HR Development
• All information pertaining to HRD activities of the organization
• HR maintenance
• Cost related to HR maintenance
• Cost related to HR separation , attrition rate
• Details of benefits provided to the employees

20. Methods of valuation of Human Resources
• Non Monetary Measurement
• Skills inventory
• Performance appraisal
• Attitude surveys
• Potentiality for development & promotion
• Subjective Value
• Monetary Measurement
• Capitalization of Historical costs methods
• Replacement cost method
• Economic Value method
• Present value method

21. Historical cost method
It calculates the value of human assets on the basis of their historical cost. These
costs include recruiting, hiring, training, salaries and benefits, among others.
The costs are capitalized and written off over the course of the expected life of the
asset, which, in this method, is the employee. The unamortized part of the cost
remains on the entity’s books and is written off against the profit and loss account at
year-end. If the asset’s life exceeds expectations, then a recalculation and
rescheduling occurs.
The historical cost method was developed by Brummet, Flamholtz, and Pyle and first
applied at R.G. Berry Corporation in 1967 (Fitz-enz, 2000).
As with other human asset accounting methods, there is a great deal of estimation
involved, especially in determining the service time aspect.
Additionally, there is an underlying assumption that the dollar is stable, which it is not.
It measures the cost to an organization, but not the value of the employee to the
organization (Bullen & Eyler, 2010).

22. Limitations
• As the historical costs are sunk costs and are irrelevant for
decision making, this model was severely criticized as it
failed to provide a reasonable value to the human
resources.
• This method capitalizes only the Training and Development
Costs incurred on the employees and ignores the future
expected costs to be incurred for their maintenance.
• It distorts the value of the highly skilled human resources
as such employees require less training and therefore,
according to this model, they will be valued at a lesser cost.

23. Replacement Cost Method
• It determines the financial implications of
replacing the person currently holding the
position that would be replaced.
• This includes recruiting, selecting, compensating,
and training, as well as income foregone during
the period. It can also involve replacing a specific
aspect of that employee’s position.
• Individual replacement costs
• Positional replacement costs

24. Limitation of Replacement cost
• The determination of replacement cost of an
employee is highly subjective and often
impossible.
• Particularly at the management cadre, finding
out an exact replacement is very difficult.
• The exit of a top management person may
substantially change the human assets value.

25. Opportunity cost
• Model advocated by Hekimian & Jones in the year 1967
• It relates to scarcity of resources in a company.
• Bidding is done between departments and the determined
earning potential of each employee is then capitalized by
the company and treated as a capital asset.
• The main problem with this method is that it assumes that
the people doing the bidding are competent in their
bidding and are offering salaries to the employee that do
not grossly overestimate or underestimate the actual value
of the employee to the employee.
• The competitive aspect also can lead to overvaluation by
driving up the value of an employee.

26. Limitations of opportunity cost
It excludes employees of the type which can be
hired readily from outside the firm.
Thus, this approach seems to be concerned
with only one section of a firm’s human
resources, having special skills within the firm or
in the labour market

27. Cost Benefit Method
• The cost benefit method involves two calculations.
• First, the total benefit the employee provides the
company with is determined.
• Then the benefit that the company provides to the
employee, such as salary and benefits, is calculated.
• The difference between the benefits the employee
provides the company with and the benefits the
company provides the employee with is the real value
of the employee.
• The cost benefit method involves too much subjectivity
and fails to recognize future implications, and it is
therefore limited in its application

28. Determinants of employee value
• Education
• Performance
• Natural attributes
• Experience
• Time Remaining
• Relationship & Morale

29. Economic value Models
• Developed by Lev and Schwartz (1971)
• It involves determining the value of human
resources as per the present value of
estimated future earnings discounted by the
rate of return on Investment (Cost of Capital).
• By discounting the future salaries & employee
related capital costs by a certain rate.

30. Steps to determine HR value
• Classification of the entire labour force into certain homogeneous
groups like skilled, unskilled, semiskilled etc. and in accordance with
different classed and age wise.eg.
• In Infosys the classification is based on software professionals &
support staff etc.
• Construction of average earning stream for each group. For
example, at Infosys Incremental earnings based on group/ age have
been considered.
• Discounting the average earnings at a predetermined rate in order
to get present value of human resources of each group.
• Aggregation of the present value of different groups which
represent the capitalized future earnings of the concern as a whole,

31. Steps
• Classify the employees as per the age ,skills
• No of employees in each category + annual
Earnings
• Cost of Capital
• Present value of future annual earnings up to
the date of retirement
• Employees present value = HR value as per
L&S model

32. Example - Calculate Value of HR
Particulars Skilled Unskilled
Annual average earning of
an employee
Rs.60000 40000
Age of retirement 65 62
Discount rate 15% 15%
No of employees in group 30 40
Average age 62 60

33. Calculation
• Skilled Annual earning =60000/
• PVAF = 15% for 3 years Difference between
the retirement age & actual age = 2.283
• Present value of salary= 136,993.50
• Number of employees = 30 * 136,993.50=
4,109,805

35. Infosys experience
• Infosys have used the Lev & Schwartz model to
compute the value of human resources. The
evaluation is based on the present value of future
earnings of employees and on the following
assumptions:
• a) Employee compensation includes all direct
and indirect benefits earned both in India and
overseas.
• b) The incremental earnings based on group /
age have been considered
• c) The future earnings have been discounted
at the cost of capital of 10.60% (previous year –
12.18%).

36. Infosys experience
• The future earnings have been discounted at the cost of
capital for Infosys. Infosys calculates cost of capital by using
Beta. Beta has been assumed at 1.54 based on average
beta for software stocks in the US.
• Infosys reports Number of employees, Value of human
resources,
• Total revenue, Software revenue, Employee cost, Value-
added excluding extraordinary income,
• Net profits excluding extraordinary income, Total revenue /
HR value (ratio),
• Total software revenue / human resources value (ratio),
Value-added / human resources value (ratio),
• Value of HR per employee (Rs. In crores), Employee cost /
HR value in percent and Return on human resources value
in percent.

37. Limitation of L&S model
• a). It is essentially an input measure .It ignores the
output i.e. productivity of employees.
• b) Service state of each individual employee is not
considered.
• c) The training expenses incurred by the company
on its employees are not considered.
• d) The attrition rate in organization is also ignored.
• e) Factors responsible for higher earning
potentiality of each individual employees like seniority,
bargaining capacity, skill, experience etc. which may
cause differential salary structure are also ignore.

38. The Problem with Accounting for
Employees as Costs Instead of Assets
• Companies touting employees as “their most valuable
assets.” But under current accounting standards, that is
simply false.
• By definition, employees are not assets since
companies do not have control over them.
• The distinction matters because it allows companies to
hide & not disclose whether they invest in their
workers in ways that promote long-term success.
• The current lack of disclosure related to employment
practices prevents policy makers and investors from
rewarding or punishing companies for how they
actually treat their employees.

39. • Right now, there’s no universally accepted way to track
the management of human capital.
• We need a new way to account for labor so that we
can track and reward companies for how they actually
treat their employees.
• Companies should provide concrete information.
• Specifically, much like banks already do, all companies
could report the total wage bill of the firm.
• Providing information related to the average length
of tenure would be insightful given that hiring is so
costly. It could also offer a sense of the culture within
the company, encouraging firms to take steps to ensure
that workers stay.
• Lastly, companies should report their investment in
training just like they do their investment in capital

40. World Economic Forum, in collaboration with Willis
Towers Watson
• The World Economic Forum, in collaboration with Willis
Towers Watson, has published a new white paper, Human
Capital as an Asset: An Accounting Framework for to Reset
the Value of Talent in the New World of Work, to provide
organizations with a model to reshape human capital
accounting.
• The framework will enable a company to monitor and
assess the return on its investments in its employees – in
the same way as it measures returns on financial and
intellectual capital.
• The paper also provides guidance for how chief human
resources officers, boards and policy-makers can
mainstream this framework in order to shape a better
approach to human capital.

42. Limitations of HRA
1. Not easy to value human assets:
• There are no guidelines differentiating the “cost”
and “value” of human resources. The existing
valuation system suffers from many drawbacks.
• After valuing human resources in a specific way,
many of them may leave the organization.
• Like physical assets, human assets cannot be
owned, retained and utilised at the sweet will
and pleasure of an organisation.

43. • 2. Results in Dehumanising Human Resources:
• There is a possibility that HRA may lead to
dehumanising and manipulation employees. For
example, a person having a lower value may feel
discouraged and this, in itself, may affect his
competence in work.
• HR is full of measurement problems:
• There is no agreement among the accountants and
financial professionals regarding the measurement
process. In what form and manner should their value
be included in the financial statements? If a valuation
has to be placed on human resources, how should it be
amortised?
• Should the rate of amortisation be decreasing,
constant or increasing? Should it be the same or
different for different categories of personnel?