HUMAN RESOURCES ACCOUNTING

Introduction
Everyone agrees that the only real long lasting asset, which an organization, nay any society or nation possesses is the quality and calibre of the people working in it. A firm having incompetent management will soon, run through the physical resources available to it. There have been generals who have got defeated - on the verge of the victory ust as there have been others who turned almost certain defeat into victory. !o far there is no agreed and generally accepted method of putting a value on this vital asset and showing it as part or along with financial statements. "owever, work has been done in the western countries to evaluate a suitable method.

Background
The financial statements, as prepared normally throw very little light on the inner strength of a company or firm to overcome and service the onslaught of unfavourable change and to either e#ploit the change to its advantage or adapt itself to it. Those who are interested in making long term investments in the firm would certainly like to be assured that it is capable of weathering the storms that it may, and is like to, face. $f, and of course it is a big if, the human resources, specially the managerial resources, at the disposal of the firm can be systematically and impartially valued and the figure is reported, it will be very valuable piece of information throwing light on the inherent strength of the firm to continue to prosper in the world which is being sub ected to more and more uncertainty. The "uman %esource Audit used to help the management plane and control the use of human resources effectively and efficiently. This helps the e#ternal users, particularly the investors to improve the quality of decision making, by knowing how the human assets of the organization have increased or decreased during the particular period, and also can be evaluated the productivity of the human being in the organization. Even though its main purpose is to improve the quality of financial decisions of management on the basis of the availability of quantitative data on human resources would result in widening the scope of managerial decision making by permitting consideration of a large set of variables or improving the basis on which these variables are currently considered. &rom the point of view of management the following additional advantages should acquire from valuation of human resources [Ref. 1]: '. There is generally good deal of turnover of personnel at various levels. (aluations of human resources will through into bold light the full cost of such turnover and compel the management to think of ways to reduce it. *evelopment of human resources, e.g., e#ecutive development, will be viewed as an investment programme to be udged against e#pected benefits and results. The real rate of return or return on investment cannot be computed unless the investment in human resources is taken in to account.

). +.

Thus valuation of human resources is likely to be significant for both the internal management and the outside world for proper decision making and for motivating e#ecutives in the right direction, information about the value of human resources available to a firm, or various divisions of it, will play an important role. "uman resources valuation can be defined as the process of identifying, measuring and communicating information about human resources to the users of the financial statement to permit informed decision making.

The ob ectives of the human resources valuation are, '. ). *evelop methods of measuring human resources cost and values.onitor the effectiveness of management/s utilization of human assets-

0age ' of 1

+.

*evelop a theory e#plaining the nature and determinants of the value of people to formal organizations - in human resource cost accounting which has been advocated by 0yle [Ref. 3], the e#penses incurred in the acquisition, training and development of human resources are treated as investments are charged to the profit and loss account 2"%(A is based on the economic value organization and in this area, early work was undertaken by "ermanson [Ref. 4], 3ikert [Ref. 5], 3ev and !chwartz [Ref. 6], 3ikert and 0yle [Ref. 7], and &lamholtz [Ref. 8 & 9].

Findings
4hile passing through the literatures carefully, $ had noticed some of the ma or issues in the field of the "uman %esource Accounting. They are, Accounting for Employees (aluation of "uman %esources "uman %esource Auditing 0erformance %atios5$ndicators for "%. 0roblems in human resources valuation !uggested model

Accounting for Emp o!""s

$magine a sole proprietor5entrepreneur whose business develops. The time arrives when there is a need to take on a member of staff. A contact of employment is formed. There is an offer of a ob. $t is accepted for a consideration 2a rewards package6. The employer 2the master6 in offering the ob contract assumes a range of legal obligations - to be careful and be considerate to the employee 2the servant6. These e#tend to rewards - cash-like and non-cash-like &acilities- tools, fi#tures and fittings and accessories at work essential for the welfare of employees. These form overheads. necessary for specific training 2an employer may e#pect that education and generic business5trade is a societal obligation6 health and safety, policies and implementation systems consultation and communications overheads pensions and contributions to social security payments costs of the infrastructure for initiating and maintaining constructs of employment and co-ordinating the employers policies and practices in respect of delivering its obligations to those that it employs. costs of severance 2retirement, redundancy and dismissal6

#a uation of Human R"sourc"s

The "uman resources function may find itself progressively on the periphery in terms of its capacity to activate the people assets of the corporation [Ref. 10]. $n any organization the most important input is the human element. The success or failure of a company depends on the people who staff the organization. 7ut unfortunately the balance sheets do not e#hibit this most vital asset, while capital invested in other assets is shown. This is one of the severe limitations of present day financial statements, which impedes the user of these statements is making full use of them. The "uman resources accounting 2"%A6 is helpful to find out the productivity of investments in respect of human beings in any enterprises. "uman resources accounting is also a scaling tool that generates and reports quantitative control information about the contribution of the human resources for promoting industrial productivity. $t can help management in taking many vital decisions relating to selection, lay-off, transfers, training promotion etc. [Ref. 11]. The prominent methods that have been suggested for the valuation of human resources are

0age ) of 1

8ost and %eplacement 8ost .ethod (Positional Replacement Replacement ost" (alue approaches. 1. #ppo!t$nit% cost met&o' (. )'*$ste' P!esent +al$e met&o' 3. ,conomic +al$ation met&o'.

ost,.Pe!sonal

Beyond the Wages Bill. The wages bill may be understood but other financial aspects of employee5"%. decisions about staffing policies5actions are not always often monitored well enough to appreciate their impact. 0eter Armstrong 2in !torey, '1196 argues that accountant views take precedence in primary decision-making within a business. 0ersonnel specialists may argue for employee development and "%. contribution to organisational performance but this represents a softer, principled view - secondary to the primary accounting view. An accountant sees an asset as something with a value on the balance sheet. Employee costs may feature in the profit and loss account but employee :value: does not appear as an asset 2or even a liability6 on the balance sheet There is awkwardness in searching for and applying accounting like formulae to the management of people. 7ut "%. is about resources. A harder focus addresses matters of staff utilisation, wage costs and e#penditure on employee-related services.

Human R"sourc" Auditing $HRA%

$n traditional accounting practices, the heavy amount incurred recruitment, selection, placement, training and development of personnel is generally treated as a revenue e#penditure and hence it is debited from the profit and loss account of the period during which it is incurred. Today, it is argued that these e#penditures, incurred by an enterprise to gain the benefit of the services of its manpower force in the future, are against the accounting principle to treat them completely as revenue. The concept of human resources valuation and the auditing concept was evolved in '1;<s, which emphasizes that human resources should be treated as physical asset and should be shown in the balance sheet of the enterprise and which facilitate the management of people as organizational resources. 3ikert one of the earliest proponents of the sub ect, has listed the following ob ectives of human resources accounting. [Ref. 7]. to furnish cost value information for making management decisions about acquiring, allocating, developing and maintaining human resources in order to attain cost-effective organizational ob ectivesto allow management personnel to monitor effectively the human resources. To provide a sound and effective basis of asset control, ie. 4hether assets are conserved, depleted or appreciated. To aid in the development of management principles by classifying the financial consequences of various practices.

Employees as Balance Sheet Assets A trained employee keep confidences and support the other :people5assets: they e#hibit loyalty and strive to generate high quality, creative performances. They serve the organisation - some with a lifetime of commitment others with a short-term perspective and others with a selfish, possibly anti-organisation approach. 3eavers transfer their e#pertise 2a company investment=6 to their new firm. >et transfer fees are hardly known outside the football arena and even here - following the 7rosnan udgement

0age + of 1

- football clubs have reappraise assumptions about the transfer value of key players. The emphasis has swung to the player negotiating the best contract of employment they can secure and clubs not being able to demand transfer fees other than to release a player from an e#isting contact.

&"rformanc" Ratios'Indicators for HRM

4hat data might we use when accounting for human assets= &TEs - &ull time equivalent staff 2formulae may aggregate 0T, short-term and long-term contract staff6. "eadcount 2"6 e.g. total &TEs at month end %evenues 2%6 - total operating income 2total sales6 E#penses 2E6 - operating e#penditure e#c. ta#, interest and e#traordinary items 0rofit - % less E 2far too simple, what is the true profit= 4ho decides what the profit is=6 8ash-like reward 286 - emoluments, salaries, wages, overtime, bonuses and commissions including ?$ contributions. 7enefits 276 - other rewards which may or may not be ta#ed as :benefit in kind: - cars, pensions, company loans etc

Staffing Performance Indicators Int"rna '. ). +. E(t"rna B. 9. D. ;. E. !ales per Employees %ecovery %ate @tilization A 0rofit per "ead 8ompensation per C 0rofit 0ersonal !ervice E#penses 20!E6 0ersonal !ervice "eadcount 20!"6 0ersonal !ervice 8ost A 20!86

2*etails are given in the Appendi#-$6

&ro) "ms in *uman r"sourc"s +a uation

$n the process of "uman resources valuation and auditing, the corporate sector is often confronted with the following problems. "uman capital plays an important role in any organization, there is widespread disagreement regarding the recognition and valuation of human resources as assets. Fenerally an asset is one which fulfils the following three criteria, '. The entity should have legally enforceable claim to it). $t should be owned by the entity +. The entity should posses it with the e#pectation of deriving services from it in future. "owever, human resources hardly fulfil these criteria. human resources as assets suffer a set back. As such, the efforts to recognize

0roper matching of costs with revenue is not possible unless the costs of the recruitment, training and development of personnel are capitalised over their effective service lives. This is so because the benefits from such e#penses are usually derived over a period beyond the year of payment. "owever, in a number of cases, the earning potential of employees may not depend on the e#penditure incurred by the firms for this purpose. 7ut it depends on behavioural aspects like skill, motivation, group loyalty, and capacity for effective interaction and decision making to influence the end results of an enterprise effectively.

0age B of 1

All companies have basically adopted the 3ev and !chwartz [Ref. 6] model for valuing their human resources. The annual reports of companies, show the value of human resources both on the assets as well as the liabilities side of the balance sheet, that is the net value is zero. .oreover if we consider the recruitment, training and development e#penses incurred by employees in the past, their net value of the organization becomes negative. The organizations, who have valued their human resources and have reported such values in their annual reports, has not been mentioned, how they are treating the huge e#penses incurred by them on hiring, training and developing their employees. Gbviously they are charging such e#penses wholly to the profit and loss account, which is against accounting principles.

Sugg"st"d mod"
Eric &lamholtz[Ref. 8] has advocated a model for human resource valuation based on a stochastic process with service rewards. A general statement of this model is, E2!6 H !'20!'6 I !'20!)6 I .....!n 20!n6 where E2!6is the total quantity of services e#pected of the individual E to the organization- !i is the quantity of services- !i206 is the profitability of occurrence of !i. !ee the Appendi#-$$ for more details.

Conc usion
$n the absence of "uman %esources Accounting and valuation, the management may not realize the negative effects of certain programmes aimed at improving profit in the short run. !uch programmes may result in a decreased value of human assets due to a fall in the productivity levels, high labour turnover and low morale. The human resources valuation system cannot be considered to be a complete system of accounting unless it is followed by equally competent system of auditing. The application or use of human resource accounting, therefore, must also be followed by a separate "% audit to ascertain whether or not the performance of the managers has been true and fair in the overall intervals of the organization they serve. "ence human resource valuation and audit activity could be helpful in improving the efficiency of human resources in the changing business scenario. Eventhough the application and usefulness of human resource valuation and accounting depends on the future efforts and e#periments to be made by practising managers, accountants and academicians. $t also needs support from professional bodies like $nstitute of 8hartered Accountants, $nstitute of 8ost Accountants etc. And Fovernment.

App"ndi(,I
Int"rna 1. Sales per employee $ndicates general employee productivity. 8ompare !0E this year over last year and with !0Es of rival organisations 2benchmarking6. Their turnover may be smaller but they may have a better !0E. !0E H %5" " may increase if the business e#pands. 4as the growth was worth it 2!0E6= 2. Recovery Rate

0age 9 of 1

Aggregate compensation and benefits then divide by revenue. %% compares staffing costs with revenues delivered. Are we obtaining better or worse returns on each C of staff e#penditure= A decreasing %% is desirable. %% H 8I75% @nravelling influences on %% can be difficult The impact on additional investment should show through in %% later - revenue increases whilst staffing costs fall. 3. tilisation ! 8an be applied e.g. to a 8onstancy 8ompany or school whose main business is allocating or selling the time of its staff. 4e assume that an increase in @A is desirable - is this always the case= @A H %58I7 % 2revenue6 can be substituted by another measurable output e.g. e#amination results 2points6. 8alculation must include staff costs of the whole business unit direct and support staff. E(t"rna ". Profit per #ead 3ike %o8E, shareholders and business analysts may use profit per head or profitbefore-ta#-per head to focus on employee-related costs and returns. 0p" H 05" A firm/s 0p" rating may highlight under-achievement and profit potential when compared industry competitors. A publicly funded organisation may see its funding reduced if its funding authorities use the ratio as a control measure. $. %ompensation per & Profit. This evaluates profit against cost5employee rather than headcount. $nterpretation can difficult. 8p0 can swing with 2profit related bonuses6. 8p0 H 8I750 8p0 is negative where a firm is making a loss. 8p0 may indicate that better management could improve cost-effectiveness or controls.

Ar" -" g"tting #fM from &"rsonn" 'HRM S"r+ic"s. 4e can evaluate the productivity5contribution 2value for money=6 of those delivering personnel5"%. services to the business. Grganisation size, location, corporate culture etc however makes e#ternal comparisons more difficult. '. Personnel services e(penses )PSE*. 4hat are the total operating e#penses of the personnel5"%. section 2personnel salaries, of facilities5equipment, training and development budgets, research5pro ect e#penditure, communications activities etc.6 Personnel Services #eadco,nt )PS#* Total &TE for the personnel5"% section in the calculation period. Personnel Services %ost !. )PS%* *ivide 0!E by total operating e#pense 2E6 to identify trends and to influence budgeting processes. 0!8 H 0!E5E

+. -.

0age D of 1

8ompare 0!8 to organisational headcount. $s 0!8 improvement better 2or worse6 than e#pected due simply to changes in the population for which it holds budgets. &or each operating unit, split the 0!E element into its constituent budgets. $dentify the proportion that, say, central personnel services are consuming compared to decentralised personnel sections. An operating unit may have a worsening 0!8 whereas another/s may be steady yet have increased training and reduced recruitment costs. The former may be investing in training people who then leave for another ob.

App"ndi(,II Sugg"st"d Mod"

The fluctuations in the value of employees/ contributions to the organization are hardly proportional to the changes in the payments to employees. @nder the 3ev and !chwartz [Ref. 6] model the value of human resources will more or less increase, even if the organization continuously incurs losses. The attitude and morale of the employees, the contribution of employees to the organization and such other factors are out of the purview of the 3ev and !chwartz[Ref.6] model of human resource valuation. Therefore, $ndian companies may consider a human resource model based on the employees/ contribution to the organization. Eric &lamholtz[Ref. 8] has advocated a model for human resource valuation based on a stochastic process with service rewards. A general statement of this model is, E2!6 H !'20!'6 I !'20!)6 I .....!n 20!n6 i.e. n

0age ; of 1

E2!6 H J!igma- !i2062!i6 iHi where E2!6is the total quantity of services e#pected of the individual E to the organization- !i is the quantity of services- !i206 is the profitability of occurrence of !i. The above equation may be presented in the following form by incorporating the discount factor for arriving at the present value. nm "%( H J!igma- 2%iK065 t H i 2'Ir6t iHi 4here "%( is the human resource value- %i is the value of the service position- 0 is the profitability of being retained in the service position i- t is the time period, n represents the number of time periods- r is the discount rate- and m is the state of e#it 2a person may reach the state of e#it by death or by leaving the organization for betterment or by voluntary retirement while serving in the present position or after occupying a few or all of the subsequent service positions the organization6. The basis for the above model is the value of the service position 2%i6.

R"f"r"nc"/
'. ). +. B. T.!. Frewal and ..8 !hukla, :Advance Accounts:, !.8hand and 8o., ?ew-*elhi, $ndia, ?ineth Edition, '11< 0ramanik, A.L., :"uman resource valuation:, Lhandelwal, ..8., Main, !.8., "uman %esource Accounting, 0ointer 0ublishers, Maipur, '11+. 0yle, 4.8., :"uman resource accounting:, &inancial Analysts Mournal, !eptemberGctober '1;<, D1-;E. "ermanson, %."., :Accounting for human assets:, Gccasional 0aper ?o. 'B, East 3ansing .ichigan 7ureau of 7usiness, Economic %esearch, .ichigan !tate @niversity. 3ikert, %., The "uman Grganization. $ts .anagement and (alues, .cFraw-"ill, Tokyo, '1D;, 'BD-99. 3ev, 7., !chwartz, A., :Gn the use of the economic concept of human capital in financial statements:, The Accounting %eview, Manuary '1;', '<+-'). 3ikert, %., 0yle, 4.8., :"uman resource accounting, a human organizational measurement approach:, &inancial Analysts Mournal, Manuary-&ebruary '1;', ;9-EB. &lamholtz, E.F., :A model for human resource valuation- a stochastic process with service rewards:, The Accounting %eview, BD, ), '1;', )9+-D;.

9. D. ;. E.

0age E of 1

1. '<.

&lamholtz, E.F., :Towards a theory of human resource value in formal organization/, The Accounting %eview, (ol. B; ?o. B, Gctober '1;), pp. DDD-;E:. ?igam, ..!., ?igam, !., :$mportance of human resource in organizations:, Lhandelwal, ..8., Main, !.8., "uman %esource Accounting, 0ointer 0ublishers, Maipur, '11+. 0rakash, M., :"uman resource accounting practices in public enterprises:, Lhandelwal, ..8., Main, !.8., "uman %esource Accounting, 0ointer 0ublishers, Maipur, '11+.

''.

0age 1 of 1