INTRODUCTION

The past few decades have witnessed a global transition from manufacturing to service based economies. The fundamental difference between the two lies in the very nature of their assets. In the former, the physical assets like plant, machinery, material etc. are of utmost importance. In contrast, in the latter, knowledge and attitudes of the employees assume greater significance. For instance, in the case of an IT firm, the value of its physical assets is negligible when compared with the value of the knowledge and skills of its personnel. Similarly, in hospitals, academic institutions, consulting firms etc., the total worth of the organization depends mainly on the skills of its employees and the services they render. Hence, the success of these organizations is contingent on the quality of their Human Resource- its knowledge, skills, competence, motivation and understanding of the organizational culture. In knowledge driven economies therefore, it is imperative that the humans be recognised as an integral part of the total worth of an organization. However, in order to estimate and project the worth of the human capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills, and contribution of the human element as well as that of the organisational processes, like recruitment, selection, training etc., which are used to build and support these human aspects, is developed. Human resource accounting (HRA) denotes just this process of quantification/measurement of the Human Resource.

MEANING AND DEFINITION

HRA is that branch of managerial accounting which involves the application of economic and accounting concepts to the area of personnel management. It is the process of recognizing, measuring and communicating useful information relating to human resources. The American Accounting Association Committee on HRA has defined human resource accounting as, the process of identifying and measuring data about human resources and communicating this information to interested parties. According to Davidson and Weil, It is the process of measuring and reporting the human dynamics of an organization. It is the assessment of the condition of human resources within an organization and the measurement of the change in the condition through time. In the words of Geoffrey M. N. Baker, Human resources accounting is the term applied by the accountancy profession to quantify the cost and value of employees to their employing organization. From the above it may be concluded that .HRA comprises the following three aspects: Evaluation of human resources. Recording the valuation in the books of accounts. Presenting the information in the financial statements for communication to the interested parties.

WHY HRA?
HRA helps in determining the return on investment on human resources. It helps in knowing whether the human resources have been properly utilized or not. It provides quantitative information on human resources which will help the managers as well as investors in making decisions. Another object of HRA is to communicate the worth of human resources to the organization and the society at large. To furnish cost value information for making management decision and maintaining human resources in order to attain cost effective organizational objectives. To allow management personnel to monitor effectively the use of human resources. To provide a sound and effective basis for asset control. To aid in the development of management principles by classifying the financial consequences of various practices It allows management personnel to monitor effectively the use of human resources. It helps in the development of management principles by classifying the financial consequences of various practices. HRA provides the investors with a more complete and accurate account of the organizations total worth, and therefore, enables better investment decisions. HRA also provides the HR professionals and management with information for managing the human resources efficiently and effectively. Such information is essential for performing the critical HR functions of acquiring, developing, allocating, conserving, utilizing, evaluating and rewarding in a proper way.

HISTORICAL DEVELOPMENT OF HRA

The traces of a rudimentary HRA can be found in the Medieval European practice of calculating the cost of keeping a prisoner versus the expected future earnings from him. The prisoners in those days were seen to be the general property of the capturing side. Consequently, after the victory a quick decision regarding whether to capture a prisoner or to kill him had to be taken based on the costs involved in keeping him and the benefits accruing from killing him. However, these represented very rough measurements with limited use. The development of HRA as a systematic and detailed academic activity, according to Eric G Falmholtz (1999) began in sixties. He divides the development into five stages. These are: First stage (1960-66): This marks the beginning of academic interest in the area of HRA. However, the focus was primarily on deriving HRA concepts from other studies like the economic theory of capital, psychological theories of leadership effectiveness, and the emerging concepts of human resource as different from personnel or human relations; as well as the measurement of corporate goodwill. Second stage (1966-71): The focus here was more on developing and validating different models for HRA. These models covered both costs and the monetary and non-monetary value of HR. The aim was to develop some tools that would help the organisations in assessing and managing their human resource/asset in a more realistic manner. One of the earliest studies here was that of Roger Hermanson, who as part of his Ph.D. studied the problem of measuring the value of human assets as an element of goodwill. Inspired by his work, a number of research projects were undertaken by the researchers to develop the concepts and methods of accounting for human resource. Third Stage: (1971-76): This period was marked by a widespread interest in the field of HRA leading to a rapid growth of research in the area. The focus in most cases was on the issues of application of HRA in business organisations. R.G. Barry experiments contributed substantially during this stage. (R.G.Barry Corporation: 1971)
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Fourth Stage (1976-1980): This was a period of decline in the area of HRA primarily because the complex issues that needed to be explored required much deeper empirical research than was needed for the earlier simple models. The organisations, however, were not prepared to sponsor such research. They found the idea of HRA interesting but did not find much use in pumping in large sums or investing lot of time and energy in supporting the research. Stage Five (1980 onwards): There was a sudden renewal of interest in the field of HRA partly because most of the developed economies had shifted from manufacturing to service economies and realized the criticality of human asset for their organisations. Since the survival, growth and profits of the organisations were perceived to be dependent more on the intellectual assets of the companies than on the physical assets, the need was felt to have more accurate measures for HR costs, investments and value. An important outcome of this renewed interest was that unlike the previous decades, when the interests were mainly academic with some practical applications, from mid 90s the focus has been on greater application of HRA to business management. Different types of models to suit the specific requirements of the organisations have been developed incorporating both the tangible and the intangible aspects. Also, larger number of organisations actually began to use HRA as part of their managerial and financial accounting practice. Today, human and intellectual capitals are perceived to be the strategic resources and therefore, clear estimation of their value has gained significant importance. The increased pressures for corporate governance and the corporate code of conduct demanding transparency in accounting have further supported the need for developing methods of measuring human value. In India, human resource valuation has not yet been institutionalized though, as mentioned above, many public as well as private have adopted HRA.

INFORMATION HRA

MANAGEMENT

IN

Like any accounting exercise, the HRA too depends heavily on the availability of relevant and accurate information. HRA is essentially a tool to facilitate better planning and decision making based on the information regarding actual HR costs and organisational returns. The kind of data that needs to be managed systematically depends upon the purpose for which the HRA is being used by an organisation. For example, if the purpose is to control the personnel costs, a system of standard costs for personnel recruitment, selection and training has to be developed. It helps in analyzing projected and actual costs of manpower and thereby, in taking remedial action, wherever necessary. Information on turnover costs generates awareness regarding the actual cost of turnover and highlights the need for efforts by the management towards retention of manpower. Accountability in the management process is often enhanced when information involving an evaluation of managerial effectiveness is generated. Finally, information on the intangibles like intellectual capital/human capital becomes necessary to measure the true worth of the organisation. This information, though un-audited, needs to be communicated to the board and the stockholders.

ASPECTS/METHODS OF HRA
There are two major aspects of HRA:
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i) ii)

Human resource cost accounting (HRCA) Human resource value accounting (HRVA)

Human Resource Cost Accounting (HRCA)

HRCA may be defined as the measurement and reporting of the costs incurred to acquire and develop people as organizational resources. It deals with accounting for investments made by an organization in acquisition and developing human resources as well as the replacement cost of people presently employed. HRCA includes: Accounting for the costs of personnel activities and functions such as recruitment, selection, placement and training. Accounting for the costs of developing people as human assets, also termed as Human Asset Accounting. The monetary approaches to the measurement of human resource cost may be based upon either historical cost or replacement cost or opportunity cost. These approaches are discussed as below:

(1)HISTORICAL COST APPROACH:

It was developed by Brummet, Flamholtz and Pyle. According to this approach the actual cost incurred on recruiting, selecting, training, placing and developing the human resources of an enterprise are capitalized and written off over the expected useful life of human resources. The procedure followed for human resource asset is the same as that of other physical assets. Any amount spent on training and developing human resource increases its efficiency, hence capitalized. The amortization of human resource assets is also done in the same way as that of other physical assets. The asset is written off over its useful life. If the asset is liquidated prematurely then its underwritten off amount is charged to revenue account. On the other
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hand, if it has a longer life than expected, its amortization is rescheduled.

(2) REPLACEMENT COST APPROACH:

This method was developed by Rensis Likert and Eric G.Flamholtz. The cost of replacing employees is used as the measure of companys human resources. The human resources of a company are to be valued on the assumption as to what it will cost the concern if existing human resources are required to be replaced with other persons of equivalent experience and talent. This approach corresponds to the historical cost approach mentioned earlier except that it allows for changes in the cost of acquiring and developing employees in place of taking their historical cost.

(3) OPPORTUNITY COST APPROACH:

This approach has been suggested by Hekimian and Jones. It values human resources on the basis of the economic concept of opportunity cost. The opportunity cost is linked with scarcity. A human resource asset has a value only when it is scarce i.e. its employment in one division is possible and not in another division. The investment centre managers will bid for the scarce employees they need to recruit. These scarce employees come from within the firm and include only those who are the subject of recruitment request made by an investment centre manager. In other words, employees not considered scarce are not included in the human asset base of the organization.

Human resource value accounting (HRVA)

Another important approach to the evaluation of human resource assets is to calculate their economic values. This concept is based on the view that difference in present and future earnings of two similar firms is due to the difference in their human organization. The economic value of the firm can be determined by obtaining the present value of future earnings. A number of valuation models have been developed for determining the present value of future earnings. Some of the important models have been discussed as below:

(1) THE LEV AND SCHWARTZ MODEL:

Lev and Schwartz developed an economic model in 1971 for determining the value of human resources in a firm. According to them, the value of human capital embodied in a person of age t is the present value of his remaining future earnings from employment in the form of salaries, wages, etc. The value of human capital of a person t years old is given symbolically in the model as: Where, = The value of human capital of a person years old. I (t) = the annual earnings of the person up to retirement. r= the discount rate of the cost of capital. T= the age of retirement.
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(2) FLAMHOLTZ MODEL (1971)

According to this model, an individuals value to an organization is determined by the services he is expected to render to the organisation during the period he is likely to remain with the organization in various position or service states. The present value human resource may be derived by discounting the realisable value of expected futures services at a specified rate. This model involves the following steps: (i) Estimation of period for which an individual is expected to render service to the organisation. (ii) Identification of various position or service states that the employee might hold during his service with the organisation. (iii) Estimation of probable period for which his expected to hold is possible position or service state. (iv) Calculation of expected service to be derived from the individual by: Where; = the quantity of services expected to be derived in each state = the probability that the same will be obtained (v) Determination of the monetary equivalent value of the expected future services by multiplying the quantity of services with the price and calculation of the income expected to be derived from their use.

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(vi) Calculation of present value of expected future services at a predetermined rate.

(3) GILES AND ROBINSONS HUMAN ASSET MULTIPLIER METHODL:

In 1972, the Institute of Cost and Management Accountants and The Institute of Personnel Management sponsored Giles and Robinson to produce a report on Human Asset Accounting. They suggested a human asset measurement method known as Human Asset Multiplier. According to this method, the valuation of human resources should be made in the same way as other business assets on a going concern basis. The calculation of human asset value, under this method, is based on the notion that an individuals remuneration, or the remuneration of a group of persons in the same grade, may be multiplied by a factor determined on the basis of his contribution to the success of the business. The total value of human assets employed in the business can be calculated by simply adding together all the individual values so calculated.

(4) HERMANSONS UNPURCHASED GOODWIL AND ADJUSTED DISCOUNTED FUTURE WAGE MODEL:
Roger H.Hermanson has suggested two models for the measurement of human resources. According to unpurchased goodwill model, the value of human resources of an organisation may be calculated by capitalising earnings in excess of normal earnings for the industry or the group of companies of which the firm is a part. For instance, the capital investment of a firm is say Rs. 10 lakhs. The rate of normal earnings is 10%. The actual rate of earnings of the firm is 15%. In this case the normal earnings are Rs. One Lakh (10% of 10 lakhs) and the actual earnings are Rs. 1.5lakhs (i.e., 15% of 10 lakhs).
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Thus, the super profits or the excess earnings are Rs. 50,000. The value of human assets shall be the capitalized value of these excess earnings. i.e. Rs. 50,000x100/15 or say Rs. 3,33,333.

(5) JAGGI AND LAU MODEL:

This model suggests valuation of human assets on a group basis rather than on individual basis. Group, in this model, means a homogeneous group of employees who may not be necessarily working in the same department. It might be difficult to predict an individuals future period stay and chances of promotion, but on a group basis, it is easier to ascertain the future period of service, chances of promotion and those who are likely to leave the firm during each of the forthcoming period. It has been assumed in this model that the pattern of movement is likely to remain constant overtime and the probabilities determined for one period can be extended to future periods. The computation of human resources of an organisation is done as below: TV= (N) r n (T) n (V) Where, TV -represents the current value of all employees in each rank. N represents the number of employees in each rank. n- Represents the time period. r Is the discount rate. T- Represents the probability. V- Represents the economic value of an employee.

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(6) MORSE NET BENEFIT MODEL (1973)

According to this model, the value of human capital is determined on the basis of the present value of net benefits derived by the organisation from the expected future services of its employees. It involves the following steps: (i) Determination of the gross value of future services to be rendered by employees in their individual capacities as well as operating in groups. (ii) Determination of the cost, i.e., the total future payments to be made to the employees. (iii) Calculation of net benefit to the organisation on account of human resources by subtracting (ii) from (i). (iv) Calculation of the present value of the net benefits by discounting at predetermined rate of discount.

OBJECTIONS AGAINST HRA

There is difference between other assets and human resource. They cannot be valued like other assets. .The methods for valuation of human resources are different from each other. Human resource asset is not recognized by tax laws. It remains only a theoretical concept. The factors to be included for valuing HRA are abstract and are not precisely measurable in monetary terms. These valuations lack objectivity.

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CONCLUSION
In India, financial statements are prepared under the provisions of Indian Companies Act, 1956. There is no provision in the Act for the disclosure of human resources in the final accounts. The only provision in the Act is regarding the disclosure of information about the employees getting a remuneration of Rs. 363,000 per annum or more as foot note in Profit and Loss Account. However, leading public sector units like BHEL, SAIL, ONGC, MMTC, HMT, OIL, ACC, NTPC etc. have started reporting valuation of human resources in their Annual Reports as additional information. Most of these companies have adopted the Lev and Schwartz Model (1971) with suitable modifications. However, they do not follow uniform policies in reporting human resource information as no Internationally Accepted Accounting Standard has yet been evolved and no guidelines are available from the professional bodies also.

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