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THE HFACTOR

-BY DEBOJYOTI DAS


THE SIX MAJOR RESOURCES OF A BUSINESS ORGANIZATION ARE : MEN, MONEY, MATERIALS,
METHODS, MACHINES AND MARKET. THEY ARE KNOWN AS 6Ms IN THE WORLD OF
BUSINESS. AMONG THEM EXCEPT MAN ALL THE FIVE OTHERS ARE INANIMATE RESOURCES.
THEY ARE CONDUCTED AT THE WILL POWER OF THE HUMAN RESOURCES. MAN WITH HIS
OWN CONSCIENCE, EFFICIENCY & THOUGHT MAKES THE ORGANIZATIONAL OBJECTIVE
SUCCESSFUL.THUS, THE HUMAN FACTOR IS THE MOST CRUCIAL DETERMINANT OF GROWTH
AND PROSPERITY
OF ANY CONCERN. ACCELERATION OF PRODUCTION, INCREASE IN
PROFITABILITY, AND EXPANSION OF THE MARKET ETC. HAVE DEPENDENCE ON THE HUMAN
FACTOR TO A GREAT EXTENT. THIS HUMAN PHENOMENA IS RECENTLY RECOGNISED AS THE
HUMAN ASSETS OR HUMAN RESOURCES. THOUGH THE HUMAN RESOURCE IS PERHAPS
CONSIDERED TO BE MOST SENSITIVE & VALUABLE ASSET IN AN ENTERPRISE, YET THE
ACCOUNTING PROFESSIONALS HAVE YET TO DEVELOP A CRITERIA TO MEASURE THE VALUE
OF THIS ASSET.HOWEVER, WE HAVE SOME MATHEMATICAL MODELS TO VALUE THE HUMAN
RESOURCES QUANTITATIVELY.
ONE OF THE MAJOR DRAWBACKS OF FINANCIAL ACCOUNTING IS THE FAILURE TO SHOW THE
HUMAN ASSETS IN THE BALANCE SHEET. WHILE ITEMS LIKE ERECTION OF BUILDING,
RESEARCH AND DEVELOPMENT EXPENDITURE ETC. ARE SHOWN IN THE BALANCE SHEET,
THE ACQUISITION & DEVELOPMENT COST OF MANAGERIAL PERSONNEL OF THE
ORGANISATION IS NOT REFLECTED AT ALL IN THE FINANCIAL STATEMENTS. THUS, AN
ENTERPRISE MAY HAVE INVESTED A CONSIDERABLE AMOUNT OF MONEY IN RESPECT OF
DEVELOPING ITS HUMAN RESOURCES. BUT, UNFORTUNATELY THIS FACT WOULD NOT BE
SHOWN IN THE BALANCE SHEET. BUT, IT CAN NOT BE DENIED THAT IF THE AUDITORS
REPORT, EXHIBITING TRUE & FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS IS
APPRAISED & EVALUATED, IT SHOULD INVARIABLY FOCUS ON HUMAN ASSETS. IN THIS
CONTEXT, LIKERT (1967) SAID THAT ABSENCE OF HUMAN RESOURCES AS AN ASSET IN
THE BALANCE SHEET, VIOLATES THE ACCRUAL PRINCIPLE OF DISCLOSURE,
UNDERRATES THE FIRMS NET WORTH & CURRENT INCOME AND THEREBY NOT
REFLECT THE TRUE AND FAIR VIEW OF THE ORGANISATION. SO, IT APPEARS THAT IF
ACCOUNTING IS TO PROVIDE MEANINGFUL INFORMATION AS REGARDS THE STATE OF
AFFAIRS OF THE CONCERN, IT MUST DEVELOP A STANDARD TO MEASURE THE VALUE OF
HUMAN RESOURCES. VALUATION OF HUMAN RESOURCES NEEDS NO EMPHASIS. LIKE ALL
OTHER RESOURCES OF THE COMPANY, THE EMPLOYEES POSSESS VALUE BECAUSE OF
PROVIDING FUTURE SERVICES AND NOW A DAY WHEN THE WORLD IS CONSIDERED A
GLOBAL VILLAGE AND IN CASES OF MERGERS, DE-MERGERS, VENTURE CAPITAL ETC. HUMAN
RESOURCE IS USUALLY THE PRINCIPAL DRIVER OF VALUATION IN SUCH DEALS. THEREFORE
THERE SHOULD BE A SYSTEM OF ACCOUNTING OF SUCH VALUABLE AND CRUCIAL ASSETS.
AND IN ORDER TO DEVELOP A CRITERIA TO MEASURE THE HUMAN RESOURCES THE
CONCEPT OF HUMAN RESOURCE ACCOUNTING CAME INTO EXISTENCE.
THE TERM HUMAN RESOURCE ACCOUNTING HAS BEEN EXPLAINED BY DIFFERENT AUTHORS
IN DIFFERENT WAYS. ACCORDING TO ERIC FLAMHOLTZ, HUMAN RESOURCE
ACCOUNTING IS THE ACCOUNTING FOR PEOPLE AS AN ORGANIZATIONAL
RESOURCE. IT INVOLVES MEASURING THE COST INCURRED BY BUSINESS FIRMS &
OTHER ORGANIZATIONS TO RECRUIT, SELECT, HIRE, TRAIN & DEVELOP HUMAN

ASSETS. IT ALSO INCLUDES MEASURING THE ECONOMIC VALUE OF PEOPLE TO


ORGANIZATION. BUT THE HUMAN ASSETS TEND TO BE LESS EASILY DEFINED OR CAUSE
DIFFICULTY IN MEASUREMENT. RESEARCHERS HAVE FOCUSED THEIR ATTENTION ON THE
DEVELOPMENT & REFINEMENT OF VALUATION METHODS AND THUS HAVE SOUGHT TO
ANSWER THE QUESTION: HOW DO WE MEASURE THE VALUE OF HUMAN ASSETS?
FROM THE BEGINNING OF THE DEBATE FOR VALUATION OF HUMAN RESOURCES OF AN
ORGANISATION, NUMBERS OF AUTHORS & RESEARCHERS GAVE DIFFERENT VALUATION
MODELS. INITIALLY, FOR THE VALUATION OF HUMAN RESOURCES COST BASED VALUATION
METHODS WERE SUGGESTED BY THEM. AT THE SAME TIME COUNTER ARGUMENTS MADE BY
A NUMBER OF AUTHORS THAT COST BASED VALUATION CANNOT HELP IN PROPER
VALUATION OF HUMAN RESOURCES & THEY SUGGESTED MODELS ON ECONOMIC VALUE.
THEREFORE, CONCEPTUALLY, EARLY HRA MODELS MAY BE BROADLY CLASSIFIED AS:
1. COST BASED VALUATION MODELS: THE MODELS ARE BASED UPON THE COSTS
INCURRED BY THE COMPANY TO ACQUIRE & DEVELOP THE EMPLOYEES. THE MODELS
ARE : HISTORICAL COST MODEL
REPLACEMENT COST MODEL
OPPORTUNITY COST MODEL
STANDARD COST MODEL
2. ECONOMIC VALUE BASED MODELS: THESE MODELS USES CAPITAL BUDGETING
TECHNIQUES TO
ASSESS HUMAN RESOURCES, THE ARGUMENT BEING THAT THE
VALUE OF FIRMS EMPLOYEES IS THEIR DISCOUNTED FUTURE EARNINGS. PRESENT
VALUE METHODS TRY TO MEASURE ECONOMIC VALUE RATHER THAN SIMPLY RECORD
INVESTMENTS IN HUMAN RESOURCES AT HISTORIC OR REPLACEMENT COST. THE
MODELS ARE:
LEV & SCHWARTZ MODEL
HERMANSONS MODEL
STOCHASTIC REWARDS VALUATION MODEL
JAAGI & LAU MODEL
MORSE MODEL
CHAKRABORTY MODEL
DASGUPTA MODEL
HUMAN RESOURCE REPORTING
THE TRADITIONAL SYSTEM OF COMPANY FINANCIAL REPORTING TENDS TO
CONCENTRATE ON ACCOUNTING FOR TANGIBLE RESOURCES FOR WHICH
TRANSACTION HAVE TAKEN PLACE WITH LITTLE REGARD TO HUMAN
RESOURCES, THEIR EFFICIENCY & POTENTIAL. IT IS POSSIBLE TO CONCIEVE OF
A SYSTEM OF FINANCIAL REPORTING INVOLVINNG THE INCORPORATION OF
HUMAN RESOURCES VALUE TO THE TRADITIONAL REPORTING SYSTEM. AS A
MATTER OF FACT, THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
(ICAI) IS THE PRIMARY ACCOUNTING BODY ESTABLISHED BY THE PARLIAMENT
HAS SET UP AN ACCOUNTING STANDARD BOARD (ASB) ON 21 ST APRIL 1977
HAS ISSUED MORE THAN 30 STANDARDS TILL DATE, BUT STILL ICAI HAS NOT
FORMULATED & ISSUED ANY PARTICULAR ACCOUNTING STANDARD RELATING
TO VALUATION & DISCLOSURE OF HUMAN RESOURCES. AS NO GUIDELINE IS
ISSUED BY ANY STATUTORY BODY ABOUT DISCLOSURE OF THE INFORMATION

RELATING TO HRA, THE DISCLOSURE OF SUCH INFORMATION IS AT THE


OPTION OF THE COMPANIES OF INDIA. HOWEVER, IT IS EXPECTED THAT IN
FUTURE THE HUMAN ASSETS WILL FIND ITS PLACE IN THE BALANCE SHEET.

THE FUTURE BALANCE SHEET


LIABILITIES

SHARE CAPITAL:
(50,000 SHARES @ Rs.10
EACH)
HUMAN
CAPITAL:

RESOURCE

AMOUNT(Rs.
)

ASSETS

AMOUNT(Rs
.)

FIXED ASSETS:

4,60,000

HUMAN ASSETS:
i.VALUE OF EMPLOYEES

1,00,000

5,00,000

1,00,000

ii. ACQUISITIONAL &


DEVELOPMENTAL COST
6,00,000

40,000
6,00,000

REFERENCES:
ERIC FLAMHOLTZ (1974), HUMAN RESOURCE ACCOUNTING
PRAGNESH B. SHAH (2010), HUMAN RESOURCE ACCOUNTING
P.L. GANGOPADHYAY (2009), PRINCIPLES & PRACTICES OF AUDITING & MODERN
BUSINESS MANAGEMENT
HEKIMIAN & JONES (1967), PUT PEOPLE ON YOUR BALANCE SHEET
HERMANSON (1964), ACCOUNTING FOR HUMAN ASSETS
RAVI M. KISHORE (2004), ADVANCED ACCOUNTING
C.B. GUPTA (2009), HUMAN RESOURCE MANAGEMENT
FOLEY (1977), ACCOUNTING FOR HUMAN RESOURCES