CHAPTER THREE

VARIOUS MODELS OF
HUMAN RESOURCE
ACCOUNTING
 VARIOUS ffiODE.LS OF HUmAn
RESOURCE. ACCOUnTinG

Realizing the importance of Human Resource Accounting (HRA) in

Human Resource Management (HRM) many companies world over is making
HRA as a necessary element on their balance sheet. One of the best examples is
of the Denmark government. The Danish ministry of Business and Industry
issued a directive that with effect from the trading year 2005, all companies
registered in Denmark are required to include in their annual repOiis
infonnation on customers, processes and human capital.

In India, there are few companies like BHEL, SAIL, lnfosys and
Reliance Industries, which have implemented HRA and some are working on
it. Infosys, which started showing human resource as an asset has been reaping
high market valuation . NIIT has been following a similar method called
Economic Value Addition (EVA).

Fig. 1.1 Shows Human Resource Accounting System

Basically there are two techniques of Human Resource Accounting -

1. Cost Based Technique called Human Resource Cost Accounting

(HRCA). Various models under this method are as follows:
(i) Historical Cost Model
(ii) Replacement Cost Model
(iii) Opportunity Cost Model
(iv) Standard Cost Method
(v) Cunent Purchasing Power Method

2. Value Based technique called human Resource value Accounting

(HRV A). Fig . 1.2 shows the elements of human resource.
Various models under this method are as follows :

[47]
 ~1
1
Recruitment cost

~~~S=e=le=c=ti=on==c=os=t======~ Magnitude of
Investment sub
~ ~~T=ra=i=n=in=q=c=o=st======~
Net Human
system Human Human
human Resource
.- resource ~ resource asset
resource Investment

r---+~V:=o=~=~k=e=rs==e=d=u=ca=t=io=n====;W . '--in_v_e_s-r-tm_e_n_t.....1\ L~_c_h_a_n_q_e_s_---,

reporting
investment

,
~~'W==el=fa=r==ec=os=t======~
I \r Write off
Efficiency of
Human
~ Other cost Resource
Investment
Human resource I Human contribution ~ Effectiveness
accounting
system
Production
efficiency
~[
·I
.I
I Productivity factor
y
_J ~ of human
resource
system
'-------,-,-~
1-.

Magnitude of
L---~--~ 1-+ Human
~I Education Resource Value
~~Skill
lnternallovalt.v ~
Value
f---+1 Promotability Human Reliable Value
subsystem resource Organisational ~ human ~ reporting Relative
~ '--r-
e-so_u_r_ce-
value Efficiency of
membership
- value
'--------~ ~---+1 Productivity '------ Human
External Resource
prospects
~~ Manaqement style

r
F.rg. 1. 1 Sh·ows Human Resource Accounting System
 (i) Lev And Schwartz Model
(ii) Hermanson's Models
(iii) Stochastic Rewards Valuation Model
(iv) Jaagi And Lau Model
(v) Morse Model
(vi) Chakraborty Model
(vii) Dasgupta Model

Human
Resource
Accounting

I
Hun1an
Resourc e Cost
•
Human
Resource Value
Accou nting Accounting

Personal Human
Cost Asset
Accounting Accounting

Fig. 1.2 the Elements of Human Resource Accounting

HRCA involves the capitalization of the expenditure incurred on

recruitment, selection and development of employees, the writing of such

capitalized expenditure every year through thy profit and loss account and

reporting the net investments in human resources to the management and in

the financial statements. HRV A is based on the economic value of

human resources to an organization. It is based on the assumption that the

economic value (future services) of the employees can be quantified and

adequately measured with the help of surrogates like salary/ earnings of the

employees. A good number of models have been suggested for valuation of

human resources.

[49]
1. HISTORICAL COST MODEL :

Cost based approaches of human resource valuation involve

computation of costs of human resource to the organization . Such costs can be
calculated by any of the following methods:

The historical cost model of valuing human resources was first

developed by William C Pyle assisted by R. Lee Brummet and Eric G

flamholtz at R G Barry Corporation, a leisure footwear manufacture,

1
Columbus Ohio (USA). This is also called original cost method or outlay cost

method. In this model, the costs of recruitment selection orientation training

and development of the human resources of the organization are capitalized

and amortized over the expected useful life of the human resources. Fig. 1.3

shows the human resource investment sub system. The amounts so capitalized

are to be shown in the balance sheet as investment in human assets. If the

employee expires before the expiry of the expected useful life, the remaining

net human asset value related to the expired employee is charged of against

current earnings. Fig. 1.4 shows the measurement of historical cost.

Fig. 1.3 Human Resource Investment Sub-system

Fig. 1.4 Measurement of Historical Cost

MERITS:

a. The method is simple and based on concept of proper matching

of cost and revenue.

b. This is the only method which is used both for the valuation of
human resources and recording the data in the books of accounts

and presenting it in financial statements.

c. This method helps in evaluating a company's return on its

investment in human resources.

[50]
 Human Resource Investment

+ + +
Acquisition Training Welfare
Costs Costs Costs Othe r Costs

+ + +
Recruitment Formal Medical Sa fety
Cost Training Expenditure Expe nditure
Cost

+ + +
Selection On-the-job Canteen
Cost Training Expenditure Ex gratia
Cost

•
Placement
•
Special
•
Specific and
,
Multi -Trade
Cost Training General Ince ntives
Cost Allowances

+ + +
Development Other Other Costs
Other Costs Programmes Welfare
Expenditure

Fig. 1.3 Human Resource Investment Sub-system

 Human (Functional asset accounts)
resource
expenses
Recruiting (Personnalised asset accounts

Cost of
human Hiring
Manager A Amortisation
resources
Training
Human
Total assets Manager B
costs of Familiarisation
the firm
expenses
Other Experience amortisation
Manager C Write offs
costs (Losses) and write
Development offs

Fig. 1.4 Meas urement of Histo rica l Cost

[sl]
DEMERITS:

a. Historical cost method based on concept of cost fails to measure

the value of human resources .

b. It is difficult to estimate the number of years an employee is

going to be with the firm . Therefore · there is problem of

estimating the number of years the capitalized expenditure is to

be amortized.

c. There is a problem of recording the write of amortization and

whether it should be increasing, constant or a decreasing rate.

d. In historical cost method capital cost decreases through

amortization while economic value of human resources increases

over time as the people gain experience. Thus there is a problem

how to reconcile this difference.

e. Historical cost method does not provide sufficient information.

2. REPLACEMENT COST METHOD:

Eric G Flamholtz has developed the replacement cost method of

valuation of human resources. 2 This method consists of estimating costs of

replacing a finn's existing human resources and developing new employees to

reach the level of competence of the existing employees . There are two

concepts of replacement cost that is positional replacement cost and personal

replacement cost.

Positional replacement cost refers to the cost incurred to replace

someone with the substitute capable of performing to the same degree in the

same position.

[53]
 POSITIONAL REPLACEMENT COST

I I
Acquisition Costs Learning Costs Separation Costs
I I I I I
t i i
I I I i I I
I Direct Costs
I I Indirect Costs I Direct Costs
I I Indirect Costs I I Direct Costs
I I Indirect Costs

Recruitment Cost of Formal Loss of Efficiency

Selection promotion of Training and Cost of Separation Prior to Separation
Hiring Transfer orientation Trainer's pay Cost of Vacant
Pl acement from within On-the-job Time Positio n during
Training search

Fig. 1.5 Measure ment of Replacement Cost

 Personal replacement cost refers to the cost of replacing a person with

an equivalent substitute rather than the cost of replaoing him with the best

available substitute. Personal replacement cost is not usually less than

positional replacement cost in general, is larger.

The replacement cost method is similar to the historical cost method and

the same principles of amortization and write offs apply. The only difference is

that the replacement cost method takes into account the cunent cost of

acquiring, training and developing employees for capitalization instead of

historical costs of these items. Fig 1.5 shows the measurement of replacement

cost.

MERITS:

a. This method considers the cunent value of the company's human

resources and thus takes into account the fluctuations of the job

market and the general rise in price level.

b. Replacement cost is better than historical cost because a more

meaningful estimate of return on human investment will be

obtained and the holding gain or loss on each employee can be

determined by comparison of acquisition cost with the cunent

cost.

DEMERITS:

a. Replacement cost method takes into account the cunent value of

company's human resources in its financial statement prepared at

the end of the year, which is against the conventional accounting

practice of valuing assets.

[55]
 b. In actual practice it is really difficult to find identical replacement

of the existing human resources.

c. Replacement cost information has to be collected from the

sources outside the organization. Therefore there may be

increased expenses and delays in preparation of financial reports.

d. Replacement cost is relevant when it is lower than the present

·value or opportunity cost.

e. Replacement cost may not equal the value of human assets to the

firm due to imperfect markets and variables such as trade union,

politics, customs and tradition, legislation, age and seniority,

inaccurate appraisal of employees etc.

f. The valuation of human resources based on replacement cost

lacks verifiability as measures of an individual ' s replacement cost

are not typically available and so judgmental evaluation has to be

substituted. Hence degree of objectivity is expected to be less

than that of original cost.

g. There is no sense in valuing and calculating replacement cost of

human asset, if management is unwilling to replace a human

asset.

3. OPPORTUNITY COST MODEL:

To overcome the limitations of historical cost and replacement cost

method Hekimian and Jones in 1967 3 advanced this method to value

employees. This method of measuring human resources of an organization is

based on the concept of opportunity cost.

Thus under this method the value of an employee in his alternative use is

determined. This value is taken as the basis for estimating the value of human

[56]
resources employed by the organization. Bidding takes place only for those

assets, which are scarce. Scarce human resources only have an opportunity

cost. A human asset possesses value if it is a scarce resource and the division or

department of the firm with the highest bid acquires the particular human

resource and includes its price in its investment base. The maximum bid price

may go to the extent of the capitalized value of the extra profits likely to be

generated by the ability and competence of scarce human asset. For example let

us assume that a firm has a capital base of Rs.1 0, 00,000 and it earned profits

of Rs.1, OO,OOO.The return on investment of the same group of firms is 12%. If

the services of a particular engineer are acquired, it is expected that the profits

will rose by Rs.30, 000 over and above the target profit.

If we capitalize Rs .30, 000 at 12% rate of return , it works to Rs .30, 000

* 100 112 = Rs .250, OOO.The company may bid up to Rs.2 , 50,000 for an

engineer. The new capital base is Rs .12, 50,000(10, 00,000 + 2, 50,000). 12%

Of Rs.12 , 50,000 is 1, 50, 000, i.e.

New profit Rs.1, 50,000

Less: Profit earned old base Rs.1, 00,000

Excess profit Rs.SO, 000

Nevertheless, the maximum bid can go up to the capitalized value of Rs.SO,

000 the actual excess profit expected to be generated .by the engineer= 50,000 * 100

/ 12 = 4,16,667

MERITS:

a. The bidding process under opportunity cost approach for more

optional allocation of personnel and sets the quantitative base for

planning, evaluating and developing human assets of the firm .

[57]
 b. When determining bid prices, management has personnel records

as well as financial records. Thus it may provide additional

information, which may improve the ability of the financial

records.

DEMERITS:

a) This method does not show the true cost of human resources in

an organization because it docs not consider the employees who

arc not being bid y other department or investment centers.

b) In order to determine the bid price for an employee a manager

must make a judgmental estimate of that employee's value.

Therefore a low degree of objectivity can be expected from

opportunity cost

c) The method is expensive to operative.

d) The method is likely to result in lowering the morale and

productivity of the employees who are not covered by the

competitive process.

4. STANDARD COST METHOD:

To avoid complication of calculation under replacement cost method,

the standard cost of recruiting, hiring, training and developing for each grade of

employees is developed and established and made up to date every year. The

standard cost calculated for all the employees is treated as the value of human

resources for accounting purposes. It is shown in the balance sheet on year-to-

year basis. In the case of new recruitments the standard cost related to the grade

of employees is increased. If the actual cost is more or less the standard cost,

the difference is transformed to the related account as per the policy of the

firm. The variance produced can be analyzed and they fom1 a useful basis for

control.

[58]
5. CURRENT PURCHASING POWER METHOD:

Under this method of taking the replacement cost to capitalize the

capitalized historic cost of investment in human resources is convetied in to

cunent purchasing power of money with the help of index number. If the index

number is double, the value of human resources is also considered to have

doubled. The converted value of human resources is to be amortized in rest of

years as per policy of the firm.

VALUE BASED MODELS :

The present value models use capital budgeting techniques to assess

human resources, the argument being that the value of fim1 's employees is

their discounted future earnings. Present Value methods are to measure

economic value rather than simply record investment in human resources at

historic or replacement cost.

Present value models seek to measure the value of human resources on

the basis of present value services to be generated by the employees of an

organi zation in future. The following two different ways has been suggested for

this purpose :

By discounting the future salaries and other capital costs (such as

costs incurred of hiring, recruiting, training and developing

employees) by a certain rate of discount, and

By discounting the future earnings of the organization at a certain

date by suitable rate and allocating a part of the value of earnings

to human resources.

[59]
 Based on this concept various valuation models developed are as under-

(i) Lev And Schwartz Model

(ii) Herma nso n 's Models

(iii) Stochastic Rewards Valuation Model

(iv) Jaagi And Lau Model

(v) Morse Model

(v i) Chakraborty Model

(vii) D asgupta Model

1. LEV AND SCHWARTZ PRESENT VALUE OF FUTURE EARNINGS

MODEL:

The model of measurement of human capital suggested by Baruch

Lev and Aba Schwarz is based on the economic concept of human capital.
4
The value of human capital is the present value of the future eamings of

peopl e till retirement. This model is also known as compensation model as it

considers employee compensation as the reasonabl e measure of indi v idu a ls

value to an organization.

Accordingly " the value of human capital represented by a perso n of age

"y" is the present value of his remaining future eamings from hi s

employment". Following fom1ul a has been suggested to quantify the value of

human capital -

Where Yy = the human capital value of a person y years old.

I( t) = the person's annual earnings up to the retirem ent.

R =a discount rate specific to the person.

T = retirement age.

[60]
 Because Yy is an expost value, gtven that I(t) is obtained only after

retirement and because Yy ignores the possibility of death before retirement age

they refined the valuation model as follows-

Where l(t) =the future annual earnings.

E(VT) = the expected value of a person ' s human asset.

Py =the probability of a person dying at age t.

According to Lev and Schwartz "the firm's labour force will be divided

into homogeneous groups of employees, such as unskilled as, semiskilled and

skilled employees, engineers of different kinds, sales man, managerial

staff etc. Average earnings profits, based on census data, will be constructed

for group and the present value of human capital calculated . The sum of

various employee groups will provide total human capital value associated with

the firms".

For example: the total number of employees in a concern is 500 and

their average earnings in different age group are as below-

Average annual earnings per

Age group
employee (Rs.)
25-34 5000
35-44 7000
45-54 8000
55-64 10000

Let us assume a discount rate of 12%. The value of human capital of the

unskilled employees will be calculated as follows-

[ 61 ]
 Let us assume that all the employment is 24 years old . Each perso n \viii

earn as follows-

Rs . 5,000 per year for the first 10 years.

Rs. 7,000 per year for the nextl 0 years.

Rs. 8,000 per year for the next 10 years.

Rs. 10,000 per year for the next 10 years.

The present value of this series of 40 yrs is calculated in the following

manner-

Annual Earnings Years Present value (Rs)

5000 10 5.650 282 50
7000 10 1.819 12733
8000 10 0 .586 4688
10000 10 0.226 2260
4 7,931

Value of human resource

= Total present value of an employee* number of employees

Rs . 4 7, 9 3 1 * 50 0

Rs. 2, 39, 65,500

MERITS:

a) This model provides inf01mation about the changes in the

structure of the labour force. Depending upon the rate of

growth in human capital one can say whether an

organisation has aging labour force or younger force. This

information can be useful if certain assumptions are correct

about the methods of determining wages and the correlation

between age productivity.

[ 62]
 b) Reporting the general and specific human resource values

indicate the fim1's recruitment and wages policy e.g. one

company pays more and keeps high quality labour. Thus

reporting general and specific values will prev ent

management from trying to increase profits in the shorts run

by hiring low quality employees which will be detrimenta l

to the firm's profitability in the long run .

c) The model represents an advance over Hermanson's

arbitrarily chosen five year period for valuation.

DEMERITS:

Though this method was found to be most famous and bein g used

very frequently by different organisations , it suffers from serious

drawbacks:

a) A person's value to an organisation IS not determined

entirely by the person inherent qualities, traits and skills but

also by the organisation rol e in which the individual is

placed.

b) The model ignores the employees change their roles durin g

their career due to promotion, transfer etc.

c) The model does not take into acco unt th e possibility and

probability of an individual leaving the organisation other

than death of an individual or retirement.

d) There is likelihood of subjectivity being associated with the

determination of the level of future salary, the length of

expected employment within the organisation and the

discount rate.

[63]
 e) The degree of objectiv ity to be expected is to be low and a

strong assumption for continuing of the organisation will

have been made.

f) It assumes that the remuneration of an employee as being

equal to his value.

3. HERMANSON'S MODEL:

Roger H. Hermanson has suggested two valuation methods for

calculating value of human assets namely, the un- purchased goodwill

5
method and the adjusted present value method. Both these concepts are

based on economic concepts of value.

3a) Hermanson's un-purchased Goodwill Model: In this model the

value of human assets of an organization may be calculated by cap itali z ing

earnings in excess of normal earnings for the industry or the group of

companies of which the finn is a part. For instance, the investment in concern

is Rs.5 lakh s. The nom1al earnings are 10%. The particular concern under

consideration is earning at the rate of 15 %.

The concern actual earnings

(5, 00,000 * .15) == Rs.75, 000

Less normal earnings

(5, 00,000 * .1 0) Rs .50, 000

Excess earnings == Rs.25, 000

The capitalized value of this value will be Rs .2, 08,333 (25,000 * 100

115). This value is called of human assets. It has been assumed by Hermanson

that the excess profit earned by the concern is due to the extra ability of

employees.

[ 64]
MERITS:

a. The relevant amounts are easy to extract in an unambi guous

fashion from the existing accounting records and so the method

produces a high degree of objectivity.

b. The method id designed to use the information contained in th e

existing records of the organization. Therefore the method is not

expensive to operate.

c. Calculations are based on actual earnings co mputed at the end of

each year and no estimates of future incom e are required to arrive

at the human asset values.

DEMERITS:

a. The method assumes that if a firm's actual rate of retum devi ates

favorably or unfavorably from the normal rate of retum for the

economy, the deviation is caused by the existence of above or

below average human resources. Thus thi s approach does not

assign a value to all human resources but only to those hum an

resources that are assumed to contribute to deviate from normal

earnmgs.

b. To determine econom1c value, future earnmgs are required but

the method relies on eamings of the previous year to calculate the

rate for the firm and the economy.

c. The method uses data from two sources such that from the firm

itself and from other firms in the same industry of economy, the

calculation cannot be completed until all the data are ava ilable .

( 65]
 d. Eamings for the previous year are used as surrogate for future

eammgs 111 order to determine economic value. The co n·elation

between past earnings and future eamings is not likely to be hi gh.

Therefore th e degree of reli ability achiev ed w ill be poor.

e. T he published results reports to the investor are in pati based on

· the results of other finns in the industry. Hence the informati on is

so intermingled in the calculation as to render it valueless as lead

type ofpredictor in the final repotied res ults .

3b) Hermanson's Adjusted Discounted Future Wages Model:

Hermanson introduced this method during 1964 6 . This model is based on

the assu mption that a relationship ex ists between a person, salary and hi s va lu e

to the organization. This model adjusted compensation value as a proxy of the

value of employee to a firm . Under thi s model compensation means the present

value of the future stream of wages or salaries to persons employed in a fim1.

The di scounted future wages are adjusted by an "efficiency ratio", whi ch is

th e weighted ave rage of the ratio of the return of specific period, normall y the

current yea r and the preceding four years. The weights are ass igned in a reverse

order such that hi ghest to the current year and so on in th e descending order of

years . In mathem atical equation it may be expressed as follows-

RFo the accounting rate of income on owned assets of the firm

for the current year.

[ 66]
 the average rate of accounting income on owned assets for

all fim1s in the economy for cunent year.

RF4 the rate of accounting income on owned assets for the fim1

for fourth preceding year.

the average rate of accounting income on owned assets for

all firms in the economy for the fouiih preceding year.

The following steps are involved 111 calculating the estimated present

value ofhuman resources:

Estimate the annual eammgs (waged and salaries) for the next

five years.

Calculate the present value of the future eamings by applying a

discount factor equal to the normal rate of retum in all firms

taken together.

The efficiency ratio is calculated by using the formula explained

above.

The total present value of future earnmgs 1s multiplied by the

efficiency ratio. The resulting figure represents the estimated

present value of human resources.

For example:

The valuation of human resources of an ABC company which has 79

employees and attempts to calculate human resource value after completion of

the year 2000 by adopting Hermanson's present value method of measuring

human resources is clear from the table ahead.

[ 67] .
 FUTURE WAGES PAYMENTS

%
Present
nse 2001 2002 2003 2004 2005
Grade No . salary
per Rs Rs. Rs. Rs. Rs.
Rs.
year
Senior Management 3 10,000 15. 0 11,500 13 ,22 5 15 ,208 17,490 20,114
Middle Manage ment 3 5,400 12.5 6,075 6,834 7,68 8 8,649 9,73 0
Supervi sory 13 19,900 10.0 21 ,890 24,079 26,487 29 , 136 32,050
Clerical and 60 70,100 10.0 77 , 110 84,82 1 93,303 1,02,663 1, 12 ,897
operative
79 1,05,400 1,16,575 1,28,959 1,42 ,686 1,57,938 1,74,791

DISCOUNTING AT 15%

Year Amount Rs. Factor Net Present Value (Rs .)

2001 1,16,575 1.000 1,16575
2002 1,28,959 .8 70 1,12 ,200
2003 1,42,686 .756 1,07,871
2004 1,57,938 .658 103,923
2005 1,74,791 .572 99,980
7,20,949 5,40,549

The Company's Efficiency Ratio:

15 13 _,12 10 10
=5-+4- +.)-+2-+-
12 11 10 8 9

18.188383
15
= 1.2125588

Value of human resources:

= 5, 40,549 8 * 1.2125588
= Rs.6, 55 ,447 (approx)

Journal entry:

Hermanson has suggested the following journal entry to reflect the

human asset value :

[ 68]
 Human resources Dr

To Future Wages Payable = 5, 40,549

To Excess Worth Created b y = 1' 14,898

Relatively Efficient Human Resources:

If the . efficiency ratio is less than 1, the value of the human resources

would be less than the amount of the future wages payable. In this case, instead

of recogni zin g an increase in equity (Excess worth created by relatively

efficient human resources), it would be necessary to recog ni ze an eq uity

decrease (reserve for future resource ineffi ciency).

MERITS:

b. The effici ency rati o measures the effectiveness of hum an

resources operating in a firm over a period of five years. A ratio

greater than 1 indicates that the average rate of retum for is above

the average rate fo r all firms in the economy and vice versa.

Hermanson has ass ured th at the perfom1ance of the fim1 was

entirely due to the efforts of empl oyees and not due to any other

extraneous cause.

DEMERITS:

a. The efficiency ratio is subjective

b. The valuation period of five years is without justification .

c. The weighting scheme used in computing th e ratio has no

theoretical or empirical justification.

[ 69]
 3) Flamholtz's stochastic rewards valuation model: The Flamholtz's

stochastic rewards valuation model 7 identifies the major variables which

determine the value of an individual to the organi zation. According to this

model a person generates va lu e for an organization as he occupies and plays

different roles and renders services to the organi zation. The movement of

people from one organi zational role to another is a stoch astic process. As

people move and occupy different organizational roles they render service

(rewards) to the organization.

Thus a person's expected realisable valu e of an organi zation can be

measured as the discounted mathematical expectation of the monetary worth of

the future rewards (services) a person is expected to render to the organi za tion

in future roles he is expected to occupy, taking into consideration the

probability of his remaining in the organi zation . The mod e l suggests a five step

approach to assess the value of an individual to the organi zation:-

Forecnsting the period a person will remam Ill the organization

that is his expected service life.

Identification of service states such that the roles he might

occupy and the time at which he will quit the organi zat ion.

Estimating the valu e derived by the organi zation when a person

occupies a patiicular position (service state) for spec ifi ed time

period.

Estimating the probability of occupying each possible mutually

exclusi ve service state at specified future times.

Discounting at a specified pre- determined rate the expected

service rewards to their present value.

[ 70]
 Prof. Flamholtz clarifies that an individual's expected realisable value is

determined by two factors:-

> The individual's conditional value, and

> The probability that the individual shall maintain his expected

service life.

The product of the two variables is the present worth of potential

services that are expected to be derived by an organization. The value in tum

consists of three factors that is productivity, transferability and promotability.

Productivity refers to the services an individual provides while,

occupying the present position.

Transferability refers to the set of services an individual is

expected to provide ifhe is tran sferred to a same position leve ling

a different department of the organization.

Promotability is a set of services an individual 1s expected to

provide at higher level position .

Further an individual' s conditional va lue IS determined by hi s sk ill

(cunently developed potential to provide services to an organization) and

activation level (the extent to which that the person is affected by motivation) .

In addition to the personal factors the organizational factors also influence the

conditional value of an individual. These are:

The role occupied perfonned by the individual within the

organization, and

Organizational rewards .

[ 71 ]
 On the basis of the above concept a person expected realisable value

to an organization can be calculated as the discounted mathematical

expectation of the monetary worth of the future roles he is expected to

occupy taking into consideration the probability of hi s remaining in the

organization. In the flamholtz model the value is determined by multiplying

the expected quantities of services of an employee in each service states in

the forthcoming period of time. The value of human resources of th e person

is ascertained by aggregating the present value of expected future services

of all employees for the period of time. And the expected se rvic es can be

estimated as the sum of the products of the services quantity expected to be

derived in each service state multiplied by the respective probabilities of

occurrence. The above formula can also be stated as follows:-

11 t 1RiP(Ri)
(R)=I - I

t=l (1 + r)

Where-

ICR) Expected realisable value

Ri = The valueR, to be derived by the organization in each

possible service state, i,

P(Ri) the probability that the organization will obtain Ri ,

time period

m state of exit

(I + rY = discount factor for money

[ 72]
MERITS:

a. This mod el is an improvement over th e Lev & Schwartz model

because it takes into acco unt the probabi lity of a perso n 's career

movement and of his leavin g the organi za tion prior to hi s

retirement or death .

b. The model is a composite mod el, which consists of both

monetary and non monetary variables. The monetary value of an

indiv idu al depends upon non mon etary variables . The model

links the competence of emplo yees w ith the reward system that

affects productivity and work sati sfacti on as we ll. T he variables

of promotability with help of statistical probability estimates to

determine the reali sabl e value of an e mployee to the organi za tion .

DEMERITS:

a. It is tremendously expensive way to predi ct exit probabiliti es or

career movem ents on an individu al bas is.

b. This model when applied fall short of a practical value because

probabilities will hav e to be determin ed for each individual

occupying various service states and these probab iliti es have to

determined for all emplo yees for " n" periods on an indi v idu al

basis.

c. There are many di fficulties in the application of this m odel such

as obtaining valid data regarding the value of service state, a

person's expected tenure and probabilities of occupying variou s

service states at a specified time .

[ 73]
 d. The predicting the stay or promotion chances of employees on an

individual basis involve large variance which reduces the

usefulness of model. Also the he model suffers from all those

drawbacks from which Lev and Schwartz's model suffers.

e. The model ignores the added value element of individuals

operating as a group.

4. JAGGI AND LAU MODEL :

8
J aggi and Lau 's model is based on valuation of groups rather than

individuals. A group implies homogenous employees who may not belong to

the same department or division. It might be difficult to predict an individual's

expected service tenure in the organization or at a particular level of position

but on a group basis it is a easier to ascertain the percentage of people in a

pa1iicular group likely either to leave the firm during each of the fmihcoming

period or to be promoted to higher levels.

In order to consider the role movement of employees within the

organization a Markov chain representation can be used. The model required

and the expected quantities of services for each rank of service. The matrix can

be prepared from the historical personnel records of the employees available in

the organization. For the purpose of measurement of quantities of services, a

ce1iain service or perfonnance criteria are used.

The value of the services an organi zation's current employee render a

future period is computed by multiplying the estimated number of current

employees that will be in each service state in that period by the value of the

services an employee in each state ( i.e. rank) renders to the organization.

[ 74]
 The equation for the computation of value of human resources of an

organization using Jaggi and Lau model is given below:

[TV] = [N ]I
n=l
r n [T Y[v]

[TV] = (N) r

[TV] column vector indicating the current value of all current

employees in each rank.

[N] Column vector indicating the number of employees

currently in each rank.

n Time period

r Discount rate

[Tt Rank transitional matrix indicating the probability that an

employee will be in each rank within the organi zation or

terminated in the next period given his current rank.

[V] = Column vector indicating the economic value of an

employee of rank during each period .

MERITS:

a. This model overcomes the .drawbacks of the Flamboltz's

stochastic Rewards valuation model because Jaggi and Lau have

suggested the group basis taking homogeneous group of

employees working in different department instead of the

individual basis for arriving at value of human resources .

b. On the group basis it is easier to ascertain the future period of

service, chances of promotion and those of living.

[ 75]
 c. In this model, it has been assumed that the pattern of movement

is likely to remain constant overtime; the probabilities determined

for one are extended to future period. Hence it ensures a

reasonable degree of objectivity.

DEMERITS:

a. The flamholtz's model is intended partly for use in maki ng

decisions about individuals. This feature is lost in Jaggi and Lau 's

model .

b. This model IS difficult to apply 111 practice because of the

difficulty in obtaining reliable data .

c. Also being a mathematical model, this model is more complex.

5. MORSE MODEL :

This model, popularly known as net benefit method has been

9
suggested by Morse. He suggested that the value of human resources is equal

to the present value of gross value of services to be rendered in future by

hum an beings both in an individual capacity as well as collective capacity

minus the present value of future payments (direct and indirect) to human

beings.

Pekin and Ogan in 1976 gave an approach, which was the extension of

net benefit approach of Morse. He introduced a certainty factor, to be

multiplied with net benefit of employees and then make the value of human

resource. According to him the value ofhuman resources is equal to the present

wm1h of certainty equivalent net benefits of all employees.

[ 76]
 Under this method two things are calculated-

~ The net benefits from each employee and

~ Certainty factor for getting the benefits.

The net benefits mean the difference between expected benefits and total

costs. The product of his monetary value benefits potential and his individual

performance index determines the expected benefits of an individual employee.

The certainty factor means the probability of the determined by assessing the

probability of continuation of the employee and the probability of survival of

the employee. The total cost means the total of the maintenance cost such that

future salaries and wages stari up costs, recruiting and initial training costs at

their historical vale and the future training and development costs. The net

benefits for all employees thus calculated is multiplied by their cetiainty factor,

which give certainty equivalent net benefits, which form the value of hum an
10
resources.

6. CHAKRABORTY MODEL:

In the context of Indian industry Dr. S.K Chakraborty has made

pioneering contribution by suggesting a model of value to of an organization.

According to him human resources should be valued in aggregate and

not on an individual basis. He divides the employees in two groups managerial

and non-managerial. To calculate the value of human resources the average

salary of the group is multiplied by the average tenure of employment of

employee in that group. The value thus obtained is discounted at the expected

average after tax return on capital employed over the average tenure period, so

that value of human asset does not fluctuate frequently.

[ 77]
 He further suggested that the recruitment, hiring, selection, development

and training costs of each employee should be recorded separately. They can be

treated as deferred revenue expenditure to be written off over the expected

average stay off the employee in the organization and the deferred potiion

should be shown in the balance sheet of the organi zation. If there is a

premature turnoff of the employee on account of retrenchment, death etc, and

then the balance on the defened revenue account for the year attributable to

that person should be written of against the income of the year of turnoff itself.

For disclosure he fmiher suggested that the assets to be included in the

balance sheet under the heading "Investments". And consideration of human

assets under fixed assets may cause problem of depreciation, capital gam or

losses etc.

7. DASGUPTA MODEL:

This model is popularly known as "total cost concept. In this model

Professor M. Dasgupta has valued HRA somewhat differently. According to

him total cost incurred by the individual up to that pmiion in the organization

should be taken as the value of a person, which is further, adjusted by his

intelligence level. The value thus calculated is revised from time to time on the

basis of age, performance, experience and other capabilities.

To clarify the concept of HRA, Prof Dasgupta has given the following

example -

Let us assume that a fim1 started a business with Rs.l, 00,000. It has

purchased fixed assets worth Rs.SO, 000 in cash. Rs.26, 000 is kept, as working

capital cost incuned on recruitment, training and development is 24,000 .The

value of human assets is calculated as 80,000.

[ 78]
 Balance sheet (including Human Resource)

Liabilities Rs . Assets Rs.

Capital 1,00,000 Fixed Assets 50,000
Hum an Resource Capital 80,000 Human Assets :
a. Individual's value 80,000
b. Value of fim1ly investment 24,000
Cunent Assets 26,000
I ,80,000 I ,8 0,000

OTHER MODELS:

1. Non monetary Model: Likert's Casual, Intervening and end result

variables model:

Likert's casual, interveni ng and end result variables model is an example

o 11 f an non monetary model. Non monetary models of human resource

accountin g are th ose w hi ch are dominated by behavioural variab les. This

model has been developed by Rensis Likert and David G. Bow ers of th e

Institute for social Research , university of Michigan, USA to arrive at the

value of human resources as a group to an organization.

The model ass umes that the organizational produ ct ivity can be exp lained

in terms of the hum an organi zation. It is comprised of three classes of variab les

"casual" , "intervening" and "end result" defined as under:

The casua l variables such as leadership styles, technical

proficiency level, managerial behaviour, organizational structure

are independent variables which can be directly of purposively

changed by the organization an d its management and which, in

tum determine the course of developments within an

organization.

[ 79]
 The intervening variables such as the loyalties, attitudes,

motivation, performance, goals and perception of all members

and their collective capacity for effective action , interaction,

communication and decision making reflect the internal state,

health and perfom1ance capabilities ofthe organization.

The end result variables such as its productivity, costs, scrap Joss ,

growth, share of market and earnings reflect the results achieved

by that organization.

The model clearly shows the interrelationships and feedback loops

between the casual variables , the intervening variable and the end result

variables. For example managerial leadership determines organizational

climate which in turn influences subordinate 'satisfaction and, consequently,

total productive efficiency. Time lag of two years or more often exists between

a change in casual in variables and the resultant changes in the end result

variables. The cycle is like this - casual variables affect intervening variables

which change end result ultimately affecting return on investment in individual

sand groups (called the investment variables)

According to Likert, a finn in which the casual variabl es display the

characteristic of participative management style will generate more effective

intervening variables and consequently more desirable end result variables.

Periodic measurements can be made of:

The behaviour of managers and supervisors and their level of

technical proficiency.

[ 80]
 The resulting motivation, loyalties and the behaviour of

subordinates and the control process of the division of profit

centers.

Their effects on performance can be meas ured and the statistical

analysis can be carried out of th e variation to find relationship .

MERITS:

a) The model is determined by the human actions and reactions. But

on the other hand this model based on non monetary variables has

vital influence on the monetary variables .

b) The accounting system described in the model is the best way to

potray the results of the human resource utilization for the benefit

of the organization .

c) The model is highly useful in the area of deci sion mak in g of

human resource. It helps in formulatin g policy to build lon g term

human resource capabilities.

d) The management planning and control area IS supplied with

additional source of infom1ation which may possibly gea r up

more operational efficiency leading to institution of more

pragmatic cost effective and end result oriented policy of human

resource development.

DEMERITS:

a) The questionnaire completed by members of organi zation forms

the basis of all subsequent calculations. The way in which

questionnaire is completed depends on the relationship between

the employee and the measurer. As a result the method is unlikely

over to produce a high degree of consensus among measures .

[ 81 ]
 b) On the completion of questionnaire the results require

interpretation. This needs subjective judgment by the measures

and so the degree of objectivity to be expected is low.

c) The assumption of linear relationship between casual , intervening

and end result variables after allowance for time lag effects that

the degree of reliability achieved by the method will be low

d) The method is expensive to operate as the measurement method

requires the education of employees to accept the new approach

without hostility. Personnel must be trained to operate the new

measurement procedures.

STATISTICAL BASED METHOD:

According to this method of human resources, no accounting is involved

but descriptive information containing statistics about human resource are

collected, used and presented. These may take the form as follows:

I. Monthly statistics on:

a. Recruitment cost

b. Selection cost

c. Training cost

d. Special development programme cost

e. Workers education programme cost

f. Auxiliary cost such as medical, canteen and other fringe benefits.

II. Total human resources investment analyzed into :

a. Personnel - officers, staff and workmen

b. Department wise

c. Expenses category wise

[ 82]
III . Periodical changes in human resources investment :

IV. Statement of contribution factor separately for officer, staff and workmen.

V. Statement on human resource cost coefficient (human resource investment

+ human resource current cost) separately for officers, staff and workmen.

VI. Times rate of return analysis

VII. Statement of per capita human resource investment for all categories and

also separately for officers staff workmen .

VIII. Age wise service states .

IX. Monetary value for service states.

X. Age wise analysis of human assets .

XI. Statement of human resource perfom1ance index showing separately for

officers, staff and workmen and also total.

XII. Statistics on employee turnover.

XIII. Any other statistic relevant to the organi zation .

[ 83]
 REFERENCES
1
Brummet, R.L., Flamholtz, E.G., Pyle, W.C., 1968, "Human Resource Measurement:
A Challenge for Accountants", Accounting Review, pp. 2 17-24 1.
2
Flamholtz, E., 1971 , "A Model for Human Resource Valuation: A Stochastic
Process with Service Rewards", the Accounting Review, pp. 253-67.
3
Hekimian,JamesS .amd Jone, CurtisH ., "Put people on your Balance Sheet",
Harward Business Review, I an- Feb., 1967 ,pp .1 05-113
4
Lev, B., Schwartz, A., 1971, "On the Use of the Economic Concept of Human
Capital in Financial Statements", The Accounting Review, pp. 103-12.
5
Hem1anson. R .H., 1964, "Accounting for Human Assets", Bureau of Business And
Economic Research, Michigan State University, East Lansing, Mi. pp.9-1 0.

r, Hem1anson . R.H. , 1964, "Accountin g for Human Assets", Bureau of Business And
Eco nomic Research, Michigan State University, East Lansing, Mi. pp. 9-10.
7
Flamholtz, E., 1971, "A Model for Human Resource Valuation: A Stochastic
Process with Service Rewards", the Accounting Review, pp . 253-67 .
8
Jaggi, B. , Lau , S., 1974, "Toward A Model for Human Resource Valuation" , the
Accounting Review, pp. 321-9.
9
Morse, W.J., 1973, "A Note on the Relationship between Human Assets And
Human Capital", The Accounting Review, pp. 589-93.
1
° Chakraborty, S .K., Topics in accountin g and finance, Oxford U ni versity press,
Delhi , 1976, pp. 397
11
Rensis Likert and William C. Pyle, "Human Resource Accounting: A Gunman
Organisation Measurement Approach", financial ana lyst Joumal , Jan.- Feb,
1971.

*****

[ 84]