CHAPTER - 3. Review on the Evolution of Human Resource Accounting

Transcription

1 CHAPTER - 3 Review on the Evolution of Human Resource Accounting

2 REVIEW ON THE EVOLUTION OF HUMAN RESOURCE ACCOUNTING: This chapter deals with the conceptual design and the mode of reporting organizational human resource value to the interested parties. The valuation models based on various cost concepts and economic value concepts are reviewed from a historical dimension. The following paragraphs provide brief explanations and critiques of the major works on human resource accounting proposed by Hermanson1 Likert2, Hekimian and Jones3, Brummet, Flamhotz and Pyle4, Lev and Schwartz5, Flamhotz6, Giles and Robinson7, Morse8, Jaggi and Lau9, Sadan and Aurbach10, Friedman and Lev11, Myers and Flowers12, Mahoney, Milkovich and Weiner13, La Pointe14, Elias15, Hendricks16, Acland17, Schwan18, Rhode, Lawler III and Sundem19, Tomassini20, Sinclair21, Pekin Ogan22 Hermanson - un purchased Goodwill Model: Based on the conventional accounting principles of Goodwill, Hermanson (1964) has suggested this method of computing human resource value of the organization. In the traditional accounting practice, goodwill is treated as an intangible asset and is shown in the Balance Sheet as an asset. Human Resource Value is computed by capitalizing earnings of the unit and is compared to the average normal earnings of the specific industry. The excess of normal earnings of the unit as ascertained by the comparison will be treated as Goodwill. 63

3 The underlying assumption is that the portion of the goodwill is the result of human resource contribution. H.R..Value is computed by.. HR value = Investments in HR Goodwill X Investments in total assets This method of computing HR value is historically based and it assumes that goodwill calculated on a particular period of time is based on additional profits, in comparison to the industry average is the direct result of investments in HR and its relationship to Investments in total assets. This model of computing HR value does not take in to account the external factors, which influence the increase or decrease in the profit of the organisation. Thus, a new beginning was made by Hermanson in attempting the valuation of HR to the organization. Adjusted Discounted Future Wages Model: Subsequently, Hermanson modified the computation of HR Value by discounting the future remuneration payable to the employees with an adjustment using an efficiency ratio. The HR value is computed on the basis of the likely future remuneration payable to the employees for the next Five years discounted at the adjusted rate of return on HR. 64

4 Adjusted rate of return is equal to the average rate for the economy multiplied by the efficiency ratio. Efficiency Ratio is computed through the following equation: 5(RF0) 4(RFi) 3(RF2) 2(RF3) 1(RF4) v. (REo) (REi) (RE2) (RE3) (RE4) 15 where RF indicates rate of return of the firm RE indicates rate of return for all firms in the economy. This method of computing HR value of the organization has the similar limitations of the unpurchased Goodwill method. The use of averages and assigning weightage in arriving at efficiency ratio is viewed as subjective by the researchers and professionals. Likert Likert (1967) has suggested a new dimension to the concept of human resource accounting. He developed a conceptual model that imbued a number of variables to be measured to ascertain the productive capacity of an organisation. Likert observed three factors, which ultimately influence the productive capacity and profitability of an organisation. He refers it as: i) Causal variables ii) iii) Intervening variables End Result variables 65

5 The casual variables are independent variables, which decide the quality and productive capacity of the human organisation that influence the course of developments within the organisation. These include organisation structure, leadership strategies, management skills, management policies and practices. These can be altered or changed by the management to suit the requirements. The intervening variables are the set of factors, which determine the organisational climate, subordinates satisfaction, employee attitude, and the capacity for effective communication. Intervening variables are influenced by causal variables. The End-result variables are the dependent variables, which correspond to the organisational attainments. End-result variables are to a great extent measurable through conventional accounting practices. These include cost of production, waste, scrap value, sales and profits. Thus, Likert's model is based on measured relationships among three groups of variables. Organisational success and higher level of performance is based on the interplay of these three variables. The current value of a firm's human organisation is estimated through measuring the causal and intervening variables. For measurement purpose, he recommended the application of psychosocio metric questionnaire technique along with the investments made by the organisation on its Human Resource. Thus, the net worth of an organisation is "the present value of contributions employees make 66

6 over their service life less costs incurred in acquiring, developing, maintaining and utilizing their service". Likert's model provides useful information about the present and the expected future attitudes and the level of subordinate satisfaction of a firm's human resource. It relies heavily on statistical analysis of the psycho-socio metric questionnaire results. Heavy reliance on statistical analysis and the interwoven characteristics of the variables hindered the use of this model. Still, Likert provided a new dimension to current thinking on human resource accounting. Hekimian and Jones Hekimian and Jones (1967) have suggested the method to value HR to the organisation through the concept of opportunity cost. They developed "the competitive bidding model" on certain conditions and procedures. The major conditions to be fulfilled are: The organizations must have at least two or more profit centers with specific responsibilities. There is a mutual demand for the services of the scarce human resource. Profit center managers constantly evaluate the performance of the organisational resources in terms of return on investment and performance appraisal. The suggested procedure: Recognising profit centers within the organisation. 67

7 Identification of the assets - both physical and human, being utilized by each profit center. Physical assets are measured at current economic value. The human assets are valued by the maximum bid price quoted by the profit center managers. Maximum bid price quoted depends on the maxim "the value of an asset is determined when there exists alternative uses". Profit center managers bid for the services of valuable employees belonging to various divisions. The maximum bid price is considered as the value of an individual employee. It represents the estimated current equivalent of the optimum use of the individual employee services within the profit center. This approach is useful in optimal allocation of personnel within the organisation. It provides a quantitative base for planning, evaluating and developing employees of the organisation. It reveals only a partial view of the human organisation based on bidding process. Total valuation of HR of the organisation in this method may not be accurate. Still, an attempt is made to ascertain the value of HR by using opportunity cost method. Brummet, Flamholtz and Pyle Brummet, Flamholtz and Pyle (1968) have suggested a procedure to value HR on the historical cost concept. This approach of valuation is in tune with the physical asset valuation. The essence of the valuation model suggested by them is based on following assumption. 68

8 When an employee is recruited by a firm, he is employed with the expectation that the returns from him will exceed the cost of acquisition, formal and informal training, Familiarisation, and Development. HR value is computed after taking in to account the cost incurred on recruitment, selection, training and development. Accumulated costs are amortised over the expected benefit period of such cost outlay. Expected benefit period (Expected Service life) of an individual employee is ascertained through: a. Multifactor attributes like age, marital status, tenure of service with in the organisation and the level of Job satisfaction with the weighted probability of continuation in service, and b. Actuarial assessment for the given period. This method fulfills the accounting concept of matching cost and revenue. In this method proper record of expenditure made on acquisition, formal training and development of an employee is maintained. Amortisation schedule is maintained to ascertain whether the expected benefit service is lower or greater than the original. R.G. Barry Corporation Head Office in Columbus, Ohio (USA) adapted this system of measuring its HR value. Likert, Pyle, Brummet and Flamholtz were associated in designing Human Resource accounting system for this corporation. The preparation of amortisation schedule, rate of amortisation and the estimated years over which the accumulated costs to be amortised are the serious questions raised against this valuation model. 69

9 The collective work of Brummet, Flamholtz and Pyle resulted in considering historical cost as a basis to match the cost and revenue of HR to determine the HR value needs appreciation. Lev and Schwartz By taking in to account the economic concept of human capital, Lev and Schwartz (1971) have proposed this model. Capital is defined by them as "a source of income stream; and its, worth is the present value of future income discounted by a rate specific to the owner of the source (or to the potential buyer)". through Human Resource value of an organisation is thus computed V*=X 1(0 (1 + r)-y where V = the human capital value of a person n years old 1 (t) = the persons annual earnings up to retirement T = retirement age r = discount rate specific to the person At the organisational level, Human Resource Value is ascertained through the following method: Categorising employees according to their age, grade of pay, and designation. Ascertaining the average annual earnings per employee in each category viz. the earnings profile. Computation of total earnings for the remaining tenure of service with in the organisation viz. expected service. Discounting the total earnings on the rate determined by the organisation. 70

10 To incorporate the possibility of death occurring prior to retirement, the authors suggested the following modification: where e(v )=Xp,M) V l = V 1/* (i + ry-y E(Vk ) = Expected value of a person Y years old T = person's retirement age Py (t) = Probability that a person dying at the age t li* = Expected earnings of the person in period 'i' r = discount rate specific to the person This model provides a method to value the employees belonging to the organisation on the basis of clear-cut distinctions like age, salary, expected service and the tenure of service till retirement. This model heavily relies on expected service and economic concept of human capital. As earnings streams are discounted at a specified rate, any alterations or modifications in the rate of discount or salary structure or age of retirement will have a serious implications on HR value. Thus, Lev and Schwartz provided a new direction in valuing HR through the use of economic concept of human capital. Flamholtz To measure HR value of the organisation, Flamholtz (1971) formulated stochastic Process with Service reward model. This model traces the movement of individuals in different positions within the organisation. 71

11 A person's value to an organisation depends upon the positions held by him in the organisation is the essence of this model. An individual creates value to an organisation as he moves to different positions in the organisation. This movement of employees from one position to another in the organisational hierarchy is referred as stochastic process. As they occupy different service states (designation) they reward (service to) the organisation by contributing to the organisational objectives. For the purpose of implementing the model and making it feasible to the organisation he suggested the following method: 1. Determining the exclusive service states (designations) that an individual will occupy in the organisational hierarchy. 2. Ascertaining the value of each service state (position) to the organisation. 3. Estimating the total tenure of service of an individual in the organisation. 4. Projecting the probability that an individual will occupy each service state(designation) at a stipulated time. 5. Using an appropriate discount rate to ascertain the Expected realizable value. Mathematically, it is determined as: E(RV) = t=\ m +/>(*,-) i=i (1 + r)' 72

12 Where, n = Value that can be derived by the organisation in each possible service state i. P(Ri) = Probability that a person will occupy state i m = State of exit. n = Number of years an employee is expected to stay in the organisation t = time r = appropriate discount rate It is a very comprehensive model, which takes into account individual employee's movement in the organisational hierarchy. It even attempts to value the service states (positions) and the value of an employee in terms of his reward to the organisation. It tries to ascertain the probability that an individual will reach the various service states through fulfilling the promotion criteria. Subjectivity of the probability estimates and the values of service state (designation) and the rewards to the organisation limit the application of this model. The creative work of Flamholtz is an attempt to determine the realizable value of HR to the organisation. Giles and Robinson Human Asset multiplier method of valuing HR was advocated by Giles and Robinson (1972). They argued that the Goodwill of a firm in 73

13 terms of super normal profits is the result of the efforts of the employees. The total value of HR to the organisation is the difference between the value of goodwill of the firm as calculated through "relative price earning ratio" of the firm, and its comparison to the industry average. This comparison reveals the surplus which reflects the HR value of the organisation. To ascertain the individual or group values, the concept of multipliers has been introduced by the authors. An employee multiplier factor reveals the level of job skill, level of motivation, level of initiative and attitude. In this method, multipliers are designed on the basis of cost of wages and salaries paid to the employees and its relation to asset value is established. A broad division of employees into following categories are made: Senior management Middle management Supervisors Clerical and Operative staff The total remuneration payable for each categories of employees is multiplied by their respective multipliers factor. Mathematically, nj i=n 74

14 where Ham = Human Asset Multiplier nj = being the number of employees in group (j) (m)ijf = factor of an employee(i) of group (j) and its total (t) In this method^ authors used the goodwill concept and the overall industrial average. The difference was attributed to HR value. Multipliers factor was introduced to consider the psychological aspects like initiative, attitude and skill. In this method of valuation, external factors which determines super normal profits is not taken in to account and the determination of multiplier factor leads to subjectivity. The work of Giles and Robinson is an attempt to measure HR to the organisation through Goodwill concept and behavioural approach. Morse's Model of Human Resource Valuation The Human resource valuation model proposed by Morse (1973) takes in to account the intricacies in the value of human assets to the organization vis-a-vis the present value of human resources less present value of payments to employees. Morse suggested the formula for computing the value of HR to the organisation in following terms! X(t) 1(0 J n + rv"- Jfl + rf' - J.V T A = y f -QlL-j, + r_ w,* _ y f,=1' (1 + 0 (1 + 0 trra + o' dt 75

15 where A N T m E,(t) G(t) x(t) r value of human assets to a formal organization; number of individuals currently employed by the organization; current time; highest time at which an individual currently employed leaves the organization; net value of the services rendered by individual i at time t to the organization, Ii (t) = Gi (t) -E, (t); all direct and indirect compensation given to an individual i at time t by the organization; gross value of services rendered by individual i at time t to the organization ; value of the sendees of all individuals currently employed and working together in excess to the value of their individual sendees at time t; and time value of money. The computation process of assessing HR value to the organisation under this model relies heavily on HR valuation model suggested by Flamholtz. Morse considered the stochastic dimension in the valuation, with additional variables like gross value of services rendered and all direct and indirect compensation paid to employees. Thus, the HR valuation by using the formula propounded by Morse is more elaborate and complicated. This elaborate procedure and the complicated mathematical processes has prevented the popular use of this model. 76

16 Jaggi and Lau Jaggi and Lau (1974) have suggested this model of valuing HR to the organisation. Instead of ascertaining the individual value, they have attempted the group valuation. Employees working within the organisation are classified into a number of homogeneous groups. The economic value of such homogeneous group of employees will be ascertained through their expected service available to the organisation. Present value will be determined by discounting at a specified rate. Instead of determining individual career progression in the organisation, this model looks into the movement of homogeneous groups within the hierarchy of the organisation. They have used Markov Chain technique to ascertain the career progression and the probability of the employees within the homogeneous group leaving the organisation, either due to retirement or due to death. In determining the group value of HR, Rank Transitional Matrix is computed along with the expected service states of the homogeneous group of employees. While drawing the matrix, historical personnel records are consulted. Similarly, projections are made to ascertain the expected service tenure of an employee staying within the organisation. Projections are based on certain set of performance criteria. HR value to the organisation is computed through, [TV]=[NJ.Irn.[T]n[V] 77

17 Where, TV N n r T V column vector showing the current value of total employees in each rank. column vector revealing the number of employees currently holding the rank time span rate of discount rank transitional matrix which indicates the probability of employees in the homogeneous group in the specified rank or leaving the organisation in a future time in the specified rank column vector showing the economic value of group of employees of rank T during each period. This model tries to consolidate the movement of group of employees within the organisation based on past records. Rank Transitional Matrix that is an estimate of the probabilities of homogeneous group's career movement considers both historical records and projections for future. Reliability on the estimates of career movement of the homogeneous group of employees within the organisation, to an extent limits the subjectivity of the valuation of HR. It is a complex model tested statistically through the use of Markov Chain. Limits of Markov Chain is attributable to this model. 78

18 This study has qualitatively contributed for HR valuation through using a particular statistical technique. Sadan and Auerbach Sadan and Auerbach (1974) have suggested this model of valuing HR of the organisation. HR value of the organisation is the function of expected benefits accruing to the organisation. They advocated through their model that cost expended on HR is based on the assumption that HR contribution will be greater than its acquisition cost. Method: To ascertain the HR value of the organisation, total work force of the organistaion is divided into six possible service states like unskilled and semi skilled workers, skilled workers, clerical staff, supervisory staff, middle managerial staff and senior managerial staff. It is represented as employee distribution vector. To determine the movement of employees from one service state to another, they suggested the preparation of transition probability matrices for each employee. In the transition- probability matrix a provision is made for the exit state. It symbolises the employee moving out of the organisation. To compute the present value of HR based on the expected future returns, they proposed the computation of estimated mean annual 79

19 salary of all employees in each service state. It is represented in the form of estimated mean salary vector. Mathematically, where, v = ^ ANo, (RSo,) h, (1 + DCo,) ANot = Employee distribution vector for different service states. RSot = Estimated mean salary vector for all employees. DCot = Cost of capital V = Represent the computed HR Value This method of HR valuation is deeply influenced by the concept suggested by Lev and Schwartz and Flamholtz. Additions are made by the authors to include the exit state and the use of Transitional Probability matrix and Employee distribution vector. Authors indicated the use of this model for effective manpower planning. Transition Probability Matrix together with Employee distribution Vector for different periods reduces the subjectivity in forecasting. Heavy reliance on quantitative techniques to arrive at the value of HR has restricted its use. Complexity in computation is also a limiting factor. Through this model, Sadan and Auerbach have made a valuable contribution by incorporating mathematical tools in computing HR value. 80

20 Friedman and Lev The H R valuation model suggested by Friedman and Lev (1974) is based on the economic theory of human-capital. The valuation method takes in to account the firm's /organization's investment in HR and the existing market wage relationship of the selected industry average in a given period. Thus, the difference in the firm's actual wage structure and the average wage rate prevailing in the relevant labour market is considered as the HR value. Friedman and Lev attributed the personnel policies of the organisation as the cause for the difference in values. The value of human resource investment is determined by discounting the series of wage differentials over the expected service life of current employees of the firm. This HR valuation model suggested by Friedman and Lev provides information about the HR investment in the form of salary paid to employees in a given period in comparison with the industry average wage structure. The difference in the value of firm's payment to the HR and the average industry payment ultimately determines the HR value of the firm. Thus, this model of computing HR value recognizes the firm level payment to HR and its difference with the industry average. The net difference in the values is the firm's HR value. The investment made by the firm on HR thus reflects in the form of contributions made by HR to the organisation. 81

21 Myers and Flowers Five Dimensional Model of Human Resource Valuation The valuation model proposed by Myers and Flowers (1974) identities the five dimensions inherent in the HR of the organisation. These are classified as knowledge, skills, health, availability and attitude. These five dimensions are factorial and not additive in nature. The lack of any one or more dimensions will affect the over all performance of the HR and to that extent overall contributions of the HR proves to be ineffective. In this model, the performance of an employee is the function of the variables like knowledge, skill, health availability and attitude. The variables are mutually interrelated and attitude as a variable is significantly important in yielding the results. The model depends on the use of attitude score and their respective weights to compute an attitude index collectively for the group of employees. The sum of the attitude index and the annual salary is the total value of the employees and the difference between the computed value and annual salary is regarded as the gain or loss arising out of the individual's continued employment within the organisation. The major drawback of this model is the dependence on psychological measurement and the conversion of the attitude scores in to the monetary values. This model is based on the complex calculations of converting the attitude scores and the value determination through annual salary paid to the employee's. The whole process proves to be 82

22 expensive and time consuming in the real world situations. The information generated by this model is more beneficial to the internal management than to the external investors. Due to these factors, this model is not used for the HR value disclosure by the companies. With all these limitations, the model suggested by Myers and Flowers is a contribution to HRA literature in the sense that they used psychological parameters like attitude index in value determination. Pekin Ogan's Model In this model, Pekin Ogan (1976) comprehensively covers the concept proposed by Flamholtz and Lev and Schwartz and suggests the incorporation of additional variables in the value determination of organisational HR. The model takes in to account the effects of cost and benefits arising out of the investments in HR. Pekin Ogan refers this approach as " Value-oriented quantification approach". HR value is computed through the following formula n L-t 1 Kki + ryrvqj Kkj Vqj L J r where = total adjusted net present values of human resources in a professional service organization. = certainty-equivalent net benefits. = the estimated useful life of the employee for the organization. = j th individual j= 1,2...n. = a discount rate external to the organization (risk-free). 83

23 K = time periods in the future. Revenues and costs are-assumed to occur at the end of kth time period, t = some time period from 1 to L which is a point in the useful life of the employee to which the certainty-equivalent net benefits that occur after t are discounted. Through this model, Pekin Ogan presents a new methodology of computing HR value to the organisation. This model considers the net benefit stream arising out of each employee in an organisation and also the probability that the employee will continue in the organisation. For value determination "Certainty factor" and "adjusted net present values" are considered. Certainty factor is designed to measure the probability of continued employment and probability of survival. Adjusted net present value recognizes the employee's expected benefit and total cost. The HR valuation model proposed by Pekin Ogan is definitely a comprehensive model, which includes cost and benefits and also the probabilistic-certainty factor. With these two variables being incorporated in the value determination processes, the process of computation has become very complex. From the implementation point of view, this model is not popularly accepted by organisations for the reason of computational complexity. From the point of contribution to the knowledge in the area of measurement of HR to the organization, it is a significant proposition. 84

24 Elias: The study undertaken by Elias focused on the impact of Human Asset information on decision-making. Target group identified for the study were certified Public Accountants, Certified Financial Analysts and Financial Analysts. The Hypothesis was tested through y} (Chisquare) and contingency Co-efficient C for measuring relationship and its significance between dependent variable and independent variable. His study revealed that the inclusion of Human Asset information in financial statement do result in the investment decision by stock investors. This study indirectly supported the disclosure of HRA in the financial statements. Derek Acland: The study by Derek Acland analysed the effects of the Human Resource Indicators by the financial decision-makers. The subjects for the study were randomly selected. He chose Financial Analysts, who were the members of Society of Financial Analysts, Canada. His study indicated that the human resource indicators do influence the decision behaviors of the subjects chosen for the study. The test proved that the provision of Human Resource indicators did cause significant change in the investment decision of the Financial Analysts. 85

25 disclosure. The study by Derek Acland also enhanced the utility of HRA Hendricks: Further study by Hendricks concentrated on the impact of Human Resource Accounting Information on stock investment decisions. The target group for this study was surrogate investors. His analysis proved that stock investment decision was affected with the addition of HRA information to conventional Accounting. Indirectly this study proved that HRA can be additional information to be supplied to external entities for decision-making. It also proved that providing additional information on HRA enriches the quality of Financial Statements. Schwan: The empirical study was conducted by Schwan on the effects of Human Resource Accounting Data on Financial Decisions by the Bankers. Schwan used non-parametric Mann-Whitney U test for data analysis. His study established a positive link between the provision of HRA along with the financial statements. Tomassini: Tomassini conducted the impact of Human Resource Accounting Information on managerial decision preferences. The target group identified for the study was surrogate mangers selected on a random basis. The study focused on personnel layoff decision. The analysis was undertaken by using t-statistic to compare the two mean values. The result of the study proved that Human Resource Accounting 86

26 Information supplied to them influenced managerial decision preference. In the above said studies there is a positive indication for the use of HRA information along with the conventional financial data. The major drawbacks of these studies are that the target group selected for the study was professional and bankers. As the professionals are more analytical in decision-making, the results of the study cannot be generalized. All the studies proved the utility of HRA as additional information will be useful to decision making by the external entities. Mahoney, Milkovich and Weiner: The study by Mahoney, Milkovich and Weiner considered the use of management Information System and the use of Index and Ratio's to monitor HR activities. The focus of the study was more on management and control, rather than on value disclosure. The Gain Index, Loss Index, Growth Index and Retention Index are the helpful tools for the management to take appropriate managerial decisions. Lapointee: Further study was undertaken by Lapointee on effectiveness of Human Resource Management activities. Lapointee suggested performance indices and Turnover ratio's to measure the effectiveness of employees and the HR department. Sinclair: Sinclair argued for Human asset accounting as an aid to decisionmaking. To prove his proposition, he suggested a more sophisticated measure - residual income concept and the new performance evaluation 87

27 system. The suggested performance evaluation system is based on using residual income and capitalizing human resource cost. Rhode, Lawler III and Sundern : The researcher^ critically assessed the impact of HRA and its implications on HRM. They suggested the use of HRA as additional information for decision-making.their arguments are for strengthening HRA as a managerial tool. Suggested model for open validation: The units (Infosys and B.H.E.L) under study disclosed HRA in tune with the current trends in the financial reporting. The top management support and leader initiatives are the major factors in HRA disclosure in their annual reports. Having observed certain limitations in the Lev and Schwartz model(chapter III) used by the units under the study to disclose HRV, the researcher suggested the following Human Resource Worth (HRW) model for the scrutiny of the decision makers and for validation. The suggested model is the outcome of the review of literature, which prompted the researcher to suggest a new model. Non-acceptance of the suggested model as a policy issue (though considered to be a viable model), made the researcher to leave the model for open validation. Design: The suggested model is an attempt to overcome the observed limitations in Lev and Schwartz model (Chapter III). 88

28 Heavy reliance on expected service is taken care in the new model through incorporating both work experience value on historical cost basis and expected service value based on projecting the monetised performance appraisal in the form of increment payable to the employee. Value adjusted rate in the proposed model is a comprehensive rate which recognizes the cost of capital, attrition rate and the actuarial rate as decided by the management. As both the components of past performance based on salary and the expected service value projected on the basis of monetised performance appraisal ratings, the observed limitation of the impact of increase or decrease in the salary structure is duly considered. The suggested model summates the categories of employees on cadre basis with in the organization to assess the worth of Human Resource. The valuation method is based on the simple mathematical summation with limited variables. Mathematically, HRW = (ank + bnk)vr k=l L."^1 Where l is the number of categories mic is the number of persons in the kth category ank is the Work Experience Value (W.E.V) of the mk* person bnk is the Expected Service Value (E.S.V) of the mkth person Vr is the value added discount rate 89

29 Expanded Version mi m2 HRW = I (anl + bnl)vr + Z (an2 + b 2)Vr ni=l n2=l (1) (2) m3 ml + E (an3 + bn3)vr S (3nL + bnu)vr n3=l nl=l (3) (4) (1) Represents maximum number of persons in 1st category (2) Represents maximum number of persons in 2nd category (3) Represents maximum number of persons in 3rd category (i) Represents maximum number of persons in 1th category Further Details: W.E.V = takes into account the historical cost to ascertain the value. The amount paid till the end of the Financial Year is considered. No adjustment is made about the Tax or other deductions made voluntarily by the employees. Emoluments include the perks and ex-gratia payments made as per the records. E.S.V = is the projected value of the employee based on past performance. It recognizes the performance appraisal ratings used to determine the increment / incentives and the assumption that the employee will remain in the organization. Vr = a comprehensive discount rate decided by the management after considering the general cost of capital, attrition rate of the specific industry and actuarial rate. The suggested model is the outcome of the studies on HRA from the historical dimension and an attempt to measure the worth of organizational HR. 90

30 References 1 Hermanson, Roger H., "Accounting for Human Assets", occasional paper no.14, Division of Research, Graduate School of Business Admn., Michigan State University, Mchigan, 1964, pp Likert, Rensis., The Human Organisation: Its management and Value, Me Graw-Hill Book Company, New York, 1967, pp Hekimian, James S., and Jones, Curties H., "Put people on your Balance Sheet, Harvard Business Review, Harvard, U.S.A. January/February 1967, pp Brummet R.L., Flamholtz, Eric. G., Pyle W.C., "Human Resource measurement - A challenge for accountants" "The Accounting Review, April 1968, pp and Pyle William C: "Human Resource Accounting" Financial Analyst Journal, Sept-Oct, 1970, pp Lev, Baurch and Schwartz, Aba; "On the use of economic concept of human capital in Financial statements", The Accounting review, Jan, 1971, pp Flamholtz, Eric G.,"A model for Human Resource valuation: A stochastic process with service rewards" The Accounting Review, April 1971, pp and Flamholtz, Eric G., "Toward a theory of human resource value in Formal organisations " The Accounting Review October 1972, pp Giles W.J. and D.F. Robinson, "Human Asset Accounting" Lawerence - Allen, Great Britan, 1972, p Morse, Wayne J: A Note on the Relationship between Human Assets and Human Capital, Accounting Review, July 1973, p

31 9 Jaggi B and H.S. Lau, "Toward a model for human resource valuation" The Accounting Review, April pp Sadan S.S. and L.B. Auerbach, "A stochastic model for Human Resourcea Valuation" California management Review, Summer 1974, pp Friedman A and Lev B., "A surrogate measure for the Firm's investment in Human Resources "Journal of Accounting Research, Autumn, 1974, pp Myers M.S. and Flowers V.S., "A Framework for measuring Human Assets" Calfornia Management Review, Summer 1974, pp Mahoney T.A., Milkovich G.T. and Weiner N., "A stock and flow model for improved human resources measurement", Personnel, May/June, 1977, pp Lapointee J.R., "Human Resource Performance Index" Personnel, July, 1983, pp Elias, N.S., The effects of Human Asset statements on the Investment Decision: AN experiment, Empirical Research in Accounting: selected studies, university of Chicago, Chicago, 1972, pp Hendricks, James, A., "The impact of Human Resource Accounting Information on stock investment Decision", The Accounting Review, American Accounting Association, April, 1976, pp Acland,D., "The effects of Behavioral Indicators on Investment Decisions: An Exploratory study, Accounting, Organisations and Society, Feb/Mar, 1976, pp Schwan, E.S., "The Effects of Human Resource Accounting Data on Financial Decisions": An empirical test, Accounting Organisations and Society, Feb/Mar, 1976, pp

32 19 Rhode, J.G., E.E. Lawler 111 and G.L. Sundem, "Human Resource Accounting: A critical Assessment", Industrial Relations, Feb, pp Tomassini, L.A., "Assessing the impact of Human Resource Accounting: An Experimental study of Managerial Decision Preferences'"!^ Accounting Review, October 1977, pp Sinclair,K, "Human Asset Accounting as an aid to decision-making" Accountancy, March, 1978, pp Pekin Ogan,: A Human Resource Value Model for Professional Service Organisation, Accounting Review, April 1976, p