CHAPTER -3-AN OVERVIEW OF MODELS OF HRA

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1 CHAPTER -3-AN OVERVIEW OF MODELS OF HRA Summary In this chapter the researcher has moved further with the analysis of secondary data. In this chapter researcher has classified the various models of HRA. Also in this chapter researcher has discuss the comparison of HRA models and lastly chapter wind up with conclusion..

2 3. AN OVERVIEW OF MODELS OF HRA It is widely recognized that human resource are no lesser important than other productive resources. However the recognition of importance of people in organizations as productive resource by the accountants is a recent origin. 1 In conventional accounting practices, human work force, a core element, did not find its place. The costs incurred in respect of attainment, selection, layoff, training, elevation and development etc. of employee are treated as revenue expenditure which yield benefits to an enterprise in the form of service rendered by the manpower and such expenditure should be quantified as well as capitalized and shown in the balance sheet. But the managers failed to recognize and treat them as assets in the financial statement. 2 In 1960 s it was the behavioral scientists attacked the conventional accounting practice for its failure to value the human resource of the organization along with other productive resource and released that this was a serious gaps for effective management. As a consequence, valuation of human resource has received extensive recognition. In the course of time a so many accounting models have been developed to value and report human resource of an organization. All Most model involves capitalization of human resource and recording them as investments. 3 A few models have been doveloped from time to time for the valuation of human resource. Approaches to the human resource valuation may be broadly divided into two categories: Approaches to monetary model Approaches to non-monetary model The monetary method for assessing the economic value of human resource in money term and the non-monetary approaches for measuring the economic value of human resource also examine the human resource but not in domestic currency like dollar Rs. or money term Ibid- 3 Ibid

3 Fig3.1 Human Resource Accounting Models Classification 5 Models of HRA Monetary Models Non-Monetary Models Cost Based Model Value Based Model Likert s model Historical cost method Replacement cost model Opportunity cost model Standard cost model 5 Global management review volume 1 issue 2 February 2007 Hermanson s un purchased goodwill method Hermanson s adjusted discount future wages mode. Ogan s model Jaggi and Lau s model Lev and Schwartz model Flamholtz stochastic Rewards valuation model Chankraborty model Dasgupta model 43

4 3.1. MONETARY MODELS The major task in HRA is that of handing over monetary value to diverse dimensions of HRA rates, investment and the value of personnel. In monetary model, the two core methods usually employed for this are 6 : Human resource cost Accounting (HRCA) Human Resource value Accounting(HRVA) Human resource Cost Accounting (HRCA) Human resource cost accounting may be well-defined as the dimension and reportage of the expenses sustained to obtain and grow individuals as business source. It contracts with accounting for investment made by a company in gaining and emerging human resources as well as the replacement cost of individuals currently working. HRCA includes 7 : Accounting for the cost of personnel activities and functions such as recruitment, selection, placement and training. Accounting for cost of developing people as human assets, also termed as human asset Accounting Cost is a sacrifice suffered to gain certain expected profit or service. All cost has two sides, viz, the expenditure & the advantage side. The expenditure portion is that which delivers profits during present accounting period, while the asset portion is that which is predictable to give rise to welfares in future. 8 This approach has formulated different types of cost based model of HRA which are Historical cost model Replacement cost model Opportunity cost model Standard cost model 6 oc.hcc.edu.pk

5 Historical Cost Model In this model cost of acquisition is capitalized and written off for useful expected life of employees and in case of unwritten off value of the acquisition cost has been shown in profit and loss account in particular years. In detail of this model may be viewed in appendix 1. 45

6 Fig Historical cost model Total cost of Firm Cost of Human Resource Human resource expenses Human assets RECRUITING HIRING TRAINING FAMILIARISA MANAGER AAAAaA MANAGER - Amortizatio n Total Expenses EXPERIENCE Other cost DEVELOPMEN MANAGER- Write offs 46

7 Replacement Cost Model This model developed by Eric G. Flamholty. In this model, value of existing hand is equals to projected cost of new employee with the same ability. This model consists of two types of cost which are known as: 1. Individual Replacement cost The current projected cost of hiring, training and developing individuals up to the standard level of efficiency of the current individuals. 2. Positional replacement cost In addition to the valuation of replacement cost of individuals, such a cost item may be projected with reference to different places in an organisation rather than exact individuals to be mentioned to as positional replacement cost. In detail of this model may be viewed in appendix 2. 47

8 REPLACEMENT COST Individual Replacement Cost Positional replacement cost Estimated cost of new employee Cost to recruit one person at the entry level Recruiting outlay cost Acquisition cost Formal training and orientation cost Informal training cost Efficiency recovery cost Familiarization cost cost of lost productivity during training Investment building experience cost Development cost Others Value of existing individual employee for the current year Cost to select one person at the entry level Cost to develop one person at each intermediate level Separation cost for one person at the critical level Fig MEASUREMENT OF REPLACEMENT COST 48

9 Opportunity Cost Model This model is developed by Hekimian & Johns which is also known as market value technique and comparative bid method. This model is used by companies when the resources of employees are limited. Before the appointment of employee the estimated profit is calculated. For achieving the estimated profit the capital is added to old capital than calculated the new capital. Thus the capitalization value of old and new capital profit is equal to HR value. In other words, from this model limited employee profit is calculated at normal rate of return and this profit is capitalized through required rate of return. And the new capital which is calculated is added to old capital. In detail of this model may be viewed in appendix Standard Cost Model This model was given by David Watson. In this method the standard cost of recruiting, hiring, training and development is accumulated every year for each grade of employees. However, this method is found to be suitable for control purposes and variance analysis, it has also disadvantage of amortization etc Human resource value accounting (HRVA) Human resource value bases model which includes methods based on the economic value of the human resource and their involvement to the business s gains. This method is also known as present value method. Present value model try to calculate economic value rather than purely record investment human resource at historic or replacement cost. This approach looks at human resource as assets. Different types of value based model. Present value model find out to measure the value of human resource on the basis of present value of the services to be generated by employee of an organization in future. The following two approaches have been suggested for this purpose:

10 By discounting the upcoming salaries and employee related capital overheads by definite discount rate. By discounting the upcoming earning of a business at a definite date by a suitable rate and allocating a part of such present value to human resource. A number of the present models have been developed for determining the present value of future earnings. Some of the important models have been deliberated as below: Hermanson s un-purchased goodwill model Hermansons s adjusted discount future wages model Ogan s Model Jaggi and lau s model Lev and Schwartz model Flamholtz stochastic Rewards valuation model Chankraborty model Dasgupta model Hermanson s Un-Purchased Goodwill Method In this model HR Value of particular firm is calculated through the capitalization value of excess earning by normal rate of return of same type of organization. In detail of this model may be viewed in appendix Hermansons s Adjusted Discount Future Wages Model Under this model the value of human resource calculated by four steps. Firstly, estimated the salary and wages of employees for the next five years, than in second Step Company calculate the present value of these estimated wages and salaries for the five years, then after in next step company calculated the efficiency ratio and in final step company multiplies the present value of estimated wages of five years with efficiency ratio. In detail of this model may be viewed in appendix 4. 50

11 Ogan s Model Ogan attempted to measure in financial terms the net present values of some of human resource of a specialized public accounting firm. According to this model, there are seven major elements of the value of human resources which is given in detail in appendix Jaggi and Lau s Model This model fulfills the various limitations which belong to every employee which is related with the changes in the working path of employee in career. Thus, in this model company calculated the value of employees groups. And these groups are belongs to homogeneous in nature. Further details model can be seen in appendix Lev and Schwartz Model This model is built on present value upcoming earnings. Under this model calculated the value of human resource as per the present value of estimated future earing discounted by the return of investment (cost of capital). Model can be seen in appendix 7 in detail manner Flamholtz Stochastic Rewards Valuation Model Under this model the limitations of Lav and schwarts is try to remove. In this model organization calculated the probability of the changes in the position of employees and leave of employees than after calculated the value of Human resources. Further details model can be seen in appendix Chankraborty model Professor S.K. chankraborty suggest to calculate value of human resource by dividing the employee two groups, managerial and non-managerial, and then multiplying average tuner of group of employee with average salary of them. The value thus obtained is discounted at the expected average after tax return on capital employed over the average turner period, so that value of human assets does not fluctuate frequently. 51

12 Professor Chankraborty suggests considering the recruitment, hiring, selection, development and training cost as deferred revenue expenditure. For disclosure he suggested that the balance sheet of the organization consists of the different portion of above expenditure, not written off and human assets under the head investment, consideration of human asset under fixed asset may cause problem of depreciation, capital gain and losses etc Dasgupta model In this model popularly known as total cost concept professor M. Dasgupta has taken somewhat different and broad canvas. According to him the total cost incurred by the individual up to that position in the organization should be taken as the value of person which is further adjusted by his intelligence level. The value thus calculated is revised to time on the basis of age performance, experience and capabilities NON-MONETARY MODEL: The non- monetary method does not assess human resource based on money terms or dollars but rather on rating or indices and ranking. This method can be used as compliment to monetary method. Nonmonetary method usually includes simple inventory of capabilities and skill of people in a firm. In assessing the benefit derived from use of human resource, behavioral measurements techniques may be used nonmonetary are following 12 Likert s model Likert s Model This model is centered on social variables. This model was developed by Rensis Likert and David G. Bowers of USA. In detail of this model may be viewed in appendix Shashi K. Gupta & Rosy Joshi, Managing of Human Resource; Kalyani Publishers,

13 3.3. COMPARISON OF HRA MODELS BASIS OF COMPARISON Meaning and Nature Types of models Meaning, Nature and Features COST MODELS Cost models fail to acknowledge the issues which define the economic value of human resources. Also no thoughtful effort is made in these models to classify issues which can improve the value of human resources. Thus, cost models of HRA are of minute use in the process of Human Resource Growth. Historical Cost Model Historical cost model resources on the basis of capital cost experienced to acquire and improve these resources. These costs are historical in nature and such assets cannot be disposed of, information on them is not of much significance for investment decision. Replacement Cost Model The replacement cost model seeks to incorporate the current value of company s hand in its final accounts and the psychology behind replacement of present set of employees with another set is not considered here. However this model cannot be used in practice as it is truly challenging to find equivalent replacements of existing workers. Opportunity Cost Model Opportunity cost model is grounded on the bidding process. It cannot be accepted as logical as logical as employees are not placed in different positions adhering to such principles. This method flops to measure the value of those workers who are authorities in certain grounds. This technique can be used for calculating the value of those employees only who can be engaged on other jobs. PRESENT VALUE MODELS Present value model seek to measure the value of human resource on the basis of present value of the services to be generated by employee of an organization in future. Lev And Schwartz Model This model is also known as compensation model and capitalization of salary model. They suggest the use of a person s future compensation as a suggorgate of his or value. Accordingly, the value of human capital embodied in a person of age x is the present value of his remaining future earning form employment. The Hermanson s Model This model is defined in two different forms of model. The first model is based on excess capitalization of profit but this excess capitalization does not define the HR full utilization because it consist many other factors this model is called Hermanson s Un- Purchased Goodwill Method. On the other hand the second model is based on the assumption that a relationship exists between a person s salary and his value to the organization. This model uses compensation as a representatively measure of a person s Flamholtz s Stochastic Rewards Valuation Model This model attentions on individual workers for the dimension of human resources Jaggi And Lau s Model Jaggi and Lau s model suggest the use of homogene ous groups of employees as the basis for the same. 53

14 value to the company. These models do not make any thoughtful effort to identify issues defining the value of human talents. At the same time these models also flop to clarify the issues which can increase the value of human talents. Both these models optional using the upcoming wages and salaries of workers of a business as a replacement of the value of its human talents. Both these models assume that wages and salaries paid to the employees honestly represent the influence made by them to their business. However in actual practice the things might be quiet different; as there are evidences that employees sometimes are not fairly compensated. Therefore the evidence generated by the above two models cannot help the management in making HRD related decision to a important extent. Source: 54

15 3.4. CONCLUSION This chapter has been given overview of human resource accounting model. Human resource accounting model divided in two approaches that is monetary approaches and non-monetary approaches. In the monetary approaches two method that is Human resource cost accounting and Human resource value accounting. In summary, while cost based HRA system are rather severely restricted in the range of their usefulness, within that range, they can be quite worthwhile furthermore the applicability of existing accounting techniques suggest that such an approach can serve as logical starting point, and an replacement cost be viewed as representing a bridge between historical cost approach and economic value approaches. The evaluation of Human resource cost accounting and Human resource value accounting and different approaches therein suggest that there is no yet widely accepted technique for the purpose of human resource accounting. Valuation is a problem not only in HRA but is still an unresolved and controversial topic in conventional financial accounting also. It is true that historical costs, and more appropriately replacement costs, appear to be most feasible and usable system in HRA. But HRVA recognizes value of employees in an organization and therefore, it would prove more useful to both managements and external users. There is a need to develop a HRVA model which should not be strong only in theory and concept but should meet criteria of understandability, usefulness, feasibility, and reliability as well. 55

16 REFERENCES 1. Flamholtz, Eric G should you attempt to value your human resource California management Review, vol. IV. 1971pp Garg, D. M. (2010). Human Resource Planning and Development. Delhi: discovery publishing house. 3. Ahmed belkaoui, accounting theory( new yark: harcourt Brace Javanovich, Inc. 1981), p Agarwal, N. (2004). human resource accounting. jaipur: Raj publishing House. 5. gupta Rajkumar, HRA- its Management implications, Anumoi publications New Delhi, abubakar, salisu (2003) a critique of the concept of human resource accounting 8. R. lee brummet, handbook of modern accounting(edited by Sidney Davison & Roman L.Weil) human Resource Accounting, Mcgrow Hill Book Co., Second Edition, Ch. 37, N.J. 1975, pp Rajkumar gupta, HRA- its Management implications, Anumoi publications New Delhi, Eric Flamholtz human resource accounting : A Review of Theory and Research unpulished paper presented to the organization behavior division at the 32nd 56

17 Books Malayendu saha (1997) human resource accounting with special reference to charitable institution discovery publishing house New Delhi Gupta, S. (2009). Advance Human Resource Management: Strategic Perspective. New Delhi: Ane Books Pvt Ltd. R.K., G. (2003). Human Resource Accounting. New Delhi: Anmol Publication Pvt Ltd. 57