AN ANALYSIS OF HUMAN RESOURCE ACCOUNTING SYSTEM IN SELECT COMPANIES IN INDIA Dr. JALAJA K.R, Assistant Professor (Sr), Department of Commerce, Bangalore University, P.G. Centre, Kolar. Email: jalaja_kr@rediffmail.com Mrs. BHARGAVI. H, Research Scholar, Department of Commerce, Bangalore University, Bangalore. Email: hbhargavi80@gmail.com ================================================================= ABSTRACT The key strength of an organisation depends upon its human capital. Human capital plays an important role for organisational success. In the era of knowledge and technology, only those organisations can survive and succeed which have adequate information about the cost, value and performance of their human resources. This information is the basis of effective management of human elements in any organisation. Such imperative information about human resources can be provided by a specialized branch of accounting deliberately developed by the scholars popularly known as Human Resource Accounting (HRA). It provides measurable information about the value of human assets, which helps the top management to take decisions regarding the adequacy of human resources. The purpose of this research paper is to study the importance of HRA for the organisations and to identify the practice of select Indian companies to measure the value of their human resources. The researcher also makes an attempt to identify the variables included in valuation of Human Resources (HR) by the companies. Keywords: Human Resources, Human Resource Accounting, Human Capital. INTRODUCTION Human Resource Accounting (HRA) is widely recognised that human resources are no lesser important than other productive resources. However the recognition of importance of people in organisations as productive resources by the accountants is a recent origin. It was in 1960 s that behavioural scientists attacked the conventional accounting practice for its failure to value the human resource of the organisation along with other productive resources. They pointed out that the failure of accountants of value human resources was a serious handicap for effective management. As a consequence, valuation of human resources has received widespread recognition. In the course of time a number of accounting models have been developed to value and report human resources of an organisation. In the management terminology this is called as Human Resource Accounting (HRA). Advocates of HRA consider the importance of the human element in organisations and the failure of conventional accounting in dealing with it as an asset. In its simplest form HRA involves the identification of the costs of recruitment, training and maintenance of an entity s human assets. HRA is the systematic recording of the transactions relating to the value of human resources. According to American Accounting Association, HRA is a process of identifying and measuring data about human resources and communicating this information to interested parties. HRA is the measurement of cost value of people for organisation. HRA is the systematic recording of the transactions relating the value of the human resources. The importance of people in the organisation as productive resource was conspicuously ignored by the management, but now-a-days it has received increasing attention and widespread interest in developing the system of HRA. Page 1
The productivity of a company s investment is known for the rate of return, which is calculated on the basis of physical assets investment only. There is a need to find out productivity of investment on human beings in any organisation. It is an effective tool for decision-making. Human resources have certain distinct characteristics from other physical assets like personality, self control, devotion, quality, skill talents, loyalty and initiatives. It is a basic need of present time to improve productivity that can be improved by the human force. Hence to encourage, it is necessary to account them and to take progressive decisions for them. Basic Premises of HRA The basic premises underlying the theory of HRA are: a) People are valuable resources of an enterprise. b) The usefulness of manpower as an organizational resource is determined by the way in which it is managed and c) Information on investment and value of human resource is useful for decision making in the enterprise. REVIEW OF LITERATURE H.K. Singh and Vivek Singh (2009) made a research paper to evaluate the HRA practices of Infosys technology limited (ITL) as well as its usefulness in HR decision. It was found that the Lev and Schwartz model was adopted by ITL and had the merit of objectivity in the valuation of human resources. However, the limitations of this model adversely affect the correct valuation of HR in ITL. Moreover, the rate of discounting future earnings of employees has changed year to year. This change in discount rate in each year makes the HR data incompatible and presents misleading valuation of HR in ITL. Some useful suggestions had also been provided to improve the HRA practices of ITL, which will ultimately contribute to ensure the bright future of HRA in India. Shalini Sharma and R.K Shukla (2010) wrote a research paper with the objective of analyzing the application of HRA in heavy industries covering the period from 2001-2010 with the case study of The Hindustan Copper Limited, a public sector undertaking. The case study helped to analyze whether the value of production per employee was increasing or decreasing year by year. The value and strength of Human Resources was calculated by dividing the Value of Production by Total manpower to arrive at Value per employee and noticed that value was increasing each year. They were of the opinion that, the efforts are to be made in gaining popularity in the application of human resource accounting. Sulieman H. Al-Beshtawi (2012) aimed at identifying practices of Jordanian banks concerning accounting for human resources and the extent of use of internal and external data and accounting information. They seemed to achieve two objectives, to highlight the need and possibility to lay the foundations and fundamentals of cost accounting system for human resources and to identify the problems faced in the measurement of costs of human resource. Their study had concluded that there was very limited use of accounting data and information in these areas. The results of the study indicated that there were two important factors which contributed to this situation, the absence of an accounting standard for disclosing information of human resources in the financial statements and the absence of the foundations and fundamentals of cost systems. Page 2
Upasna Joshi1 and Reeta Mahei (2012) has made an attempt to do the comparative study of the human resource accounting practices of CCI, HPCL, Infosys and Rolta India Limited. The variables that are important for the purpose of human resource accounting were identified and by analyzing, the annual reports of these selected companies scores were assigned to the organizations and mean scores for these organizations were calculated. Ranks to the organizations were also given based upon the extent of the HRA information reported in their annual reports. Ankita Chaturvedi (2012) investigates the impact of investment in human resource training and development on employees' effectiveness in SAIL. A quantitative measure published by the Institute of Intellectual Capital Research and approved by the Saratoga Institute database was used to assess human resource effectiveness in SAIL. Therefore it was suggested to the company that beside technological up gradations and modernization, the company should also make efforts towards competency development. METHODOLOGY The present study is a conceptual in nature and based upon secondary sources. For the collection of data researcher mainly relied upon the report of Business organisations, web sources, books, journals. Two companies from public sector and two companies from private sector were taken as sample to study their HRA disclosure practices. OBJECTIVES OF THE STUDY The objectives of the study are: 1. To study the importance of HRA to the organisations. 2. To examine the HRA practices followed by selected companies in India. OBJECTIVES OF HUMAN RESOURCE ACCOUNTING The objective of HRA is not just the recognition of the value of all resources used or controlled by a firm, but it also includes the improvement of the management of human resources so that the quantity and quality of goods and services are increased. The basic objective underlying human resource accounting is to facilitate the effective and efficient management of human resources. Effectiveness is the relationship between the output of a responsibility centre and the goals of an organization. Efficiency is the amount of output per unit of input or the amount of input per unit of output. IMPORTANCE OF HUMAN RESOURCE ACCOUNTING TO THE ORGANISATIONS According to Likert (1971), HRA serves the following purposes in an organisation: 1. It furnishes cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness. 2. It allows management personnel to monitor effectively the use of human resources. 3. It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved. 4. It helps in the development of management principles by classifying the financial consequences of various practices. Page 3
Basically, HRA is a management tool which is designed to assist senior management in understanding the long term cost and benefit implications of their HR decisions so that better business decisions can be taken. If such accounting is not done, then the management runs the risk of taking decisions that may improve profits in the short run but may also have severe repercussions in future. For example, very often organisations hire young people from outside on very high salaries because of an immediate business requirement. Later on, however, they find that the de-motivating impact of this move on the existing experienced staff has caused immense long term harm by reducing their productivity and by creating salary distortions across the organisational structure. HRA also provides the HR professionals and management with information for managing the human resources efficiently and effectively. Such information is essential for performing the critical HR functions of acquiring, developing, allocating, conserving, utilizing, evaluating and rewarding in a proper way. These functions are the key transformational processes that convert human resources from raw inputs (in the form of individuals, groups and the total human organization) to outputs in the form of goods and services. HRA indicates whether these processes are adding value or enhancing unnecessary costs. In addition to facilitating internal decision making processes, HRA also enables critical external decision makers, especially the investors in making realistic investment decisions. Investors make investment decisions based on the total worth of the organisation. HRA provides the investors with a more complete and accurate account of the organisations total worth, and therefore, enables better investment decisions. For example, conventional financial statements treat HR investments as expenditures. Consequently, their income statement projects expenditures to acquire place and train human resources as expenses during the current year rather than capitalizing and amortizing them over their expected service life. The balance sheet, thus, becomes distorted as it inaccurately presents the total Assets as well as the net income and, thereby, the rate of return which is the ratio of net income to the total assets. HRA helps in removing this distortion. Finally, in an era where performance is closely linked to rewards and, therefore, the performance of all groups/departments/functions needs to be quantified to the extent possible, HRA helps in measuring the performance of the HR function as such. HUMAN RESOURCE ACCOUNTING PRACTICING COMPANIES IN INDIA Even though, many benefits have contributed by HRA, yet its development and application in different industries has not been encouraging, because Indian companies act 1956, does not provide any scope for showing any information about human resources in financial statement. Due to the development of business and industries, some of the Indian companies, both public and private, value their human resources and report this information in their annual report. The following companies are selected for the purpose of this study. 1. Bharat Heavy Electrical Ltd (BHEL). 2. Steel Authority of India Ltd (SAIL). 3. Infosys Technologies Limited. 4. Rolta India Limited. 1. Human Resource Accounting System in Bharat Heavy Electrical Ltd (BHEL) : Page 4
BHEL had started providing information related to Human Resource Accounting (HRA) in its annual report from the financial year 1973-74 by using Lev and Schwartz model. It is the first company in India to disclose the HRA information in its annual reports. BHEL also started considering efficiency factor for the purpose of Human Resource Valuation from the year 1980-81. BHEL divides total employees of the organisation according to group wise, category wise and also per physically challenged employee. The company used 12% discount rate and reported information like Total Number of Employees, Value Added, Employee Remuneration and Benefit, Value added per Employee, Turnover per Employee. 2. Human Resource Accounting in Steel Authority of India Ltd (SAIL): SAIL started valuation and reporting of its human resource from the financial year 1983-84. SAIL follows the human resource valuation model suggested by Lev and Schwartz by accommodating some adjustments suggested by Flamholtz and Jaggi and Lou. SAIL uses the constant rate of discounting the future expected return at 14%. Company provides the information regarding employee under section 217(2A) of the Companies Act 1956 with Companies Rules 1975. SAIL provides the information regarding Number of Employees, as well as category wise distribution of employee. Company also provides the information about Turnover, Value Added and Capital Employed, EPS, Net Worth per share, Employee Remuneration and Benefit. 3. Human Resource Accounting Practices in Infosys Technologies Limited: Infosys is a leading information technology company that was incorporated in 1981 as Infosys Consultants Private Limited. In 1992, the company was converted into a Public Limited Company. In the year 1995-96, it became the first software company to value its human resources in India. Lev and Schwartz model with a discount rate 11.2% has been used for the purpose of valuation of human resources of the organisation. It considers all direct and indirect benefits earned both in India and abroad for the valuation purpose. The incremental earnings based on age and group are taken into consideration. Balance Sheet with intangibles is also disclosed by the company in its reports. Infosys provide information like Income, value added, number of employees, age-wise distribution and category wise distribution of employee, Net worth, EPS, Economic Value Added, Value of Human Resource Value of Human Resource per employee and also present the ratio like Value Added/Human Resource Value, Return on Human Resource Value in percentage. But in from 2010-11 Infosys has stopped providing HRA information in annual reports. 4. Human Resource Accounting Practices in Rolta India Limited: It is a multinational software development and services company, established in 1989. The economic approach model i.e. Lev & Schwartz model is the basis of calculation of human resources of the company. The company considers all direct and indirect benefits earned by employees as a basis for calculation. Average increment is based on the increment paid during last three years. Retirement age is taken as per company s policy. Based on these assumptions human resource value was calculated considering different discount rates for different years to arrive at the present value of future earnings. CONCLUSION Apart from reporting the value of HR and HR processes, HRA also implies whether the processes are genuinely and necessary are adding value. It also highlights reducible and unnecessary costs. HRA also gives information Page 5
about the organization's efforts towards development of its employees and measures the performance of Human Resource Development Function. It would give an organization a correct vision towards the way forward. There are several areas in which non-monetary measurements may be evolved in accounting and human resource accounting is probably one of these. To make valuation of human resource objective and comparable there must be a universally acceptable method of valuation and each and every company should make benefit out of HRA. REFERENCES: 1. Singh, H.K and Vivek Singh. (2009). Human Recourses practices in Infosys Technologies Ltd- An Evaluation, 5(1), 67 73. 2. Shalini Sharma., R K Shukla. (2010) Application of Human Resource Accounting in Heavy Industries, Samridhi, 1(2), 34-39. 3. Sulieman H. Al-Beshtawi (2012), Accounting for the Cost of Human Resource and disclosed in Financial Reports of the Banks of Jordan, European Journal of Economic, Finance and Administrative Sciences, 1 (46), 13-25. 4. Upasna Joshi and Reeta Mahel (2012), HRA System in Selected Indian Companies, 3 (2), 69-76. 5. Ankita Chaturvedi (2013), Human Resource Accounting and its Effect on Organizational Growth : A Case Study Of Steel Authority Of India Ltd. International Indexed & Refereed Research Journal, 4, (43-44) 6. Anubha Gupta and Vidya Mahesh (2011) Human Resource Accounting in Educational Institutions, Abhinav Journal of Research in Arts and Education, 1(12), 55-58. 7. Porwal, L. (2001). Accounting Theory An Introduction (Third). New Delhi: McGraw-Hill Publishing Company Limited. 8. Shashi K Gupta and R.K. Sharma. (2008). Management Accounting Principles and Practice, (Eleventh), Kalyani Publishers. Page 6