Question 2
“The most valuable capital is which is invested in Human Resources.” In the light of this statement, bring out the significance of Human Resource Accounting. Also briefly explain the methods of evaluating Human Resources.
1. Meaning of Human Resource Accounting (HRA)
Human Resource Accounting is the process of identifying, measuring and reporting the value of human resources (employees) in the financial statements of an organisation.
It treats employees not merely as an expense but as an asset, similar to plant or machinery, because they generate future economic benefits for the business through their skills, knowledge, experience and creativity. Methods of evaluating Human Resources
2. Explanation of the Statement
“The most valuable capital is which is invested in Human Resources” means that:
- Machines, buildings and money are important, but they cannot work on their own. Methods of evaluating Human Resources
- It is the people who plan, operate, control and improve all other resources.
- If an organisation invests in its employees through training, development, motivation and welfare, it gets higher productivity, better quality and long-term growth.
Therefore, the investment in human beings is more valuable than any other physical capital. HRA highlights this fact by recognising and reporting the value of human resources.
3. Significance / Importance of Human Resource Accounting
(1) Recognition of Human Resources as Assets
Traditional accounting treats employee-related expenditure (like training) as a revenue expense. HRA shows that people are assets who provide benefits over many years. This changes the attitude of management from “cost of people” to “investment in people”. Methods of evaluating Human Resources
(2) Better Decision Making for Recruitment and Training
When the cost and value of employees are measured, management can compare:
- Cost of hiring a new employee vs. promoting or training an existing one.
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Return on investment in training programmes.
This helps in scientific manpower planning and HR policies.
(3) Improved Performance Evaluation
HRA provides information about:
- Productivity of different categories of employees,
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Contribution of human resources to profits.
This helps management to evaluate performance of departments and to reward employees fairly.
(4) Helps in Employee Motivation and Retention
When employees know that the organisation recognises them as valuable assets, they feel more important and respected. This improves morale, motivation, loyalty and reduces labour turnover. Methods of evaluating Human Resources
(5) Helpful to Investors and Other Stakeholders
Financial statements normally show only physical and financial assets. HRA adds information about quality and strength of human resources, which helps investors, creditors and analysts to judge the long-term earning capacity of the business.
(6) Long-Term Planning and Strategy Formulation
Information about the value and potential of human resources helps management to:
- Plan expansion or diversification,
- Decide on automation vs. labour-intensive methods,
- Frame long-term strategies for growth.
(7) Social Responsibility and Better Image
By reporting investment in employees’ education, health, welfare and development, the enterprise shows that it is socially responsible. This builds a good public image and better relations with employees, government and society. Methods of evaluating Human Resources
4. Methods of Evaluating Human Resources
There is no single universally accepted method, but some important methods are:
A. Cost-Based Methods
B. Value-Based Method
C. Other Approaches
- Cost-Based Method
(1) Historical Cost Method
- All expenses incurred on recruiting, selecting, hiring, training and developing employees are capitalised as the cost of human assets.
- These costs are then amortised (written off) over the expected service life of employees. Methods of evaluating Human Resources
- Simple to apply, but it ignores the actual value generated and does not reflect changes in skill or performance.
(2) Replacement Cost Method
- Human assets are valued at the amount that would be required to replace existing employees with new ones of similar ability and experience at current prices.
- It reflects current conditions better than historical cost, but it is difficult to estimate accurately and may be very high in inflationary times.
(3) Opportunity Cost Method
- Used mainly in internal transfers of employees.
- The value of an employee is measured by the opportunity lost by placing him in one department instead of another.
- Departments may “bid” for the services of a key employee; the highest bid is taken as his value.
- This method is not practical for valuing the entire workforce. Methods of evaluating Human Resources
B. Value-Based Methods
(4) Present Value of Future Earnings Method
- The value of an employee is taken as the present value of the future earnings or services expected from him during his remaining service life.
- Future earnings (salary, benefits, contribution to profits) are estimated year-wise and then discounted to present value.
- It focuses on future benefits but depends heavily on assumptions regarding earnings, service life and discount rate. Methods of evaluating Human Resources
(5) Lev & Schwartz Model
- A popular version of the above method.
- It estimates the future earnings of employees for each age group up to retirement and discounts them to present value.
- The sum of present values for all employees gives the total value of human resources.
- Used mainly for large organisations but needs detailed data about age, salary structure and service period.
(6) Expected Realisable Value / Reward Valuation Method
- Employees are valued according to their expected contribution to the organisation in terms of profits or cost savings. Methods of evaluating Human Resources
- It is similar to valuation of a brand or goodwill where future benefits are estimated and discounted.
- It tries to capture actual contribution, but again measurement is subjective.
C. Other Approaches
(7) Behavioural / Non-Monetary Methods
- These methods do not assign a rupee value; instead they use rating scales, scores and indices for qualities like leadership, creativity, commitment and job satisfaction. Methods of evaluating Human Resources
- They are useful for internal HR decisions but cannot be shown easily in financial statements.
Conclusion
Human Resource Accounting is based on the idea that people are the most valuable capital of an enterprise. By measuring and reporting the value of human resources, HRA:
- Improves the quality of managerial decisions,
- Enhances employee motivation,
- Helps investors judge the true strength of the organisation, and
- Supports long-term growth and social responsibility. Methods of evaluating Human Resources
Though there are limitations and no perfect method of valuation, the different cost-based and value-based techniques provide useful information for recognising and managing human resources as vital assets of the business. Methods of evaluating Human Resources. If you would like to know the syllabus of Mcom-l Contemporary Accounting, you must visit the official website of Gndu.
👉 Important questions of Contemporary Accounting