HUMAN RESOURCE ACCOUNTING (HRA) PRACTICES IN INDIA

Success of corporate undertakings purely depends upon the quality of human resources. It is accentuated that; Human element is the most important input in any corporate enterprise. The investments directed to raise knowledge; skills and aptitudes of the work force of the organization are the investments in human resource. In this context, it is worth while to examine and human resource accounting practices in corporate sector in India.

Human resource accounting is of recent origin and is struggling for acceptance.  .It is clearly said that, Human resources accounting is an accounting measurement system and a large body of literature has been published in the last decade setting for the various procedures for measurement.  At the same time the theory and underlying concepts of accounting measurement have received sizeable attention from academics and a substantial body of literature has developed. The conventional accountings of human resources are not recognized as physical or financial assets. 

  Though Human Resources Accounting was introduced way back in the 1980s, it started gaining popularity in India after it was adopted and popularized by NLC.  Human Resources accounting, also known as Human Asset Accounting, involved identifying, measuring, capturing, tracking and analyzing the potential of the human resources of a company and communicating the resultant information to the stakeholders of the company.  It was a method by which a cost was assigned to every employee when recruited, and the value that the employee would generate in the future.  Human Resource accounting reflected the potential of the human resources of an organization in monetary terms, in its financial statements.

Even though the situation prevails, yet, a growing trend towards the measurement and reporting of human resources particularly in public sector is noticeable during the past few years.  BHEL, Cement Corporation of India, ONGC, Engineers India Ltd., National Thermal Corporation, Minerals and Metals Trading Corporation, Madras Refineries, Oil India Ltd., Associated Cement Companies, SPIC, Metallurgical and Engineering consultants India Limited, Cochin Refineries Ltd. Etc. are some of the organizations, which have started disclosing some valuable information regarding human resources in their financial statements. It is needless to mention here that, the importance of human resources in business organization as productive resources was by and large ignored by the accountants until two decades ago. 

During the early and mid 1980’s, behavioral scientists attacked the conventional accounting system for its failure to value the human resources of the organization along with its other material resources.  In this changing perspective the accountants were also called upon to play their role by assigning monetary value to the human resources deployed in the organization. Human Resource Accounting involves the dimension of cost incurred by the organization for all the personnel function.  Hence the issue is to be addressed is how to measure the economic value of the people to the organization and various cost based measures to be taken for human resources. The two main components of Human Resources Accounting were investment related to employees and the value generated by them.  Investment in human capital included all costs incurred in increasing and upgrading the employees’ skill sets and knowledge of human resources.  The output that an organization generated from human resources was regarded as the value of its human resources.  Human Resources accounting is used to measure the performance of all the people in the organization, and when this was made available to the stakeholders in the form of a report, it helped them to take critical investment decisions.All the models stressed that human capital was considered an investment for future earnings, and not expenditure.

   For valuing human resources, different models have been developed.  Some of them are opportunity cost Approach, standard cost approach, current purchasing power Approach, Lev and Schwartz present value of future earnings Model Flam holtz’s stochastic rewards valuation Models etc.  Of these, the model suggested by Lev and Schwartz has become popular.  Under this method, the future earnings of the human resources of the organization until their retirement is aggregated and discounted at the cost of capital to arrive at the present value.

Human resources accounting system consists of two aspects namely:

a)      The investment made in human resources

b)      The value human resource 

Measurement of the investments in human resources will help to evaluate the charges in human resource investment over a period of time.  The information generated by the analysis of investment in human resources has many applications for managerial purposes.  The organizational human performance can be evaluated with the help of such an analysis.  It also helps in guiding the management to frame policies for human resource management.  The present performance result will act as input for future planning and the present planning will have its impact on future result.  The same relationship is also applicable to the areas of managerial applications in relation to the human resource planning and control.Investment in human resources can be highlighted under two heads, namely,

 Investment pattern:

The human resource investment usually consists of the following items:-

1)      Expenditure on advertisement for recruitment

2)      Cost of selection

3)      Training cost

4)      On the job training cost

5)      Subsistence allowance

6)      Contribution to provident Fund

7)      Educational tour expenses

8)      Medical expenses

9)      Ex-gratia payments

    10) Employee’s Welfare Fund

All these items influence directly or indirectly the human resources and the productivity of the organization.

 Investment in current costs

After analyzing the investment pattern in the human resources of an organization the current cost of human resources can be ascertained.  For this purpose, current cost is defined as the cost incurred with which derives benefit of current nature.  These are the costs, which have little bearing on future cost.  Thus, the expenses incurred for the maintenance of human resources are termed as current costs.  Current cost consists of salary and wages, Dearness allowance, overtime wages, bonus, house rent allowance, special pay and personal pay.

 Amidst this background, it is significant to mention  that  the importance and value of human assets were  recognized in the early 1990s when there was a major increase in employment in firms in service, technology and other knowledge-based sectors.  In the firms in these sectors, the intangible assets, especially human resources, contributed significantly to the building of shareholder value.  The critical success factor for any knowledge-based company was its highly skilled and intellectual workforce.Soon after, the manufacturing industry also seemed to realize the importance of people and started perceiving its employees as strategic assets.  For instance, if two manufacturing companies had similar capital and used similar technology, then it was only their employees who were the major differentiating factor.  Due to the above development, the need for valuing human assets besides traditional accounting of tangible assets was increasingly experienced.

          From the above discussions, it is felt that, Human resource accounting provides quantitative information about the value of human asset, which helps the top management to take decisions regarding the adequacy of human resources. Hence, It is Concluded that, the Human Resources are an indispensable but often neglected element is thus to be fore grounded into the industrial area for the betterment of the economy.