Human Resource Accounting Or Commonly Termed As Hra Accounting Essay



It has been observed in recent decades, the economies of the world made a fundamental shift from an industrial economy (manufacturing base) towards the services based economy (contribution to GDP of 53.7%) based on knowledge and information for survival and profit. Now a day's success of any service industry is based entirely on the quality of human resources it possesses. The growing awareness and recognition of human and intellectual capital, the basic economic resources of the current era, have forced the company to change its approach to investing only in traditional physical assets (such as inventories, plant and equipment) for human capital development and investment. Human capital and intellectual property are considered as determinants of economic success, both at the macroeconomic and business. 

All major companies have realized this effect. All the major performance analysis in any industry are not done only the basis of topline & bottomline but contribution of the human resource is also calculated. This has lead to the investment in training and development very important and there is an urgent need to develop new methods, tools and concepts for monitoring and evaluation of programs for management development in terms of its impact, results and the value or ROI. Unfortunately, there is no specific accounting standard developed by any regulatory authority for the assessment of human resources of any organization. The paper deals with the concepts of "human resource accounting" & various techniques used for the determination of the value of human resources


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Human resources or human capital assessment is concerned with identifying and measurement of the HR value of a company. There is an already debate about whether to consider human capital as an asset of the organization as defined conventionally or not. Human resorce capital is different from other assets in the sense that, human beings does not consists of a property of any particular organization & they have a discretion over the supply or withholding their services to any organization. And its imperative that they really are a huge and important source of revenue for any company that currently exist. Consequently, if human capital is reported in external financial statements like Infosys and Rolta does in India , is a vital economic resource and should be administered.

The accountants have not given due attention to HR asset of the company in the past. Currently in our accounting practices, the weighed amount incurred in hiring, placement, selection, training and staff development is regarded as a revenue expenditure and therefore it is charged to the profit and loss account of the period in which incurred by that amount. Now, there is an argument about these expenses are actually done by a company to provide its services in the future workforce is against the principle of accounting for the treatment of a full income. In fact, these costs must be capitalized as assets in the balancesheet of the company . The fact that professional accountants to treat human resources as an asset like the other physical and financial assets has led to the evolution of the concept of Human Resource Accounting, and be reported in the balancesheet of the company.

"Human Resource Accounting orcommonly termed as HRA is defined as a process for assessment of the value of human resources in any organization and calculate the increase in the value provided by the management development and proper communication to the People of the organization."

Need for HRA

People are the most valuable resources for a company.

To determine the productivity of investment done in human resources in any organization. Can be used as a scaling tool of quantitative information on the contribution of human resources in the generation of industrial productivity.

The information on investment in the human resources and current value of human resources is taken as an important input for major decisions making in the company.  It assists in the development of economic evaluations of people inside the organization and provide th base for continuous monitoring of the net accounting policy.

Human Capital Valuation

The main challenge in the HRA is to assign monetary values to the various dimensions of human resources, including:

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The net worth of employees.

Here are the two types of approaches to human resource calculation of value:

The cost based approach - This approach to valuation of human resources based on costs incurred in the process of acquisition and retention of an employee wrt any company.

The economic value-based approach - This approach is based on the valuation of human resources wrt the economic value that is generated by the human capital that contributes to the objectives of the company.

We will discuss separately the two methods, first let's start with cost-based approach


Cost can be defined as a price to be paid for availing some anticipated benefit or service. Generally two major types of costs are associated with HRA. They are as follows:

Historical Cost Approach - it can be described as the cost involved in acquiring and developing the human resource capital of any organization. These majorly consists of the costs incurred for Recruiting costs,Hiring costs, Orientation & training costs further these costs can be divided into direct costs (salaries) & indirect costs (supervisory costs).


These type of valuation approach uses the assumption that the currency is stable .

Only focuses on the costs to the organization and fails to check any value generated by the employee to the organization.

Human resource assets cannot be sold like other products and there is not any defined standards for independent checks in determining the HR valuation.

Replacement Cost Approach: This approach is designed to analyzew the impact of cost occurred due to replacement of the existing employees with the new one for the same purpose. the major emphasis is given on the loss of revenue generated due to unavailability of a particular employee. The disadvantage of this method is that it can give an inflated figure becoz sometime cost of replacement for any firm can be very high if the resource is critical.

Opportunity Cost Approach - The basis for this type of valuation is to measure the opportunity cost of lost in in vesting in the HR , if the amount was invested somewhere else.this method is limited to valuation of hr for internal purpose of assessment only.


The economic value based approach determines the expected present value of all the services (in economic terms) which are expexted to be provided by the human resources in any organization. This consisits of contribution made by the individuals, groups or in aggregate by all the human resources in the organization. Two major methods are used for calculating the economic value :

Monetary Methods

Non-Monetary Methods.

Monetary Measures for assessing Individual Value

The Lev & Schwartz Model

Flamholtz's model of determinants of Individual Value to Formal Organizations

Morse Net Benefit Model:

Hekimian and Jones Competitive Bidding Model


The Likert and Bowers Model

Brummet, Flamholtz, and Pyle's economic value model

Hermanson's unpurchased goodwill model

Human organizational dimensions method

Methods for valuation of expense centre groups

Monetary Methods


It is the most popular model used for HR valuation. The main adavvantage of this model is its simplistic approach and giving the value of human in resource in the current time. Infosys uses this model for its HR valuation. As we know Infosys's annual rport is take n as standard in the industry to publish their annual report. The Lev and Schwartz model assumes that the human resource value of a company can be calculated by summation of value of all the Net present value (NPV) of employees.

Under this model, the following steps are adopted to determine HR Value:

Step -1: Calculate the present annual earnings of each employee

Step -2: calculate the remaining service life of each employee on the basis of their present age

Step -3: Deter mine the average annual earnings growth rate based on the historical data of the employee

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Step -4: Calculate the future value of the expected earnings of each employee on the basis of Annual earnings growth rate & remaining service life.

Step -5: Discount the future value of earnings at a predetermined discount rate (i.e. cost of capital) & time = remaining Service life, to get present value of human resources of the organization.

Step -6: Aggregate the present value of all employees of the organization to arrive at the total HR Value.

Formula used for valuation: HRV= P.E. (1+CAGR) t / (1+ rd) t


HRV = the value of an Individual 

P.E.   = the individual's present annual earnings

CAGR = annual growth rate of earnings

 t      = remaining service life

rd  = a discount rate specific to the cost of capital to the company

Factors Affecting The HR Valuation in The LEV & SCHWARTZ HRA Model

AGE OF EMPLOYEE: Higher the ratio of young employees in any organization more will be the value of HR for that organization.

PRESENT EARNINGS: Higher the present earnings of employees of any organization, more will be the value of HR for the organization.

ANNUAL GROWTH RATE OF EARNINGS: Higher the growth rate of annual earnings, more will be the value of HR for the organization.

RATE OF DISCOUNT: Higher the rate at which we discount the future value of expected earnings of the employees, lower is the valuation of HR for the company. So we can say that higher the difference between the CAGR & Rate of Discount, higher is the HR value.

We will understand calculation of HR value & various ratios related to HR valuation by taking an simple example of any arbitrary organization based on Lev and Schwartz model:


Rate of discount = 8 %

Annual growth rate of earnings (CAGR) = 10 %



Present Age

Service remaining


Future Value


























































Total NPV


total employees


total income




total employee cost


semi skilled


value added








total value of human resources




semi skilled







value of human resources per employee


total income/ hr value


employee cost / hr value


value added/ hr value


return on hr value


Limitations of the Lev & Schwartz Model

Lev & Schwartz measures the input measure & ignores the output measure like productivity of employees.

The attrition rate, which is very important to decide any employees presence in a particular r organization is also ignored

Each employee is in a different Service state. In the lev & Schwartz we take the cumulative value of all the employees , each individual employee is not considered.

Many other factors like potentiality of an individual employees to earn based on his seniority, bargaining capacity, technical skills, management etc. which create a differential salary structure in the organization are also ignored.