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Assignment On

Human Resource Accounting Practices At Bharat Heavy Electricals Limited (BHEL)

:Assigned By: Mr. Bhavik Parmar Lecturer MHRD

:Prepared By: Chirag V. Vyas MHRD Sem 2 Roll No:05

:Submitted To: M.H.R.D. Department M.J. College of Commerce, Bhavnagar Unviersity, Bhavnagar

Gratitude Expression
Words cannot express the gratitude in my heart for all the people who are directly or indirectly connected with this assignment.

I am Grateful to Mr. Bhavik Parmar Lecturer MHRD, for providing me this assignment and his valuable guidance to complete the assignment. I am thankful to Dr. K.S. Vataliya Principla M.J.College of Commerce for his support. I would like to take the opportunity to thank Mrs. Swati Patel Coordinator M.J. College of Commerce for allowing me to do this assignment and for her valuable inputs.

Here how can would like to express my gratitude for my classmates Deepali, Dolly, Ravi, Ketan, Hiten, Kripal, Mahesh, Brijraj, Anjana, Trupti, Priya, Purna, and others for their fullest support.

Thank You.

Chirag V. Vyas

Table of Contents

Sr. No.


Page No.

01 02 03

Introduction Meaning and Definition Importance of Human Resource

04 05 06

Accounting (HRA) 04 Human Resource Accounting (HRA) Practices In India 05 06 07 08 BHEL at Glance HRA Approach use by BHEL Conclusion Bibliography 12 15 21 22 07


To ensure growth and development of any organization, the efficiency of people must be augmented in the right perspective. Without human resources, the other resources cannot be operationally effective. The original health of the organization is indicated by the human behavior variables, like group loyalty, skill, motivation and capacity for effective interaction, communication and decision making. Men, materials, machines, money and methods are the resources required for an organization. These resources are broadly classified into two categories, viz., animate and inanimate (human and physical) resources. Men, otherwise known as the human resources, are considered to be animate resources. Others, namely, materials, machines, money and methods are considered to be inanimate or physical resources. The success or otherwise of an organization depends on how best the scarce physical resources are utilized by the human resource. What is important here is that the physical resources are being activated by the human resources as the physical resources cannot act on their own. Therefore, the efficient and effective utilization of inanimate resources depends largely on the quality, caliber, skills, perception and character of the people, that is, the human resources working in it. The term Human resource at macro level indicates the sum of all the components such as skills, creative abilities, innovative thinking, intuition, imagination, knowledge and experience possessed by all the people. An organization possessed with abundant physical resources may sometimes miserably fail unless it has right people, human resources, to manage its affairs. Thus, the importance of human resources cannot be ignored. Meaning and Definition of Human Resource Accounting

The concept of human resource accounting can be better understood if one goes through some of the important definitions given by the competent authors in the accounting field. The American Accounting Society Committee on Human Resource Accounting defines it as follows: Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties. In simple terms, it is an extension of the accounting principles of matching costs and revenues and of organizing data to communicate relevant information in financial terms. Mr. Woodruff Jr. Vice President of R. G. Batty Corporation defines it as follows: Human Resource Accounting is an attempt to identify and report investments made in human resources of an organization that are presently not accounted for in conventional accounting practice. Basically it is an information system that tells the management what changes over time are occurring to the human resources of the business.

Importance of Human Resource Accounting


o Human








Employment, locating and utilization of human resources. o It helps in deciding the transfers, promotion, training and retrenchment of human resources. o It provides a basis for planning of physical assets vis--vis human resources. o It assists in evaluating the expenditure incurred for imparting further education and training in employees in terms of the benefits derived by the firm. o It helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it. o It helps in locating the real cause for low return on investment, like improper or under-utilization of physical assets or human resource or both. o It helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavourable circumstances. o It provides valuable information for persons interested in making long term investment in the firm.

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 1980s, 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 holtzs 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) b) The investment made in human resources 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) 2) 3) 4) 5) 6) 7) 8) 9) Expenditure on advertisement for recruitment Cost of selection Training cost On the job training cost Subsistence allowance Contribution to provident Fund Educational tour expenses Medical expenses Ex-gratia payments

10) Employees 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.


BHEL at Glance
BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. BHEL caters to the core sectors of the Indian Economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defence. The wide network of BHELs 15 Manufacturing Divisions, 4 Power Sector Regional Centres, 8 Service Centres, 15 Regional Offices, 4 Overseas Offices, 1 Subsidiary and over 100 project sites spread all over India enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centres. BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management.


BHEL has Installed equipment for over 1,00,000 MW of power generation- for Utilities, Captive and Industrial users. Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries. BHEL's operations are organised around three business sectors, namely Power, Industry - including Transmission, Transportation and Renewable Energy - and Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market. BHEL's vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player. The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness.


Rupees (In Million) 2006-07 Turnover Value Added Employee (Nos.) Profit Before Tax Profit After Tax Dividend Dividend Tax Retained Earnings Total Assets Net Worth Total Borrowings Debt : Equity Per Share (in Rupees) : - Net worth - Earnings - Dividend 179.5# 49.3# 220.1 58.4 22.6 18.4 18739 7182 42124 3736 2415 600 93 1722 22280 8788 89 0.01 2007-08 21401 8323 43636 4430 2859 746 127 1986 29352 10774 95 0.01 CHANGE (%) 14.2 15.9 3.6 18.6 18.4 24.4 36.8 15.3 31.7 22.6 6.3 0.0

(US $ in million) Turnover Profit Before Tax Profit After Tax Conversion Rates (Rates as on 31st March) : 1 US $ = Rs. 43.14 for 2006-07 1 US $ = Rs. 39.49 for 2007-08 4344 866 560 5419 1122 724 24.8 29.5 29.3

HRA Approach use by BHEL


Human is the core factor and which is required to be recognized prior to any other 'M's But till now an urgent need based modification is required while identifying and measuring data about human resources. In this paper my objective is to identify the extensive use of Lev & Schwartz model of Human resource accounting, in spite of several criticized from various sides regarding its applicability. Further more, it also portrays the applicability in wide variety of organization of such model (some pubic sector units and IT based sector). Human is the buzzword in the modern knowledge based society. It is the most vital input on which the success & failure of the organization very much depend upon. Starting from the classical economist to modern human capital economist such development in considered to be a continuous process.

It is one of the most important 'M' associated, which is considered while taken care of 4M's associated with any organization and they are money machines, materials and men. But the most interesting thing is that the first three are recognized and find a place in the assets side of the Balance sheet of the organization. But in case of fourth one ambiguity prevails among the accountant.


In spite of its usefulness has been acclaimed is various literature over the decades but its application still remain a suspectable issue, the IASB and the ASB in different countries have not been able to formulate any specific accounting standard for measurement & reporting of such valuable elements. It is a popular phenomenon among the Indian corporate world is to disclose information relating to human resource in annual statements. In this context, it is necessary to conduct a study to assess the disclosure pattern of HRA information in Indian corporate World. It first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public enterprise, during the financial year 1972-73. Later it was also adopted by other leading public and private sector Organization in the subsequent years. Some of them are Hindustan Machine Tools Ltd.(HMTL). Oil and Natural Gas Corporation Ltd.(ONGC), NTPC, Cochin Refineries Ltd. (CRL), Madras Refineries Ltd.,(MRL), Associated Cement Company Ltd.(ACC) and Infosys Technologies Ltd.(ITL). However, adaptability of various model (mainly Lev and Schwartz model, Flamholtz model and Jaggi and Lev model) and discount rate fixation and disclosure pattern ie. either age wise, skill wise etc in BHEL, SAIL, MMTC (Minerals & Metals Trading Corporation Of India Ltd.) HMTL, NTP make it clear, that there has been no uniformity among Indian enterprises regarding HRA disclosure. Problem Statement: Understanding the way of valuation of human resources by using Lev & Schwartz model and how valuation of such asset are related with the other financial variables for financial reporting purpose.


Objectives of HRA approach Study at BHEL and Other Organizations: The main objectives of the study are: i) To asses the way of presenting HRA information in the financial statement by selected companies ii) To identify HRA methods and models (mainly the extensive use of Lev & Schwartz model) which are used to arrive at human resource value. iii) How human resource are related with the other accounting variables for the purpose of human financial reporting in selected companies. The ways of presentation of HRA information disclosed by some of the companies


Productivity & Performance Indicators

Source: Secondary Terminology used: 1) PBT-Profit Before Tax 2) HR- Human Resource 3) TA-Total Assets 4) Turn-Turnover ( or Sales) 5) FA-Fixed Assets 6) VA- Value Added Models of Human Capital Valuation Many models have been created to value human capital. Some are based on historic costs while some are based on future earnings. But each has its own limitations and one model has proved to be more valid than other. Although the Lev and Schwartz model has been the most widely use model for its ease of use & convenience.


The Lev & Schwortz Model The Lev and Schwartz model states that the human resource of a co is the summation of value of all the Net present value (NPV) of expenditure on employees. The human capital embodied in a person of age r is the present value of his earning from employment Under this model, the following steps are adopted to determine HR Value. i) Classification of the entire labour force into certain homogeneous groups like skilled, unskilled, semiskilled etc. and in accordance with different classed and age wise.eg. In Infosys the classification is based on software professionals & support staff etc. ii) Construction of average earning stream for each group.eg. At Infosys Incremental earnings based on group/ age have been considered. iii) Discounting the average earnings at a predetermined rate in order to get present value of human resource's of each group. iv) Aggregation of the present value of different groups which represent the capitalized future earnings of the concern as a whole,

Where, Vr t r

= the value of an Individual r years old = retirement age = a discount rate specific to the cost of capital to the company.

I (t) = the individual's annual earnings up to retirement


Critical appraisal of the Lev & Schwartz model: It is essentially an input measure .It ignores the output i.e. productivity of employees. Service state of each individual employee is not considered. The training expenses incurred by the company on its employees are not considered. The attrition rate in organization is also ignored. Factors responsible for higher earning potentiality of each individual employees like seniority, bargaining capacity, skill, experience etc. which may cause differential salary structure are also ignore.


The conceptual thinking about valuation human resources is still in a developing stage. No model of HR accounting is accepted by the accounting bodies all over the world. However, still we find some application of Lev & Schwartz model is most public sector units and IT based sectors. In knowledge based sectors where human resources are considered to be the key elements for monitoring the business activities to attend their goals successfully, may not overlooked this side. Hence, considering the great significance of HRA proper initiation should be taken by the government along with that other professional & accounting bodies both at the national & international levels for the measurement & reporting of such valuable assets.


[01] N.P. Agarwal, Sugan C. Jain, Priti Gupta Human Resource Accounting, Raj Publishing House, Jaipur [02] Sumanta Dutta HR Accounting - A Strategic Use of Lev & Schwartz Model

[03] http://www.bhel.com/about.php

[04] http://www.bhel.com/financial_information/bhelglance.php