Human Resource Accounting

CONCEPT
• Human resource accounting is the process of identifying and
reporting investments made in the human resources of an
organization that are presently unaccounted for in the
conventional accounting practices.

• It is an extension of standard accounting principles.

• Measuring the value of human resources can assist organizations

in accurately documenting their assets.

• The valuations of human resources along with other assets are

also required in order to find out the total cost of an
organization.

• In 1960s, Rensis Likert along with other social researchers made

an attempt to define the concept of human resource accounting
(HRA).
 DEFINITIONS
1. American Association of Accountants (AAA) defines HRA as follows:

‘HRA is a process of identifying and measuring data about human

resources and communicating this information to interested
parties’.

2. Flamhoitz defines
HRA as ‘Accounting for people as an organizational resource. It
involves measuring the costs incurred by organizations to recruit,
select, hire, train, and develop human assets. It also involves
measuring the economic value of people to the organization’.

3. According to Stephen Knauf, ‘ HRA is the measurement and

quantification of human organizational inputs such as recruiting,
training, experience and commitment’.
 NEED FOR HRA
1. Under conventional accounting, no information is made available about
the human resources employed in an organization, and without people
the financial and physical resources cannot be operationally effective.

2. The productivity and profitability of a firm largely depends on the

contribution of human assets. Two firms having identical physical assets
and operating in the same market may have different returns due to
differences in human assets.

3. If the value of human assets is ignored, the total valuation of the firm
becomes difficult.

4. If the value of human resources is not duly reported in profit and loss
account and balance sheet, the important act of management on
human assets cannot be perceived.

5. Expenses on recruitment, training, etc. are treated as expenses and

written off against revenue under conventional accounting. All expenses
on human resources are to be treated as investments, since the
benefits are accrued over a period of time.
 OBJECTIVES
1. To provide cost value information about acquiring, developing,
allocating and maintaining human resources.

2. To enable management to monitor the use of human resources.

3. To Find depreciation or appreciation among human resources.

4. To Assist in developing effective management practices.

5. To Increase managerial awareness of the value of human resources.

6. For better human resource planning.

7. For better decisions about people, based on improved information

system.
APPROACHES/METHODS OF HRA
 HISTORICAL COST MODEL
• In Historical Cost method, the basic contributing factors
for developing the human resource of the organization
has been equated to the actual cost incurred.

• In this approach, the actual costs of recruiting, selecting

hiring, training, placing and developing the employees of
an organization are capitalized and amortized over the
expected useful life of the asset concerned.

• If the asset is liquidated prematurely, losses are

recorded, and if an asset has a longer life than estimates,
revisions are made in the amortization schedule.
 REPLACEMENT COST MODEL
• This approach was first suggested by Rensis Likert, and was
developed by Eric G. Flamholtz on the basis of concept of
replacement cost.

• This approach measures the cost of replacing an employee.

• According to Likert (1985) replacement cost includes

recruitment, selection, compensation, and training cost
(including the income foregone during the training period).

• The data derived from this method could be useful in

deciding whether to dismiss or replace the staff.
 OPPORTUNITY COST MODEL
• This method was first advocated by Hc Kiman and
Jones
• Based on the concept of opportunity cost i.e. the value
of an employee in its alternative best use.

• The opportunity cost value may be established by

competitive bidding within the firm, so that in effect,
managers bid for any scarce employee.

• A human asset therefore, will have a value only if it is a

scarce resource, that is, when its employment in one
division denies it to another division.
PRESENT VALUE OF FUTURE EARNINGS
MODEL
This Model of accounting was developed by Lev and
Schwartz in the year 1971.

This model proposed an economic valuation of

employees based on the present value of future
earnings, adjusted for the probability of employees’
death/separation/retirement.

This method helps in determining what an employee’s

future contribution is worth today.
 Expense Model
• According to Mirvis and Mac (1976), this model focuses
on attaching dollar (rupee) estimates to the behavioural
outcomes produced by working in an organization.

• Criteria such as absenteeism, turnover and job

performance are measured using traditional
organizational tools and then costs are estimated for
each criterion.

• For example, in costing labour turnover, dollar(rupee)

figures are attached to separation costs, replacement
costs, and training costs.
 BENEFITS OF HRA
1. It discloses the value of human resources, which helps in proper interpretation
of return on capital employed.

2. Managerial decision-making can be improved with the help of HRA.

3. Identifies human resources as valuable assets, which helps in preventing misuse

of human resources by the superiors as well as the management.

4. It helps in efficient utilization of human resources and understanding the evil

effects of labour unrest on the quality of human resources.

5. Increase productivity because the human talent, devotion, and skills are
considered valuable assets, which can boost the morale of the employees.

6. Assist the management for implementing best methods of wages and salary
administration
 LIMITATIONS OF HRA
HRA is yet to gain momentum in India due to certain difficulties:

1. The valuation methods have certain disadvantages as well as advantages . therefore,

there is always a bone of contention among the firms as to which method is an ideal
one.

2. No standardized procedures are developed so far. So, firms are providing it only as
an additional information.

3. Under conventional accounting, certain standards are accepted commonly, which

is not possible under this method.

4. All the methods of accounting for human assets are based on certain assumptions,
which can go wrong at any time. For example, it is assumed that all workers continue
to work with the same organization till retirement, which is far from possible.

5. It is believed that human resources do not suffer depreciation, and in fact they always
appreciate, which can also prove otherwise in certain firms.

6. The lifespan of human resources cannot be estimated. So, the valuation seems to be
unrealistic.
FORENSIC ACCOUNTING
 CONCEPT
Forensic accounting is the specialty practice area of accounting
that describes engagements that result from actual or
anticipated disputes.

"Forensic" means "suitable for use in a court of law", and it is

to that standard and potential outcome, that forensic
accountants generally have to work.

Forensic accounting utilizes accounting, auditing and

investigative skills to conduct an examination into a
company's financial statements.

Thus, forensic accounting provides an accounting analysis

suitable for court.
 Definition
• The Association of Certified Fraud Examiners
(ACFE) described forensic accounting as

• “The application of accounting skills to

provide quantitative financial information
about matters before the courts.”
Financial forensic engagements(EPBSTMB)

• Economic damages calculations, whether suffered

through tort or breach of contract;
• Post-acquisition disputes such as breaches of
warranties
• Bankruptcy, insolvency, and reorganization.
• Securities fraud;
• Tax fraud;
• Money laundering;
• Business valuation.
 Areas of Forensic Accounting
• Forensic Accounting encompasses two areas:

1. Litigation Support
Litigation represents the factual presentation of economic issues
related to existing or pending litigation.

In this capacity, the forensic accountant quantifies damages

sustained by parties involved in legal disputes and can assist in
resolving disputes before they reach the courtroom.

If a dispute reaches the courtroom, the forensic accountant may

testify as an expert witness.

Knowledge of the courtroom sets the forensic accountant apart

from a typical accountant.
2. Investigation
Investigation is the act of determining whether criminal
matters such as employee theft, securities fraud (including
falsification of financial statements), identity theft, or
insurance fraud have occurred.
Investigation may also occur in civil matters.
A forensic accountant may be hired to search for hidden
assets in a divorce case.
• While forensic accounting and fraud auditing are related,
fraud auditing is more anticipatory.

• Fraud auditors try to control a situation before something

happens, whereas a forensic accountant may be hired after
the act.
• A forensic accountant is usually hired after a company
suspects theft, fraud or embezzlement.
Advantages of Forensic Accounting
• Fraud Identification and Prevention
• Making Sound Investment Decisions
• Formulation of Economic Policies
• Rewarding Career Opportunity
 Disadvantages of Forensic Accounting

• Confidentiality Issue
• Increased Chances of Threats and Negative
Publicity
• Costs a Lot of Money
• Losing Employee Trust
• Limited Use of Services