USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

Methods of valuation of Human Resource

In order to measure the appropriate value of human resources, it is difficult to compl with the commonly accepted accounting principles. However, there are two important approaches for the valuation of human resources.

 

First one is based on the cost i.e., cost incurred by the enterprise to recruit, hire, train and development of employees.

 

Second one is to measure the economic value of the human resource based on capitalisation of earnings.

 

The important methods for the valuation of human resources are given below :

 

(i) Acquisition Cost. Under this method, costs incurred for the purpose of recruitment, hiring and induction and training of employees are taken into account. Expenditure incurred regarding the above activities is recorded properly and a proportion of it is written off to the income of the future periods during which human resources will provide service. But if in any situation, the human assets are liquidated prematurely, the amount which is not written off is changed to the income of the year the liquidation takes place. The historical cost of human resources is similar to the book value of other physical assets. This method is simple to understand, easy to work out and easy to implement.

 

(ii) Replacement Cost. In the case of acquisition cost, past costs are taken into account. But under this approach, one takes into account how much it costs to replace a firm’s existing resources and thus represents a current value approach. Under this method, historic cost is adjusted according to the current market conditions.

 

(iii) Standard Cost. It is the cost incurred for the purpose of recruiting, hiring, training and development of human resources in the organisation. In connection with the above activities the standard costing principles are to be applied. i.e., target is set for various components of human resources which are helpful to compare the actual and find the variations from the targeted one.

 

(iv) Opportunity Cost. Opportunity cost is the maximum alternative earning that is earned if the productive capacity or asset is put to some alternative use. Human resource valuation under the method of opportunity cost is difficult. Because alternative use of human resource within the organisation is restricted. And at the same time, this type of alternative use may not be identifiable in the real industrial environment.

 

(v) Present Value of Future Earnings Method. This model is developed by Lev and

Schwartz in 1971 and is popular in India. It is otherwise called as capitalization of salary method. According to this method, future earnings of employees are estimated upto the age of retirement and are discounted at a rate appropriate to the person or the group to obtain the present value. They have given the following formula for calculating the value of an individual.

 

Vr = I(t) / (I+ R)t-r

Vr = The value of an individual r years old

I(t) = The individual’s annual earnings upto the retirement

t = retirement age

R = a discount rate

 

(vi) Rewards 1′aluation Model. It has been suggested by Flamholtz. This method identifies the important variables that determines the value of each and every individual employee in an organisation i.e., his expected realisable value.

 

(vii) Net Benefit Model. This model was suggested by Morse (1973). According to this method, the value of human resources is equivalent to the present value of net profit earned by the enterprise from the services of the employee.

 

(viii) Certainty Equivalent Net Benefit Approach. This model has been suggested by Pekin Ogan in 1976. It is an extension of net benefit approach of Morse. Under this method, the value of human resource is determined by considering the certainty with the net profit earned by the enterprise in future.

 

(ix) Aggregate Payment Approach. This approach has been developed by Prof. S.K Chakraborty 1976, the first Indian to develop a model on human resources of an enterprise. According to this method, the value of human resources can be calculated on a consolidated basis and not the individual basis. But the managerial and non- managerial values are evaluated separately.

 

(x) Total Cost Concept. This approach has been developed by Prof. N. Dasgupta (1978). According to his opinion both employed and unemployed persons should be taken into account for the determination of value of human resources of the nation. In order to prepare the balance sheet of a nation, the system should be such which shows the human resources not only for a firm but also of the whole nation.

 

(xi) Input Out Control Mechanism. Dr. Rao (1983) has suggested this approach. The system of human resource accounting was developed and applied in a transport equipment manufacturing concern. The output factors of the system are described to be the indicators of human resource development and utilisation.

 

ADVANTAGES OF HRA

 

(i)                 It supplies quantitative information about the human capital.

 

(ii)               It helps the management to make proper interpretation of return on capital employed.

 

(iii)             It will help to increase the productivity of human resources through the monetary value attached to human resources.

 

(iv)             It assists the management to evaluate management development programme.

 

(v)               It will provide an invaluable contribution for accounting to humanity and it will lead to improved efficiency and performance of employee while preserving human dignity and honour.

 

(vi)             When and where human element is the prime factor that places human resource accounting to a significant role.Example: A drama company, a professional accounting firm.

 

(vii)           The value of organisation’s human resources is very much helpful for the real investors and the entrepreneurs in making long term investment decisions.

 

(viii)         It helps the management to reorient their attitudes towards employees and improving their administrative and leadership styles.

 

PROBLEMS AND LIMITATIONS OF HRA

 

(i)                 There is no specific and proper guidelines for finding cost and value of resources of an enterprise.

 

(ii)               It may lead to dehumanising and manipulation among employees.

 

(iii)             Continuous fear of opposition from the trade unions.

 

(iv)             The measurement of human capital bristles with many difficulties and requires huge expense.

 

(v)               The human capital cannot be purchased or owned by the firm and it would not be recognised as asset.

 

(vi)             Accountants express their objection because human asset cannot be objectively measured.