Human Resource Account Sem 6

1.
Meaning of Human Resource Accounting (HRA)
 Human Resource Accounting (HRA) is a specialized accounting framework that focuses on the
measurement, valuation, and reporting of an organization’s human resources as important
assets. It recognizes that employees are a critical asset that contributes significantly to the
success and sustainability of an organization.
 Unlike traditional accounting, which primarily focuses on tangible assets like machinery and
buildings, HRA emphasizes the value of human capital—skills, knowledge, experience, and
abilities of employees—highlighting their importance in achieving organizational goals.
Key Features:
 Valuation of Employees: HRA aims to quantify the economic value of an organization’s

workforce, reflecting their contribution to productivity, profitability, and overall business
performance.
 Focus on Development: It emphasizes the significance of investing in employee development,
training, and education, suggesting that such investments enhance human capital and overall
organizational value.
 Measurement of Employee Contributions: HRA seeks to provide a framework for measuring
and reporting the contributions of employees to the organization's success.
2. Techniques of Human Resource Accounting Valuation
There are several techniques used for the valuation of human resources, each with its own
approach to measuring the economic value of employees:
A. Cost-Based Methods
1. Historical Cost Method:

o This method calculates the value of human resources based on the actual costs incurred
in recruiting, hiring, training, and developing employees. This includes salaries, training
expenses, benefits, and other costs associated with human resources.
o Formula:
Value of Human Resources=Cost of Recruitment+Training Costs+Salaries+Other Direct C
osts\text{Value of Human Resources} = \text{Cost of Recruitment} + \text{Training
Costs} + \text{Salaries} + \text{Other Direct
Costs}Value of Human Resources=Cost of Recruitment+Training Costs+Salaries+Other Di
rect Costs
2. Replacement Cost Method:
o This method estimates the cost required to replace an employee with a similar skill set
and qualifications. It takes into account the costs associated with recruiting, training,
and onboarding a new employee.
o Formula: Value of Human Resources=Replacement Cost of Employees\text{Value of
Human Resources} = \text{Replacement Cost of
Employees}Value of Human Resources=Replacement Cost of Employees
3. Opportunity Cost Method:
o This technique assesses the value of human resources based on the income the
organization forgoes by not utilizing their skills optimally. It considers the potential
earnings that the organization could have achieved if the employees were deployed in
their most productive roles.
B. Economic Value Methods
1. Present Value of Future Earnings:

o This approach calculates the present value of expected future earnings generated by an
employee over their remaining career with the organization. This technique considers
salary, bonuses, and other financial benefits.
o Formula: Present Value=∑Earningst(1+r)t\text{Present Value} = \sum
\frac{Earnings_t}{(1 + r)^t}Present Value=∑(1+r)tEarningst where
EarningstEarnings_tEarningst is the expected earnings in year ttt and rrr is the discount
rate.
2. Net Income Method:
o This method evaluates the contribution of human resources to the net income of the
organization. It involves measuring the increase in income attributable to the workforce
and deducting costs associated with employees.
o Formula: Value of Human Resources=Net Income−Employee Costs\text{Value of Human
Resources} = \text{Net Income} - \text{Employee
Costs}Value of Human Resources=Net Income−Employee Costs
3. Economic Value Added (EVA):
o EVA measures the value created by an organization over and above the required return
on its capital, including human capital. It assesses the overall economic profit generated
by the workforce.
o Formula: EVA=Net Operating Profit After Taxes−(Capital×Cost of Capital)\text{EVA} =
\text{Net Operating Profit After Taxes} - (\text{Capital} \times \text{Cost of
Capital})EVA=Net Operating Profit After Taxes−(Capital×Cost of Capital)
C. Qualitative Methods
1. Balanced Scorecard:
o This strategic planning and management system measures organizational performance
beyond financial metrics. It includes factors like employee skills, satisfaction, and
retention, providing a comprehensive view of human capital's contribution.
2. Performance Appraisal Systems:
o Regular performance evaluations can provide qualitative insights into employee value,
identifying high performers and understanding their impact on organizational success.
3. Employee Surveys and Feedback:
o Collecting feedback from employees about their skills, job satisfaction, and engagement
can provide qualitative data that contributes to the understanding of human capital
value.

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1.

Meaning of Human Resource Accounting (HRA)

 Valuation of Employees: HRA aims to quantify the economic value of an organization’s

2. Techniques of Human Resource Accounting Valuation

1. Historical Cost Method:

B. Economic Value Methods

1. Present Value of Future Earnings:

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