VALUING HUMAN RESOURCES
QUESTIONS FOR DISCUSSIONS
Q1. By early 2000, many companies in India had started valuing their human capital and reported the same in their balance sheets and other financial statements. Briefly explain the concept of valuation of human resources and compare the various models available for human resources accounting.
HRA 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 employee generated during the tenure he/she worked .for the company. HRA reflected the potential of the human resources of an organization in monetary terms, in ifmancial statements.
The two main components of HRA 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 nom human resources was regarded as the value of its human resources.
VARIOUS MODELS OF HRA
Historical Cost Method:
The costs, which were incurred on the development of human resources, were with intention to obtain future benefits.
Therefore, these costs were not to be treated as expenditure,but investments, future revenues or assets. The expenditure incurred by an organization on recruiting, selecting, trainig and developing employees had to be capitalized and shown in the balance sheet as assets, as the humans possess some skills, knowledge and experience which could be turned into value for tbe organization. However', it was argued by some critics that costs did not reflect the true value and truevalue could be known only by the difference between real performance and the cost incurred, associated with the human resources of the organization.
2. Replacement Cost Method:
The cost incurred by an organization on replacing the earlier employees and strengthening. the organization further, had to reflect the human resource value of both the employees and organization. Critics argued that it is difficult to assess the replacement cost of the employees as the value, which they generated over period of time and their contribution to the organization was difficult to measure in relation to cost incurred to employ them.
3. Opportunity Cost Method:
According to this model, the potential monetary value to be generated by an employeewas be estimated by allocating the employee to an actiyity in which he/she best fitted. In otherwords, opportunity cost of key employees in the organization was assessed in relation to their performanance and in accordance with the organizational goals. The investment managers used to bid for t] employees and the highest bid for an employee was considerd his price, which was to be reflect in the balance sheet.The bid price was a measure of the employee's competence and experience,a1 the value that he would generate for the organization. Citics argued that competitive biddin. involved assessing the future coniribution of an employee to the organization's goals make more individuals to disassociate themselves from the bidding process, thereby making it difficult for the organization to measure their value. They further argued that the bid price placed on employee may be based on the perception of the bidder, which may not give a correct estimation the employee's true value. The value to be generated by an employee was relative and hence this measurement cold not be effective.
4. Standard Cost Method:
According to this model, the cost of recruiting, selecting, training and developing a particular grade of employees were standardized. These costs were determined and evaluated over the years to get the total value of the...