Here is an interesting article from http://www.expressitpeople.com/20021216/cover.shtml
on Human Resource accounting.
How far is it prevalent in India and is it prevalent only in IT sector? Is it not required in other industries also? Where i work (for example), human resource accounting is unheard of. Human resource is just considered as "expenses".
The need for human resource accounting
Punita Jasrotia/New Delhi
“Our main asset is our people!”
How true is this oft-repeated statement made by the management of all knowledge-driven companies? The problem in fact starts when it comes to assessing the real value of human assets. While most organisations can readily give detailed information about their tangible assets like plant and machinery, land and buildings, transport and office equipment, there is no formal record of investment in employees. Human assets accounting or human resource accounting (HRA), which stands for measurement and reporting of the cost and value of people as organisational resources, is still to become an accepted trend in the Indian IT industry.
It is true that worldwide, knowledge has become the key determinant for economic and business success, but Indian companies focus on ‘Return on Investment’ (RoI), with very few concrete steps being taken to track ‘Return on Knowledge’.
What is needed is measurement of abilities of all employees in a company, at every level, to produce value from their knowledge and capability. “Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business. HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organisation,” says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India. The current accounting system is not able to provide the actual value of employee capabilities and knowledge. This indirectly affects future investments of a company, as each year the cost on human resource development and recruitment increases.
Experts point out that the information generated by HRA systems can be put to use for taking a variety of managerial decisions like recruitment planning, turnover analysis, personnel advancement analysis and capital budgeting, which can help companies save a lot of trouble in the future.
On balance sheet
Organisations can actually find out how much they can earn from an individual, as the intellectual assets of a company are often worth three or four times the tangible book value. Human capital also provides expert services such as consulting, financial planning and assurance services, which are valuable, and very much in demand.
Realising this, many companies world-over are making HRA as a necessary element on their balance sheets. One of the best examples is of the Denmark Government. The Danish Ministry of Business and Industry has issued a directive that with effect from the trading year 2005, all companies registered in Denmark will be required to include in their annual reports information on customers, processes and human capital. A minimum of five measures for each is required, and comparison with the previous two years must be shown. Figures for investment in intellectual capital must be shown and compared with the previous two years. A narrative should accompany each set of figures. Information for investors about intellectual capital, both current and future, should occupy at least one third of the report. Where relevant, information must also be provided regarding care for the environment.
In India, there are very few companies like BHEL, Infosys and Reliance Industries, which have implemented HRA and some are working on it. Infosys, which started showing human resource as an asset in its balance sheet, has been reaping high market valuations. NIIT has been following a similar method called Economic Value Addition (EVA), which also helps in assessing the real value that an employee can fetch for the company.
Experts point out that companies can derive many benefits by going in for HRA. Not only can they measure the return on capital employed on total organisational assets (including the human assets), but the resources can also be planned accordingly. “Once organisations realise the actual benefit and take it as a growth process, it will only help them in increasing their shareholders’ value. When a company is able to assess an individual’s worth, it helps in increasing its own worth,” says Ajay Sharma, senior HR manager of Cadence Systems.
Basically HRA can be tracked through two methods—cost-based analysis and value-based analysis. The cost-based approach focuses on the cost parameters, which may relate to historical cost, replacement cost, or opportunity cost. The value-based approach suggests that the value of human resources depends upon their capacity to generate revenue. This approach can be further sub-divided into two broad categories: non-monetary and monetary.
The disposition of resources can also be examined by allocating relative human asset values to different job grades. HRA also helps in examining expenditure on personnel and in re-appraisal of expenditure on services and training. It can also serve as a key factor in case of mergers and takeover decisions, where the human asset value becomes a relevant factor. Another very significant role, which HRA can help in creating, is goodwill for a company. The company can project itself in having best practices with superior policies in place. Experts believe that this may help the organisation attract more investments.
While HRA as a concept has been present in India for more than a decade, with BHEL taking a lead, it is only now that the awareness is being translated into application. However, Gupta points out that in terms of awareness and acceptance, the level is still low as many companies take little initiative to make the numbers public to shareholders, despite having the data.
Another major deterrent is the lack of an industry standard. This means that every company has to evolve its own standard,
which can become a tedious process, considering that most of them are still involved in improving their business. Industry bodies like Nasscom can help set a standard.
Another aspect working against the acceptance of HRA is the need for extensive research that it entails. Many companies do not want to go into the intricacies of finding the value of their human resources. “While most big companies (with a large manpower) can afford to dwell into such best practices, it is not an economically viable option for small and medium companies,” says Sharma of Cadence.
Naresh Taneja, the head of human resources of HCL Technologies (Mumbai, formerly Gulf Computers), believes that one cannot totally rely on this concept. “Considering the dynamism of this industry, it is very difficult to predict as to what is going to be your future requirements and how technology is going to shape in the near future. This only raises the question on the benefits of HRA.”
Gupta is however optimistic about the future. “As HRA is not directly related to RoI, many companies do not take it very seriously. However, in the past few years organisations have been investing a lot on improving their systems and infrastructure. And the next obvious step would be measurement of human assets.”
However, it’s ultimately the people who deliver results. Realising the benefits, which it can provide, the responsibility lies on the companies, as to how much importance can they or do they give to their HR.