Human Resource Accounting is a method to measure the effectiveness of personnel management activities and the use of people in an organization.

Approaches to Human resource accounting was first developed 1691 the next stage was during 1691-1960 and third phase post-1960.
There are two approaches to HRA. Under the cost approach, also called human resource cost accounting method or model, there is a) Acquisition cost model and b)replacement cost model. Under the value approach there are a) present value of future earnings method, b) discounted future wage model, c) competitive bidding model.

cost approach

This approach is also called as acquisition cost model.This approach is developed by Brummet, Flamholmay tz and Pyle but the first attempt towards employee valuation made by a foot ware manufacturing company R. G. Barry Corporation of Columbus, Ohio

Columbus, Ohio

Columbus is the capital of and the largest city in the U.S. state of Ohio. The broader metropolitan area encompasses several counties and is the third largest in Ohio behind those of Cleveland and Cincinnati. Columbus is the third largest city in the American Midwest, and the fifteenth largest city...

 with the help of Michigan University in the year 1967 . This method measures the organization’s investment in employees using the five parameter

Parameter

Parameter from Ancient Greek παρά also “para” meaning “beside, subsidiary” and μέτρον also “metron” meaning “measure”, can be interpreted in mathematics, logic, linguistics, environmental science and other disciplines....

s: recruiting, acquisition; formal training and, familiarization; informal training, Informal familiarization; experience; and development. this model suggest instead of charging the costs to p&l accounting it should be capitalized in balance sheet.the process of giving an status of asset to the expenditure item is called as capitalization.
in case of human resource it is necessary to amortize the capitalized amount over a period of time. so here one will take the age of the employee at the time of recruitment and at the time of retirement. out of these a few employee may leave the organization before attaining the superannuation. This is similar to a physical asset.
e.g.:-
If company spends one lakh on an employee recruited at 25 years, and he leaves the organization at the age 50, he serves the company for 25 years (his actual retirement age was 55 years). The company has recovered rupees 83333.33 so the unamortized amount of rupees 16666.66 should be charged to p&l account i.e.
100000\30=3333.33
3333.33*25=83333.33
100000-83333.33=16666.67
This method is the only method of human resource accounting which is based on sound accounting principals and policies.

Limitations

• The valuation method is based on false assumption that the dollar is stable.
• Since the assets cannot be sold there is no independent check of valuation.
• This method measures only the costs to the organization but ignores completely any measure of the value of the employee to the organization (Cascio 3).

It is too tedious to gather the related information regading the human values.

Replacement Cost approach

This approach measures the cost of replacing an employee. According to Likert (1985) replacement cost include 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.

Limitations

• Substitution of replacement cost method for historical cost method does little more than update the valuation, at the expense of importing considerably more subjectivity into the measure. This method may also lead to an upwardly biased estimate because an inefficient firm may incur greater cost to replace an employee (Cascio 3-4).

Present Value of Future Earnings

Lev and Schwartz (1971) 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.

According to this model, the value of human
capital embodied in a person who is ‘y’ years old, is the present value of his/her future
earnings from employment and can be calculated by using the following formula:

E(V_y) = Σ P_y(t+1) Σ I(T)/(I+R)^{t-y
T=Y Y}
where E (V_y) = expected value of a ‘y’ year old person’s human capital
T = the person’s retirement age
P_y (t) = probability of the person leaving the organisation
I(t) = expected earnings of the person in period I
r = discount rate

Limitations

• The measure is an objective one because it uses widely based statistics such as census income return and mortality tables.
• The measure assigns more weight to averages than to the value of any specific group or individual (Cascio 4-5).

Value to the organization

Hekimian and Jones (1967) proposed that where an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that division’s investment base. For example a value of a professional athlete’s service is often determined by how much money a particular team, acting in an open competitive market is willing to pay him or her.

Limitations

• The soundness of the valuation depends wholly on the information, judgment, and impartiality of the bidder (Cascio 5).

Expense model

According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral 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 labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs.