Methods of human resource accounting

A number of different valuation models have been developed for the measurement of human assets in an organization. The various approaches may be divided into two categories:

(i) Monetary measures, and (ii) non-monetary measures.

Monetary Measures

1. Replacement Costs

In this method, the value of an employee is estimated in terms of the cost that the organization will have to incur if it were to replace the present employee with a person of equal ability. The replacement cost here includes recruitment, training and development expenditure along with the opportunity cost of revenue lost during the period of training.

Flamholtz who used this model has referred to two different concepts of replacement costs viz. individual replacement cost and positional replacement cost. For each employee, the position he might occupy in the future must be identified. Secondly, the positional replacement cost of the employee should also be measured.

The probability of the employees occupying their respective positions at the expected time should also be made. This positional replacement cost is defined as the cost of replacing the set of services expected to be rendered by an individual in the present and future positions.

2. Opportunity Cost

The value of human assets in the opportunity cost method is determined on the basis of the value of individual employees in an alternative use. The guiding criteria here is that human assets have value only when there is an alternative use for them, i.e., only scarce personnel represent the value of human assets.

Thus, there is no opportunity cost for employees that can be hired easily. Hekiman and Jones use the opportunity costs to arrive at the worth of employees. The approach involves a competitive bidding process by the investment center managers for scarce employees they desire.

The bid price is based on the perceived value of the individual employee and only scarce employees form the asset base of the investment center. It is argued that the evaluation of human assets on this basis encourages managers to select employees more optimally and result in the most efficient use of employee time.

3. Historical costs

This method involves capitalizing the cost of maintaining the individual in the organization to produce the service state rewards to the organization, i.e., all costs related to recruitment, training and development of the employees.

Training costs are usually demortized over a shorter period than recruitment costs since training becomes outdated as new skills must be developed to meet technological change. The value is written off annually over an individual employee’s expected tenure in the organization. The unexpired value is shown as an investment in human resources.

This method is considered to be useful to both internal and external users of accounting data as the method is considered by researchers to be objectives and facilitates comparison.

4. Economic Value

This method measures the value of human assets on the assumption that an individual generates value for an organization as he occupies and moves among organizational roles and renders services to the organization. The roles he will occupy depend probabilistically upon the roles previously occupied. Thus, the valuation process involves the use of probabilities of the employees change of position and of service to be derived.

A person’s expected service value may be expressed as follows:

(S) = (n / t=1) Si P (Si)


(S) is the expected total service, Si is the service expected to be derived from each state to be occupied by the employee and P(S) is the estimated probability of the expected service being actually derived.

The total value of expected future service is determined by multiplying the physical equivalent of services by the price of services. The total value is then discounted at the appropriate rate of return to obtain the present value of service. The present value so obtained represents the value of human assets.

5. Discounted Present value of Future wages & salaries

The value of human resources is taken to be equal to the present value of future earnings of employees until retirement. For this purpose employees may be classified into homogeneous groups according to the type of assignment, nature of work, age, level of skill etc. An appropriate rate of discount like the cost of capital may be used to compute the present value of future earnings.

Non-monetary Measures

1. Discounted net present value of future earnings based on managerial behavior, style, policies and the employees attitudes, performance and collective capabilities. The value of human resources is measured by predicting the future earnings of the employing firm, discounting the same to net present value and allocating a portion of this value to human assets. The future earnings of the firm are predicted taking into account two types of variables: casual variables like management behavior, style, organizational structure, and Intervening variable like loyalties, motivation, goals and attitudes of the employees.

2. Value of employees based on attitude scores derived from their knowledge, skill etc. and their annual income. The attitude score of an employee is then multiplied by his annual salary. The difference between this value and the employee’s annual earnings represent the gain or loss the firm is incurring by retaining the employee.

3. Flamholtz model: According to Flamholtz, an individual’s value to an organization can be measured by applying personnel evaluation methods like ranking. Individuals may be evaluated by their supervisors subordinates, peers or independent experts. The economic value of an individual to the organization can be measured in terms of their net contribution to the organization, that is, their gross value, less the compensation and other costs associated with their utilization.

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