Hr Accounting Policies in Infosys
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. Ans: 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.
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 human resources in an organization 5. Goodwill Method:
This model was developed by I-Iarmonsonand was also called the Hormonson model. According to this model, the additional profit earned by an organization during a particular period of time was compared to the industry’s ayeragerat. Q2. Explain in detail the HRA model adopted by Infosys. What benefits did the company reap after valuing its human resources? Ans: HRA AT INFOSYS The company used the Lev & Schwartz Model (Refer Exhibit I) and valued its human resources assets at Rs 1. 86 billion. Infosys’ HRA model was based on the present value of the employees’ future earnings with the following assumptions: An employee’s salary package included all benefits, whether direct or otherwise, earned both in India and in a foreign nation. . The additional earnings on the basis of age and group were also taken into account. To calculate the value of its human assets in 1995-96, all the 1,172 employees of lrifosys were divided into five groups, based on their average age. Each group’s average compensation was calculated. Infosys also calculated the compensation of each employee at retirement by using an average rate of increment.
The increments were based on the industrY standards, and the employee’s performance and productivity. Finally, the total compensation of each group was calculated. This value was discounted at the rate of 27. 36 percent per annum which was the cost of capital of Infosys, and the sum of the values of all the groups was calculated to arrive at the figure ofRs 1. 86 billion. The formula used by Infosys as per the Lev and Schwartz model was: H = IE (IR Ie(y)/(l +dy,Pe where, H = discounted present human capital value for all individuals in the company le(Y)= annual earnings of employee e for the year ‘y’ = discount rate specific to the cost of capital of the company .The company could determine whether its human asset was appreciating over the years or not. This information was important for the company as its success depended solely on the knowledge of the employees. In addition, the company could also use this information internally to compare the performance and productivity of employees in various departments. HRA also helped Infosys to decide the compensation of employees.
The company ensured that it compensated each employee according to his/her worth. Q3. What are the possible disadvantages of the evaluation of human capital by organizations? Do you think it is ethical on the part of an organization to place a monetary value on its employees? Explain. Ans: The disadvantages of evaluation of human capital by organizations is such that many organizations do not project a true and fair view of financial position by valuing human capital, it might also result in might result in underestimation of some efficient employees and over-estimation of some others.
Also, various companies used various models of HRA and comparing two companies using two different models would be difficult. Companies could misuse HRA to enhance their image Putting monetary value on its employees is has both its pros and cons, on societal and human perspective , it might be that adopting this approach would amount to treating humans as commodities, doubting an individual’s abilities, knowledge, skills and experience. Furthermore assigning a definite value to each individual may not be proper because knowledge of each individual differed from that of another. But,
In a dynamic environment, changing trends , surviving in the global village is like dangling from double edged sword, employees having realized that ar forever on competitive tetherhooks and hence it is justified to value human assets as it changed the perspective from which the companies viewed their employees’ utility to the organization. The financial strength of a company is determined by all the resources in the company, including human resources. Companies felt that HRA would gain popularity in India only when organizations would move away from the traditional management style, which gave less importance to people.
There were also countless functional benefits such as – 1. take managerial decisions based on the availability and the necessity of humanresouw it gave the investors and other clients insights into the organization and its future potential. Proper valuation of human resources helped organizations to eliminate the negative effects of redundancy helped them to channelize the available skills, talents, knowledge and experience of their employees more efficiently