HUMAN RESOURCE ACCOUNTING PRACTICES IN INDIAN ORGANISATIONS

Chapter – 4

HUMAN RESOURCE  ACCOUNTING PRACTICES IN INDIAN ORGANISATIONS

It is a universally accepted fact that the progress of any organization is absolutely dependent on the skillful utilization of its human resources. Even in the modern world an organization may own adequate financial resources and acquire physical resources with latest technology as it needs, it would find it difficult to manage its affairs, if the human organization of the concern is not strong enough. However, the strange irony is that in India most of the organizations do not recognize it properly. They do not adopt human resource accounting (HRA) although it could contribute significantly both to internal and external management decisions. HRA also helps the people of the organization in improving their performance and bargaining capacity. It makes each of them conscious about the ratio between his contribution towards the betterment of the concern and the expenditure incurred by the concern on him¹.

Particularly with liberalization of the Indian economy and its gradual integration with the world economy, India as a developing nation, has realized the importance of its human resources. Perhaps due to the abundant manpower available and relatively low cost, this area of accounting was overlooked earlier. But now the importance of human element in an organization has been realized and Indian companies are now considering human resource factor just like another factor to production.

At present, we look forward to compete in the global market. Therefore, it is not enough to just manage an organization but the need of the hour is to manage any organization effectively for achieving corporate excellence in respect of all the factors to production.

Indian organizational and Human Resource Dynamics are different from that of other part of the globe. The government report shows that approximately 73 per cent of national income is utilized to compensate employees. In addition to wages and salaries, organizations often make other sizable investments in their human resources.

Thus, Human Resources Management is a modern term for what has traditionally been referred to as personnel management. The development of personal management in the UK and the USA was largely voluntary. However, in India, it emerged because of governmental intervention and compulsions. In the beginning of 20^th Century, various malpractices in the recruitment of workers and payments of wages were prevalent which caused a colossal loss in production due to industrial disputes. The Royal Commission on Labour in India (1931) under the number of benefits, some by legislation and some due to awareness, increased cost of living, higher expectation and standard of living and higher cost of scarce manpower. Obviously, the increased Human Resource costs become more pronounced in the service industry than in the manufacturing industry, as human resource was the main input in the service sector. Thus, the third factor was the attempt to integrate the trade unions with managerial vision of the enterprise, that survival and prosperity were common to both.

The concept of Human Resource Accounting in India is a recent phenomenon and is struggling for its acceptance. In India, Human Resource Accounting has not been introduced so far as a system. The Indian Companies Act does not provide any scope for furnishing any significant information about human resources in financial statements. However, a growing trend towards the measurement and reporting of human resources, particularly in the public sectors, is noticeable during past few years. BHEL, Cement Corporation of India, ONGC, Engineers India Ltd., National Thermal Power Corporation, Mineral and Metals Trading Corporation, Madras Refineries, Associated Cement Companies, SPIC, Cochin Refineries Ltd. etc. are some of the organization which have started disclosing some valuable information regarding human resources in their financial statements².

Statutory Provisions Regarding Maintenance of Accounts- The Companies Act 1956:

Section 211 of the Companies Act 1956 requires that:

(i)                 Every Balance Sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI or as near there to as circumstances permit or such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance  sheet due regard shall be had to the general instructions for preparation of balance sheet under the heading ‘Notes’ at the end of that part.

(ii)               Every Profit and Loss Account of a company shall give a true and fair view of the profit or loss of the company during the financial year and shall comply with the disclosure requirements specified in Part II of the Schedule VI.

Central Government may exempt any class of company from compliance with any requirements of Schedule VI in the public interest. Also the Central Government may modify the requirements of Schedule VI on an application made by the Board of Directors or with the consent of the Board of Directors. The concept of true and fair view implies that: (a) as regards the balance sheet one should not be misled about the financial position of the company, and (b) as regards the profit and loss account one should not be misled about the size of the profit or loss for the year and about the factors that have contributed to the profit or loss. Since absolute accuracy is too costly, even if possible, the law does not insist on hundred per cent accuracy but the extent of inaccuracy should not be such as to vitiate or blur the picture of profit / loss or financial position ³

In general, most people consider that if the Schedule VI requirements and the generally accepted accounting principles are followed and proper books of account are maintained as required in Section 209 (1) of the Companies Act, 1956, the profit and loss account and balance sheet will be automatically true and fair but it is too technical a view. The requirements of the Schedule VI relating to the balance sheet and profit and loss account provide for disclosure of physical assets and creation of depreciation provision thereon but there is complete silence regarding disclosure of value of human assets in balance sheet. The amount incurred on recruitment, selection, placement, training and development is generally treated as revenue expenditure and hence, it is debited to profit and loss account of the period during which such amount is incurred but any outlay on development of physical assets is capitalized which add nothing to the income generating process without human touch. These results in violating of matching principle which requires that current year’s sales revenue should be matched with current year’s expenditure to arrive at current year’s profits. The concept of materiality is impaired because by charging total expenditure of HR development which will also yield benefit in future years in profit and loss account of current year, profit figure is substantially suppressed and true and fair view of the profitability and financial position of the enterprise is not correctly disclosed by the profit and loss account and balance sheet. In fact, expenditure incurred by companies in India on training and development of HRs is significant and its knowledge can change one’s impression about the profit situation or the financial position. However, unfortunately this most valuable asset is not included in financial statements of the majority of the companies in India. It is equally a fallacy to find that whilst physical assets with insignificant valuation like furniture, loose tools etc are valued and shown in the balance sheet, the acquisition and development cost of even the ablest and most efficient manager is not reflected in the balance sheet.

As regards disclosure of statistical information regarding employees of the companies in their annual reports, Section 217 (2A) of the companies act 1956 requires the companies to give a statement showing the particulars of employees who are in the receipt of remuneration of not less than ` 300000 per annum during the financial year or not less than ` 25000 per month during part of the year in the company annual reports. This statement includes name of the employee, designation, gross and net remuneration received, age, qualifications, experience of the employee, and date of joining and particulars of last employment held by the employee. As far as HRA is concerned the disclosure of particulars of employees by companies in fulfillment of statutory requirement of Section 217 (2A) is not sufficient to draw any conclusion.

Accounting Standards in India:

The wave of standardization in accounting policies, methods and techniques reached India towards the end of the 1970s. The Institute of Chartered Accountants of India (ICAI), being the premier accounting body in the country, set up an Accounting Standards Board (ASB) on 21^st April, 1977 for recognizing the need to harmonize the diverse accounting policies and practices being used in India. The main task of the ASB is to formulate accounting standards so that such standards may be established by the Council of the Institute in India. The ICAI is one of the members of the International Accounting Standards Committee (IASC). At the time of formulation of accounting standards in India, the ASB takes into consideration the applicable laws, customs and business environment of India in the light of the provisions of the International Accounting Standards issued by the IASC. The accounting standards in India are issued under the authority of the Council of the ICAI. These standards are intended to apply only to items that are material. While discharging their attest functions, it is the duty of the members of the ICAI to ensure that the accounting standards are implemented in the presentation of financial statements covered by their audit reports. In the event of any deviation from the standards it is also their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviation. In the initial years, the standards are recommendatory in character and the ICAI gives wide publicity among the users and educates members about the utility of accounting standards and the need for compliance with the disclosure requirements⁴.

The ICAI has so far issued thirty accounting standards. These standards are not recognized in the Companies act 1956. Hence, these standards are optional to the corporate management. However, choice of accounting policies in conformity with accounting standards is a preferred approach as these contain professional views of the ICAI. The ICAI has also declared most of these accounting standards as mandatory for the members of the Institute who have to look into compliance thereof while discharging their attest function⁵

Though the ASB of the ICAI have issued thirty accounting standards on most of the important areas in accounting and have ensured their implementation by making accounting standards mandatory, the strange irony is that they have not formulated any specific accounting standard on measurement and reporting of cost and value of HRs. This is one of the severe limitations of conventional financial statements which hinders the users of these statements from making full use of them. The non-disclosure of information relating to HRA in financial statements distorts net profit or loss disclosed by profit and loss account, financial position disclosed by balance sheet and also distorts computation of rate of return on capital employed because its components namely net profit and total capital employed are distorted⁶. 

Disclosure Pattern of HRA Information by Indian Enterprises:

If we look at the annual reports of public sector undertakings and private enterprises in India, we find that chairman’s reports invariably contain the statements highlighting the significance of HRs. Bharat Heavy Electricals Ltd., a leading public enterprise had introduced HRA in its Annual Report of the financial year 1974 – 75 for the first time in India. In the subsequent years twenty one organizations belonging to the public sector and seven belonging to the private sector had adopted such a practice. They are as follows:

1)                  Steel Authority of India Ltd. (SAIL)

2)                  Hindustan Machine Tools Ltd. (HMTL).

3)                  Oil & Natural Gas Corporation Ltd. (ONGC)

4)                  National Thermal Power Corporation Ltd. (NTPC)

5)                  Hindustan Shipyard Ltd. (HSL)

6)                  Oil India Ltd. (OIL)

7)                  Minerals and Metals Trading Corporation of India Ltd. (MMTC)

8)                  Cement Corporation of India Ltd. (CCI)

9)                  Engineers India Ltd. (EIL)

10)              Electrical India Ltd. (ELIL)

11)              Project and Equipment Corporation of India (PEC)

12)              Metallurgical and Engineering Consultants Of India (MECON)

13)              Canbank Financial Services Ltd.(CFSL)

14)              Southern Petrochemical Industries Corporation Ltd. (SPIC)

15)              Cochin Refineries Ltd.(CRL)

16)              Madras Refineries Ltd. (MRL)

17)              Associated Cement Companies Ltd. (ACC)

18)              Tata Engineering &Locomotive Co. Ltd. (TELCO) and

19)              Infosys Technologies Ltd. (ITL) ⁷

20)              Bharat Heavy Electricals Limited (BHEL)

21)              Global Tele Limited (GTL)

22)              Hindustan Petroleum Limited (HPL)

23)              Hindustan Zinck Limited

24)              Indian Drugs and pharmaceuticals Limited (IDPL)

25)              Indian Oil Corporation (IOC)

26)              Rolta India Limited

27)              Satyam Computers Limited (SATYAM)

28)              U.P State Cement Corporation Limited (UPCCI)

Associated Cement Companies (ACC):

Categorized total employees age wise and designation wise like (a) Senior executives (b) Managerial (c) officers (d) clerical and other (e) supporting staff (f) skilled workers (g) semi skilled workers (h) unskilled workers to asses the value of human resources and it has been disclosed from the financial year 1983 -84 by using Lev & Schwartz model with adjustments suggested by Flamholtz, Jaggi and Lau. ACC reported in its annual report information under the head human resources accounting. This company not depicted human resources accounting information from the year 1987.

Bharat Heavy Electricals Limited (BHEL):

This Company followed the discount rate at 12 per cent considering the weighted average cost of capital. It adopted the model of Lev& Schwartz and categorized employees according to their age, grade and category for the purpose of valuation and reporting information related to human resource accounting. It also disclosed the ratios like Human Resources (HR) / Total Resources (TR), Human Resources/ Fixed Assets (FA), Turnover / Human Resource value, Value added / Total Resource, Profit Before Tax / Human Resource value.

Cement Corporation of India Limited (CCI):

This company reports the number of training and development programs conducted every year and the number of employees that participated in such programs under the head of human resource accounting. It started reporting of human resources value from the year 1979-80. It discount the future expected return of an employee by applying the rate of discount at 15 per cent. It reports number of employees’ category wise and in total. Break up of the number of total employees made by company are as under (a) Engineers/ Technicians (b) Accountants (c) Doctors (D) Architects (e) Ministerial Staff (f) Others.

Can Bank Financial Services Limited (CFSL):

CFSL reports the number of employees group wise as well as in total and it started HRA valuation and reporting practices in the financial year 1989-90 by adopted a Lev and Schwartz model.

Electrical India Limited (EIL):

EIL divides total employees into 20 groups from level one to level twenty. EIL uses the salary based economic valuation model proposed by the Lev and Schwartz for the valuation of its human resources. The company applies the rate of discount at 12 per cent to calculate the present value of future expected income of employees.

Engineers India Limited (EIL):

This company started reporting information relating to human resource accounting under the head “Human Valuation”, from the financial year 1981-82, and adopted a Lev and Schwartz model with the amendments suggested by Jaggi and Lau. The total employees are divided into seventeen levels starting from level one for watchman to the highest position with the level seventeen, further all levels are categorised as a age wise in seven age groups. But all these levels are merged broadly into four categories as under (a) Managers, (b) Executives (non-technical executives) (c) Drafts man (Technical executives) (d) supporting staff.

Global Tele Limited (GTL):

            This company reports human resource value in the section ^‘’people first’’.  GTL follows the Lev and Schwartz model and divided the total employees into two groups as under: (i) Operation Staff and (ii) Support Staff / Other. GTL also reports some ratios, Total HR value to total turn over, value added to total value of human resource.

HMTL (Hindustan Machine Tools Limited):

HMTL uses the Lev and Schwartz economic value based model for the valuation and reporting of information regarding its human resources as supplementary information in its annual reports. This company reports information in the following ways value added per employee, average monthly earnings per employee, the average monthly fringe benefits per employee, investment per employee and profit before tax per employee etc.

Hindustan Petroleum Corporation Limited (HPCL):

HPCL divides all the employees into two groups, namely (i) Officers and (ii) Non Officers. The company calculates the present value of future expected return at the rate equal to weighted average cost of capital for the year. The company does not follow the constant rate, It varies from year to year.

Hindustan Zinc Limited (HZL):

This company discloses the number of employees and human resource value both group wise as well as in total. It calculates the present value of the future expected income of employees, by applying Lev and Schwartz model with a discount rate of 12 per cent.

Indian Drugs and Pharmaceuticals Limited (IDPL):

IDPL was not reporting discount rate, but it was reporting the human resource values by following the economic valuation model proposed by Lev and Schwartz.

Kochi Refineries Limited (KRL):

Kochi Refineries Limited follows the discount rate of 15 per cent which is equal to the cost of capital. It follows Lev and Schwartz model to asses the value of human resources.

Metallurgical and Engineering Corporation of India Limited: (MECON):

This company started human resource valuation and reporting practice in the year 1984 -85, following the salary based economic valuation model proposed by Lev and Schwartz. It reports ratios like human resources to total resources, value added to human resources and turn over to human resources.

Minerals and Metals Corporation of India (MMTC):

MMTC started human resource valuation and reporting practice in the year 1982 by using a modified model of human resource valuation given by Lev and Schwartz under the head of “Human Asset Accounting”.

Madras Refineries Limited (MRL):

This company follows the Lev and Schwartz model with a discount rate of 15 per cent and it also reports some ratios like human resources to total resources and turnover to human resources.

National Thermal Power Corporation (NTPC):

NTPC divides total employees into three groups as under (a) Executives (b) Supervisors (C) and Workmen. It also presents some ratios similar to Human Resource Value/ Total Resource Value, Value added / Human Resource Value, Turn over / Human Resource Value.

Oil India Limited (OIL):

            This company reports total resources including Human Resources (Net fixed assets and Net current assets) at current costs. It uses the Lev and Schwartz model with suggestions given by Flamholtz and Jaggi and Lau. It categorized all employees into two groups. (i) Technical, (ii) Administrative and Commercial. Company further classifies them into three groups (i) Managers (ii) Executives and (iii) Work men. The discount rate varies from 10.5 per cent to 15 per cent.

Oil and Natural Gas Corporation Limited (ONGC):

This Company considers the rate of interest, at which the Government of India advances them loans, as the discount rate. It divides total employees into four categories as under (a) Managerial and Supervisory (b) Clerical (c) Skilled Workers (d) Unskilled Workers.

Project and Equipment Corporation of India (PEC):

PEC have been following the human resources accounting practice from the year 1980-81 and it report group wise and in total in terms of employees and also it reports human resources value group wise as well as in total.

Rolta India Limited (ROLTA):

Rolta India Limited considers all the direct and indirect benefits earned both in India and abroad by their employees. It reports human resource value per employee, net profit per employee, revenue per employee, total employee cost etc.

Satyam Computers Limited (SATYAM):

It uses the Lev and Schwartz model to asses the value of human resources. It considers the weighted average cost of capital for the past five years as the discount rate; employees are divided into two categories: (a) Development associates, (b) and support associates. It reports human resource value in Indian rupees as well as in US dollars. It also reports associates cost i.e. cost of employees in rupees and also as a per centage of human resource value, per centage share of development associates human resources value and support associates human resources value in total human resource value.

Southeran Petrochemical Industries Corporation (SPIC):

This Company divides total employees in groups as under (a) Officers (b) Skilled (c) Semi Skilled Staff (d) Unskilled Staff and Others (e) Trainees. It reports value added along with ratio of total earnings to human resources and value added to human resources. It does not disclose the discount rate.

State Trading Corporation (STC):

STC calculates the human resource value by applying the economic value method of Lev and Schwartz model, and it applies the rate of discount at 12 per cent. It present its human resource value as category wise and total number of employees, category wise as well as total human resource value and also total resources including human resources.

Steel Authority of India Limited (SAIL):

SAIL reports value of its human resources from the financial year 1983-84, and it follows the human resource valuation model suggested by Lev and Schwartz by taking some adjustments given by  Flamholtz  and Jaggi and Lau. SAIL takes the possibility of leaving the job by employees.  SAIL has divided its total number of employees into six groups (a) Managers (b) Executives (c) Supervisors (d) clerical staff (e) Skilled workers and (f) Semi skilled workers. It reports number of employees’ category wise, age wise and total. It also reports the human resource value of all employees in total as well as category wise. SAIL uses the constant rate of discounting the future expected return at 15 per cent.⁸

HRA Practices in the Indian IT Sector:

A review of the annual reports of the top 50 IT and ITES companies in India. (Based on revenue of 2008, Capitaline) discloses that most of them have strong HR orientation, though a very few have the formal HRA system.  As far as the disclosure of HR information is concerned, the IT sector provides a good amount of decision inputs to the stakeholders through the annual reports.  Among the Indian IT companies, Infosys Technologies Ltd., Satyam Computer Services Ltd., and KPIT Cummins Info systems Limited (KPIT) have adopted HRA system and have been disclosing HRA information in their published annual reports.  In the following part of this article, a brief profile of these three IT companies, along with the details regarding their HRA practices, has been presented.

Infosys Technologies Limited:

Infosys Technologies Limited is one of the largest Indian IT companies, with nine development centers and over 30 offices world wide. Infosys employs over 1,04,850 employees (2009). It was formed on July 2, 1981 by NR Narayana Murthy and six other software professionals. It is the first Indian IT company to be listed in NASDAQ. At Infosys, employees are considered as the most important assets. The company strongly believes that the quality and level of service that its professionals deliver are among the highest in the global technology services industry. It takes genuine efforts to minimize the information asymmetry between management and shareholders. The company has always been at the forefront in practicing progressive and transparent disclosure. The US Generally Accepted Accounting Principles (GAAP) was first adopted in India by Infosys. Additional disclosures are provided in the annual reports of Infosys so that the stakeholders can have deeper insights to the way the company is running its business. In addition to the mandated Indian and US GAAP financial statements and supplementary data as required by the relevant statutes, the disclosures which are provided in the Annual Reports of Infosys include: Brand Valuation, Balance Sheet (including Intangible Assets), Economic Value-added Statements, Current-cost Adjusted Financial Statements, Intagiable Scorecard, Risk Management Report, Human Resource Accounting and value added statement (Annual Report, Infosys, 2006 – 07).

In Infosys, the Lev and Schwartz model has been used to measure the value of human resources. The company has valued its HR based on certain assumptions, which include: (a) Employee compensation includes all direct and indirect benefits earned both in India and abroad, (b) The incremental earnings based on group/age are considered, and (c) The future earnings are discounted at the rate which is equivalent to the weighted average cost of capital of the last five years. The discount rate varies from year to year, e.g., it was   14.97 per cent in 2007, whereas it was 12.96 per cent in 2006. The employee strength along with the category, gender and age-wise classification, have been specified in the annual reports under the Section ‘Additional information to shareholders’ as ‘Frequently asked questions’.

Another significant item presented in the annual reports of Infosys is the balance sheet after incorporating value of intangible assets, such as brand value and HR value.Moreover, in the annual reports of the company, items like total income, total employee cost, value added, net profits excluding exceptional items, value of human resources per employee, total income / human resources value (ratio), employee cost / human resources value (%), value added/human resources value (ratio) and return on human resources value (%), have also been disclosed. The Intangible Assets Score Sheet Provides certain vital information like total employees, employees added during the year gross and net, laterals added, staff education index, employees nationalities, gender classification in percentage, value added per employee, software professionals and total employee, average age of employees, and attrition.

TABLE – 4.1: BALANCE SHEET (INCLUDING INTANGIBLE ASSETS) OF INFOSYS (PERIOD MARCH 2003 TO MARCH 2009)

As on March 31 (` in Cr)

Particulars	2003	2004	2005	2006	2007	2008	2009
Source of Funds
Share Capital	33	33	135	138	286	286	286
Reserves and surplus
Capital Reserves – intangible assets	17,905	32,541	42,487	69,552	89,069	1,30,684	1,34,478
Other reserves	2,827	3,216	5,182	6,828	10,969	13,509	17,968
Minority interest / Preference share	-	93 (pre.Sh)	0.14	68	4	-	-
	20,765	32,668	47,806	76,586	1,00,328	1,44,479	1,52,732
Applications of  Funds
Fixed Assets	772.72	1,031	1,574	2,226	3,771	4,777	5,354
Intangible assets
Brand value	7,488	8,185	14,153	22,915	31,617	31,863	32,345
Human Resources	10,417	21,139	28,334	46,637	57,452	98,821	1,02,133
	17,905	29,324	42,487	69,552	89,069	1,30,684	1,34,478
Investments	33	945	1,210	755	25	72	---
Deferred tax assets	36	39	44	65	92	119	126
Current assets, loans and advances	2,721	3,233	3,922	6,334	9,521	13,018	16,646
Less: current liabilities and provisions	703	1,907	1,432	2,346	2,150	4,191	3,872
Net current assets	2,018	1,326	2,490	3,988	7,371	8,827	12,774
	20,765	32,668	47,806	76,586	1,00,328	1,44,429	1,52,732

Source: Annual Reports of Infosys 2002-2003 to 2008-2009

Satyam Computer Services Limited:

Satyam, a Hyderabad based IT consulting and Services Company had already proved itself as a globally reputed one. It was established on June 24, 1987.  In 2009, it acquired the new brand identity,’ Mahindra Satyam’. Satyam’s network is spread across over 63 countries. As of March 31, 2008, 50,570 employees were placed in the company’s man power inventory. Satyam serves over 654 global companies, out of which 185 are Fortune Global 500 or Fortune US 500 Companies. The company believes that its real strength lies in both tangible and intangible assets. The Company has also put adequate emphasis on the valuation of human resources and brand valuation as the information relating to these two important assets definitely helps stakeholders in taking their decisions. The ‘additional information to investors’ shown in the annual reports of Satyam includes balance sheet with tangibles and intangibles, human resource accounting, brand value, economic value-added statement, enterprise value and financial ratios. 

The company uses the Lev and Schwartz model for measuring its HR value.  HR value is the present value of the future earnings up to the retirement age, and the future earnings are discounted by the weighted average cost of capital for the past years. In the financial year 2007, it had been discounted at 15.29 per cent.  In the annual report of Satyam, the summary of human resources value is provided. The category-wise number of employees and their per centages, and the values of the respective category as per both the Indian GAAP and US GAAP are presented in the annual reports.  The information relating to the associate cost, as a per centage to the HR value, is also provided to reflect the value addition aspect.  In the section, ‘Balance sheet with tangibles and intangibles’ the brand value and the human resources value are shown along with the value of other tangible items.  The HR value and the brand value constitute more than 80per cent of the total balance sheet value (FY 2007 – 89.73 per cent FY 2006 – 87.72 per cent; FY 2005 – 85.49 per cent). 

TABLE – 4.2: VALUE OF HUMAN RESOURCES IN SATYAM

(MARCH 2003 TO MARCH 2009)

Period	Human Resources Valuation
	Category	Number	` in Cr.
March 2003	Development	9,031	7,800
	Support	728	425
	Total	9,759	8,225
March 2004	Development	13,210	11,314
	Support	912	473
	Total	14,032	11,787
March 2005	Development	17,859	15,886
	Support	1,305	700
	Total	19,164	16,586
March 2006	Development	24,801	22,203
	Support	1,710	1,161
	Total	26,511	23,364
March 2007	Development	33,812	39,319
	Support	1,858	1,581
	Total	35,670	40,900
March 2008	Development	85,013	92,331
	Support	6,174	6,490
	Total	91,187	98,821
March 2009	Development	97,349	95,600
	Support	7,501	6,533
	Total	1,04,850	102,133

Source: Annual Reports of Satyam 2002-2003 to 2008 – 2009

           

In case of the Financial Ratios depicted in the annual report, the ratios and information relating to HR are – personnel expenses to software revenues, number of associates, asset base per associate, and export revenues per associate. In the Director’s Report, there is a section, ‘Human resources’, where certain information about the associates, the HR practices, and the initiatives taken by the Company regarding the development of the HR have been mentioned.

KPIT Cummins Info systems Limited:

            KPIT Cummins Info systems Limited, headquartered in Pune, India provides IT and ITES to clients across the world. KPIT Info systems Limited merged with Cummins InfoTech Limited in 2002 to form KPIT Infosystems Limited. The company has been recognized as one of top ten investor friendly companies in India (Business Today, August 2007). KPIT Cummins was ranked 42^nd on The 2008 Global Outsourcing 100 and Best 20 Companies by Service offered: by international Association of Outsourcing Professionals (IAOP). The most important reasons for adopting HRA practice in KPIT Cummins is that  in the software / IT industry human resource is a significant asset utilized in generating revenues and the conventional accounting practice does not take any cognizance of this important asset in the organization. The widely accepted Lev and Schwartz Model has been used to compute the value of human capital. The value of human capital is the present value of the future earnings of the human resources. The future earnings have been discounted at the per centage which is the weighted average cost of capital for the company. The subsidiary employees are not considered in the valuation and only the earnings in Indian Rupees are factored into the valuation. The Table shows the comparision of the HRA practice in Infosys, Satyam and KPIT⁹.

TABLE – 4.3: COMPARISON OF THE HRA PRACTICE IN INFOSYS, SATYAM AND KPIT

DIMENSION	INFOSYS	SATYAM	KPIT
Year of Introducing HRA	1998 – 99	1995 – 96	2000 – 01
Method adopted for HR valuation	Lev and Schwartz	Lev and Schwartz	Lev and Schwartz
Discount rate (2007)	Discounted at the rate which is equivalent to the weighted average cost of capital of the last five years. 14.97 per cent in 2007	The future earnings are discounted by the weighted average cost of capital for the past 5 years. 15.29per cent in 2007	Discounted at the rate which is equivalent to the weighted average cost of capital of the last 5 years 13.49 per cent in 2007.
Mode of disclosure of HR information	Text and tables	Text, tables and graphical representation	Text, tables and graphical representation
HR items disclosed in the annual reports	1.      Number of employees 2.      HR valuation separately for the software professionals and the support staff 3.      Functional classification of employees 4.      Gender classification of employees 5.      Age profile of the employees 6.      Total employee cost 7.      value-added 8.      value of human resources per employee 9.      Total income / human resources value (ratio) 10.  Employee cost / human resources value (%) 11.  Value-added / human resources value (ratio) 12.  Return on human resources value (%) 13.  Awards to employees for their performance 14.  Intangible Assets score sheet 15.  Staff education index 16.  Average age of employees 17.  Attrition 18.  Number of nationalities 19.  Balance sheet including intangible assets 20.  Information as per section 217 (2A) of the Companies Act, 1956	1.      Number of Associates / employees 2.      HR valuation separately for the development and the support staff 3.      Employee cost 4.      Employee cost vs. HR value. 5.      Functional classification of employees 6.      Qualification wise break-up of associates 7.      Average age of associates 8.      Value of human resources category wise 9.      Personnel expenses to software revenues 10.  Asset base per associate 11.  Export revenues per associate 12.  Geographical spread of employees 13.  Balance sheet including intangible assets 14.  Information as per Section 217 (2A) of the Companies Act, 1956	1.      Number  of employees 2.      HR valuation separately for the development and the support staff. 3.      Total Employee cost 4.      Functional classification of employees 5.      Value of human resources category wise 6.      Information as per Section 217 (2A) of the Companies Act, 1956.
HR Value disclosed as	Additional information to shareholders in the Annual Reports	Additional information to shareholders in the Annual Reports	Additional information to shareholders in the Annual Reports

Source: HRM Review – April 2010

Human Resource Accounting in HPCL

HPCL considers the human dimension as key to the organization’s success.  Several initiatives from the development of HR to meet new challenges in the competitive business environment has gained momentum. HPCL recognizes the values of its human assets who are committed to achieve excellence in a sphere. HPCL has a mix of energetic youth and experienced seniors, who harmonize the efforts to achieve the corporation’s goals.The Lev and Schwartz Model is being used by HPCL to compute the value of HR.

TABLE – 4.4: HR OF HPCL DURING THE PERIOD 2002 TO 2010

Year-wise Manpower	No. of Management Employees	No. of Non-management Employees	Total Strength
2002	3,571	7,786	11,357
2003	3,583	7,630	11,213
2004	3,594	7,494	11,088
2005	3,562	6,999	10,561
2006	3,849	6,929	10,778
2009	11,246	4551	15,797
2010	11,291	4,779	16,070

Source: Annual Reports of HPCL from 2002-2010.

The information regarding the HR in HPCL for the years 2002 to 2010 is given in the above table. Its interpretation gives the following results: There are two main patterns of employees, i.e., management and non-management in HPCL. The total strength of the employees was 11,357 in the year 2002 which reached 10,778 in the year 2006 showing a decreasing trend due to the adoption of the computerized system, afterwards the total strength reduced to 16,070 in the year 2010. It is indicated that the number of non-management employee was more than the management employees during the period from 2002 to 2010.

In the table 4.5 it has been attempted to analyze HRA system in India practiced and HRA information disclosed by different enterprises in India. This table reveals that the present value of future earnings model of Lev and Schwartz is the most popular model to compute the HR value among the Indian enterprises. BHEL, MMTC, NTPC, ELIL, PEC, MECON, SPIC, CRL, MRL, OIL, and ITL have used this modal. SAIL, CFSL and CCI have adopted this model after incorporating certain refinements as proposed by Eric G. Flamholtz and Jaggi and Lau. It also shows the discount rates used by the enterprises for assessing their HR value. SAIL, CRL, MRL and CCI have followed a discount rate of 15 per cent while a risk free rate of return of 12 per cent has been used by BHEL, MMTC, NTPC, and ELIL in order to compute their HR value. The rate of discount of 10 per cent has been used by EIL.12.25 per cent by ONGC, 14 Per cent by MECON and 10.5 per cent by OIL. The cost of capital based on worldwide beta for software stocks used as the discount rate by ITL in different years has not been constant. It has varied between 17.17 per cent and 27.97 per cent. Thus the discount rates used by all the companies except ITL have ranged from 10 per cent to 15 per cent. The logic behind the rates used by the companies other than ITL has not been mentioned in their annual reports. However, HMTL, PEC, CFSL, SPIC, and ACC have not reported the value of the discount rates adopted by them for valuing their human resources, except HMTL and ITL all the enterprises under consideration have reported category wise distribution of HRs and their value. HMTL has disclosed only category wise distribution of its HRs. Out of the selected companies BHEL, SAIL, MMTC, HMTL and NTPC have reported HRs not only category wise but also age wise.

The table 4.6 describes about the Various ratios relating to productivity and performance of HRs have been computed and reported by BHEL, MMTC, NTPC, PEC, MECON, CRL, MRL, OIL, and ITL in their annual reports. BHEL, the only company, has computed all the ratios relating to productivity and performance of HRs selected in this analysis and also reported these in its annual reports. MMTC and ITL have computed and reported only four out of ten selected ratios. PEC, MECON and NTPC have disclosed three ratios in their annual reports. CRL, MRL and OIL have presented only two ratios in their annual reports. All the companies mentioned earlier have presented the information of salary with sub-breaks in their annual reports as a part of schedule of accounts. None has shown segment wise distribution of salary. Manpower development costs have been presented by NTPC, MMTC, MRL and ONGC whereas other companies have reported this information only in narrative sense in their directors’ report or elsewhere in the report. The information regarding production hours lost due to various reasons has been disclosed in detail by HMT only while other enterprises have shown it in narrative sense in their respective directors’ report in the head of ‘Labor Relations’. Most of these enterprises have not mentioned their objectives of reporting HRA information. Only SAIL, CCI, MMTC and NTPC have mentioned the purpose for which they are reporting information regarding HRA in their annual reports.

TABLE – 4.5: HRA SYSTEM PRACTISED IN INDIA AND HRA INFORMATION DISCLOSED BY DIFFERENT ENTERPRISES

Name of the enterprise	HRA introduce in the  year	Model adopted	Discount rate(in per centage) applied	Categorywise no. of employees	Agewise and categorywise no.of employees	Categorywisee human resource values	Productivity & performance ratios
BHEL	1974-75	Lev and Schwartz model	12	Yes	Yes	Yes	Yes
SAIL	1983-84	Lev Schwartz model with refinement as suggested by Flamholtz and Jaggi and Lau	15	Yes	Yes	Yes	--
MMTC	1982-83	Lev and Schwartz model	12	Yes	Yes	Yes	Yes
EIL	1980-81	Not reported	10	Yes	--	Yes	--
HMTL	1986-87	Not reported	Not reported	Yes	Yes	--	--
ONGC	1981-82	Not reported	12.25	Yes	--	Yes	--
NTPC	1986-87	Lev and Schwartz model	12	Yes	Yes	Yes	Yes
ELIL	1983-84	Lev and Schwartz model	12	Yes	--	Yes	--
PEC	1980-81	Lev and Schwartz model	Not reported	Yes	--	Yes	Yes
MECON	1984-85	Lev and Schwartz model	14	Yes	--	Yes	Yes
CFSL	1989-90	Lev and Schwartz model with certain modifications	Not reported	Yes	--	Yes	--
SPIC	1983-84	Lev and Schwartz model	Not reported	Yes	--	Yes	--
CRL	1987-88	Lev and Schwartz model	15	Yes	--	Yes	Yes
MRL	1985-86	Lev and Schwartz model	15	Yes	--	Yes	Yes
ACC	1983-84	Lev and Schwartz model	Not reported	Yes	--	Yes	--
CCI	1979-80	Lev and Schwartz model with refinements as suggested by Flamholtz and Jaggi and Lau.	15	Yes	--	Yes	--
OIL	1982-83	Lev and Schwartz	10.5	Yes	--	Yes	Yes
ITL	1995-96	Lev and Schwartz	Variable rates ranging from 17.17 to 27.97	--	--	--	Yes

Source: Annual Reports of the sample enterprises. Note: ‘yes’ indicates that the information has been reported by the respective companies.

Name of enterprises	Human resources/ Total re-sources	Human resources / Fixed as sets	Turnover / Human resources	Turnover / Fixed assets	Turnover / Total resources	Value added /  Human resources	Value added / Fixed assets	Value added / Total resources	Profit before tax / Human resources	Human resources / Value added
BHEL	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
MMTC	Yes	Yes	Yes	--	--	Yes	--	--	Yes	Yes
PEC	Yes	--	Yes	--	--	Yes	--	--	--	--
MECON	Yes	--	Yes	--	--	Yes	--	--	--	--
CRL	--	--	Yes	--	--	Yes	--	--	--	--
MRL	Yes	--	Yes	--	--	--	--	--	--	--
OIL	Yes	Yes	--	--	--	--	--	--	--	--
NTPC	Yes	--	Yes	--	--	Yes	--	--	--	--
ITL	--	--	Yes	--	--	Yes	--	--	Yes	Yes

TABLE – 4.6: PRODUCTIVITY AND PERFORMANCE INDICATORS OF HUMAN RESOURCES DISCLOSED BY DIFFERENT ENTERPRISES

 

Source: Compiled from the Annual Reports of the enterprises under consideration.

Note: ‘Yes’ implies that the above ratios have bee n disclosed by the respective enterprises.

Conclusion:

Proper initiation should, therefore, be taken by the Central Government and the professional bodies in India in respect of formulation of specific accounting standard and suitable valuation models on the measurement and reporting of value of HRs. Though it is not an easy task to enlist the suitable items of HR information, the following items may be reported by an organization in its annual reports:

i.                        Disclosure of Valuation of HRs.

ii.                        Disclosure of Employee Costs: 

a)                  Information of salary with break-ups

b)                  Employee costs for different reasons

c)                  Manpower development costs

d)                 Grade wise distribution of employee costs and

e)                  Production hours lost

iii.                        Disclosure of Productivity/Performance Ratios:

a)                  Production per employee (in terms of quantity)

b)                  Output value per employee

c)                  Value added per employee

d)                 Investment per employee

e)                  Average age per employee

f)                   Employee costs to output value

g)                  Value added to HRs

h)                  Profit before tax to HRs

i)                    Turnover to HRs

j)                    Value of HRs to Total Assets (at current cost)

k)                  HR value to fixed assets (at current cost)

l)                    HR value per employee

m)                Turnover per employee

n)                  Profit before tax per employee

o)                  Utilization ratio of manpower

iv.                        Disclosure of Employee Statistics:

a)                  Employees’ classification – based on nature of work, based on qualifications, and based on grade

b)                  Age –wise distribution

c)                  Region-wise distribution

d)                 Unit-wise/project wise distribution

e)                  Statistical information of employees of weaker section, SCs / STs and other backward classes and handicapped.

v.                        Other Disclosures:

a)                  Average monthly earnings per employee

b)                  Average cost of fringe benefits per employee

c)                  Capital investment on social benefits per employee

d)                 Social overhead per employee

e)                  Contribution to national exchequer per employee

f)                   Awards to employees for their performance

g)                  Ratio of minimum to maximum earnings

h)                  Information regarding labour welfare programmes

i)                    Highlight on man power development programmes

Since there is no specific disclosure pattern of HR value for all enterprises, a format which seems to be suitable for meeting the requirements is presented:

1.                  Heading – ‘Human Resources’ the most valuable assets.

2.                  Importance -- a brief autograph may be devoted as to why computation is deemed necessary. Subsequently if such disclosure is made compulsory by law, the Act and Section may also be mentioned.

3.                  Grouping According to Age and Profession (Number of Persons):

AGE GROUPS

	20–25	25–30	30–35	35–40	40–45	45–50	50–55	55–60
Managers	--	--	--	--	--	--	--	--
Other executives	--	--	--	--	--	--	--	--
Supervisor	--	--	--	--	--	--	--	--
Skilled staff	--	--	--	--	--	--	--	--
Semi skilled staff	--	--	--	--	--	--	--	--
Unskilled staff	--	--	--	--	--	--	--	--
Total

4.                  Specification of retirement age.

5.                  Grouping According to Income (Number of Persons):

	2000 –3000	3000 –4000	4000–5000	5000–6000	6000 and above
Managers	--	--	--	--	--
Other executives	--	--	--	--	--
Supervisors	--	--	--	--	--
Skilled staff	--	--	--	--	--
Semi skilled staff	--	--	--	--	--
Unskilled staff	--	--	--	--	--
Total

6.                  Model Adopted for Computation: [If the present value of future earning model is used then the rate of discount should be mentioned.]

7.                  Human Resource Values¹¹:

Professional Category	Number of Persons		Human Resource Value (`)
	Current year	Previous year	Current year	Previous year
Managers	--	--	--	--
Other Executives	--	--	--	--
Supervisors	--	--	--	--
Skilled staff	--	--	--	--
Semi Skilled staff	--	--	--	--
Unskilled staff	--	--	--	--
Total

So far 28 companies have published its human resources information, these are consists of public sector companies 21 and private sector companies 07 and also the period of acceptance of human resource accounting practice in post- Liberalization period was 21 companies from public sector companies, where as three from private sector companies only four companies were accepted human resource accounting in post liberalization period. The fifteen companies have been following the method of L&S model, 06 companies by L&S model with refinements suggested by Flamholtz, Jaggi and Lau own amended model was one, not reported models were three¹².