Human Resources and Social Responsibility (Accounting)

In this article we will discuss about the Accounting for Human Resources and Social Responsibility of an Organization:- 1. Introduction to Accounting for Human Resources and Social Responsibility 2. Methods of Accounting for Human Resources and Social Responsibility 3. Value Approaches 4. Two Sides of the Account 5. Solved Illustrations.


  1. Introduction to Accounting for Human Resources and Social Responsibility
  2. Methods of Accounting for Human Resources and Social Responsibility
  3. Value Approaches of Accounting for Human Resources and Social Responsibility
  4. Two Sides of the Account
  5. Solved Illustrations

1. Introduction to Accounting for Human Resources and Social Responsibility:


Everyone agrees that the only real long lasting asset which an organisation, may, any society for nation, possesses is the quality and calibre of the people working in it. A firm having incompetent management will soon, run through the physical resources available to it. There have been generals who have got defeated—on the verge of victory just as there have been others who turned almost certain defeated into victory.

Fayol, the noted French Management writer, was given charge of an almost bankrupt company but he made it into a very successful concern.

It is however, unfortunate that so far there is no agreed and generally accepted method of putting a value of this vital asset and showing it as part of or along with financial statements. However, work has been done in the western countries to evolve a suitable method. Various methods have been put forward by various authorities which we shall examine.

2. Methods of Accounting for Human Resources and Social Responsibility:

Cost and Replacement Cost Methods. Since accountants first undertook the task o putting a value on human resources, it was natural for them to first turn to the historical cost method which has been the traditional method of valuing physical or intangible assets for the purpose of financial statements.

In the case of human resources, cost would comprise:

(i) The amount spent on processes leading up to selection and placement in position;


(ii) The cost of formal training imparted to the selected people; and

(iii) The cost of informal training, the loss incurred because of the mistakes committed, due to their being new on the job and because of the time taken to reach the normal level of efficiency.

In cost accounting, labour turnover cost has been computed in this manner. To compute a figure which is more up-to-date, one can imagine that everyone would leave and then arrive at the cost of replacing all members of the present strength.

Positional Replacements Costs:


This refers to the sacrifice that would have to be incurred if a person presently employed in a specified position were to be replaced today with a substitute capable of providing an equivalent set of services in that given position.

Position replacement cost typically comprises:

(i) Acquisition and learning costs, and

(ii) Separation costs.


Personal Replacement Costs:

This refers to the sacrifice to be incurred to replace a person today with a substitute capable of providing an equivalent set of services in all the positions that the former might occupy. The concept of personal replacement cost is akin to the concept of economic value.

Generally, replacement cost has reference only to the replacement of people in relation to specified positions (positional replacement) rather than with reference to the replacement of persons (personal replacement).

To the extent that the value of anything or person is not more than the amount to be spent, on replacing it or him by something or someone of equal efficiency and effectiveness, one may accept the replacement cost method but only for such categories of staff as can be easily replaced people at the shop floor level and those at middle management levels.

Here also, one should note that the real value of human resources flows from the synergistic effect and, to that extent, historical cost or replacement cost cannot be treated as adequate. The method is totally inadequate when it comes to evaluating top management people since identical top management material is difficult to find an team work is vital.

There can be two theoretical objections to both the methods stated above. Firstly it is a recognised fact that people do develop at work and some of them develop so much that they later occupy high positions. Therefore, part of the salary that is paid to them is really development cost; it would be wrong to charge the whole of the salary against revenue.

However, to computer the amount that should be treated as development cost is well-nigh impossible. Also, in practice managements will not pay anybody more than the value of his present contribution to the firm. Still, this defect in the cost and replacement cost methods should be noted.

Secondly, all cost on developing men at various levels are soon recovered, or at least are meant to be recovered. Therefore, these are amortised over a short period of life even if they are capitalized for the time being; most firms do not carry forward such costs at all.

If the costs are already recovered, how can they be treated as an asset? To count this argument one can say that there are many asses with a firm that are not shown on the balance sheet, such as know-how and goodwill; human resources is the most important such asset. Even if it is not shown on the balance sheet, it can certainly be valued.

3. Value Approaches of Accounting for Human Resources and Social Responsibility:

Below we give the more common methods accepted as taking value into account.

Opportunity Cost Method:

An interesting method advocated by Hekimian and Jones, called opportunity cost method, is that divisional heads may bid for the services to various people whose services they may require and then include the bid price in the investment base.

The method roughly works as shown below. Suppose a division’s target ROI is 15%, it has capital base of Rs 1,00,00,000 but its profit is only Rs 13,00,000 i.e., Rs 2,00,000 short of the target.

It is felt that if it can acquire the services of a particular executive, its profits can improve by Rs 90,000 i.e., the profit will be Rs 15,90,000,7 90,000 more than Rs 15,00,000 Rs 90,000 capitalised at 15% comes to Rs 6,00,000.

The division certainly may bid up to Rs 6,00,000 for the services of the executive. Actually, the maximum bid may even be the capitalised value of Rs 2,90,000, the extra profit likely to be generated by the executive’s availability.

The method can work for some of the people but, surely, quite a few people, especially those at the top, will not be available for the auction. It also ignores people that are not scarce. Adjusted Present Value Method.

In his book, “Accounting for Human Assets” Hermanson advocates that earnings for the next five years be estimated and then discounted, the resulting figure being multiplied by an “Efficiency Factor”—the 5 years weighted average of the return on investment of the firm divided by a similar average for the concerned industry [(REO)/RFO)].

The method attempts to bring in the question of effectiveness but the ratio of ROI of the firm to the ROI of the industry, based on past performance, assumes that there were no unusual or extraneous factors—that the performance was entirely due to the efforts of the employees and executives of the firm.

If the past returns on investment can be suitably adjusted to remove the effect of all factors beyond the firm’s control, the method may approximate to value somewhat.

Economic Valuation Methods:

Lev and Schwartz advocate the estimation of future earnings during the remaining working life of the employees, taking into account the possibility of early death and then arriving at the present value by discounting the estimated earnings at the firm’s cost of capital.

Replacement cost may be either:

(a) Positional replacement cost or

(b) Personal replacement cost.

The above equation ignores the possibility of earth prior to retirement; but that can be easily taken care of by visualizing ‘t’ as the age at which the employee may die, if that is before retirement. Mortality tables can help in this regard.

The method ignores the possibility of a person moving from one career to another and the possibility of early exit. The most important defect of the method is that it assumes remunerations of an employee being equal to his value; further, the synergistic effect is totally ignored.

Flamholtz = seeks to remove the defects pointed out above and value the human resources on the basis of their discounted earnings in the future taking into account changes in their service status and the possibility of early retirement. The two methods stated above would consider each employee individually.

As Jaggi and Lau point out, to estimate the career movement and the possibility of early death or retirement for each individual person would be very difficult. Hence the proper approach should be to do the exercise for the entire staff strength, considering various groups of employees.

The method commonly in use by those who wish to report the value of their human resources is the one advocated by Jaggi and Lau that is group by group future earnings are estimated and then discounted, the resultant figures being aggregated.

However, Bharat Heavy Electrical Ltd. uses the Lev and Shawartz model. Stating that the human value of human capital embodied in an individual is the present value of his remaining future earnings fix)m employment, the promotion policy and pay scales being assumed as constant, the company reported the following values for its human assets in its published accounts for the year ended March 31, 1988:—

Objections. One can easily spot the main difficulty with the so called value approaches based on future earnings. Future earnings of employees will be the costs to the firm; how can they be the value to the firm?

The assumption, of course is that the benefits from the services of the employees will be the same as their remuneration. If this is valid, how will the firm survive? The fact is that human beings yield, specially because of their- team work, much more than they are paid.

Even for individuals as Economic Theory points out, the pay is based on marginal productivity and that naturally leaves a large surplus for the employer. One would think that it is the human resources as a whole, or all employees as a team, that has to be value; otherwise the result is likely to be unsatisfactory. Also, the value must be based on the benefit likely to be derived by the firm.

A Suggested Approach:

On the quite valid assumption that most human beings are generally equally endowed with intelligence and possess almost the same will to work, it may be supposed that most firms in an industry will putting in the average performance.

If there are 20 firms in an industry, perhaps 12 or 13 will be earning profits at the average level or thereabouts, one or two may do very poorly and only two or three may perform substantially better than the rest.

If the human resources of all firms are valued, the figures for the 12 or 13 average firms will cluster round one figure but those for the two or three above average firms will be substantially higher. There is advantage in knowing the values for the above-average firms but there appears to be no advantage for establishing the figure for the average firms.

To put it differently, if a firm claims that it enjoys good human resources, it must prove the claims through actual performance; if the performance over the ‘years is only average, the claim cannot be accepted as valid, if the performance is better than that of other firms, then to that extent, its human resources are better, or, to that extent, the firm possesses additional human resources.

If an attempt is made to vale the additional human resources, over and above those possessed by firms generally, it may be quite successful.

The idea is u measure the extra or special results shown by a firm, not counting extraneous or abnormal factors. In industry, the extra or special results will be in the form of, profits or return on investment; therefore, if a firm shows good profit or an ROI in excess of the average and in this computation the effect of abnormal factors or factors beyond one’s control is removed, the firm may be said to possess special human resources and a value can be put on these extra or special human resources.

This is the goodwill approach, as all accountants will recognise, and valuation of goodwill is something from which no accountant will shrink, even though the result, is bound to be subject to many factors where human judgement is necessary.

In valuing human resources, only the permanent factors leading to extra or super profits should be considered but a careful assessment must be made of the various factors in operation; it will certainly be risky to proceed on the basis of profits alone.

The following factors must be considered to assess the continued performance of a company in the future:

(i) Return on Investment in the light of:

(a) Share of the market and the growth rate of sales;

(b) Value added; and

(c) Replacement programme of assets.

(ii) Research and Development:

(a) Development of new products; and

(b) Development of new markets and uses.

(iii) Management Capability:

(a) Executive development;

(b) Employee satisfaction and morale;

(c) Customer satisfaction; and

(d) Awareness of changes in the social, technological and economic environment and the ability to meet them

(iv) General:

(a) The problems faced by the firm and the manner in which they were tackled; and

(b) The general image that the firm enjoys among government, bankers, financial institutions, etc.

Many of the factors are capable of precise measurement through use of accounting and statistical techniques though quite a few can be only qualitatively and subjectively judged. It is significant in this regard that people are already talking of management audit. The profession of management consultants is already in existence and, therefore, the valuation process should not be too difficult.

It will be seen that though the goodwill is advocated—that the extra performance be established for the firm concerned and that the value of the human resources be either the capitalized value or say 5 years’ purchase of this figure—the exercise will be quite analytical to see the future role of the human beings.

It will have to be undertaken by a team having at least two members—one of them must be a good forward looking management consultant and the other an accountant.

The exercise will not be an easy one and, therefore, it may be undertaken once in three years. The figure arrived at as value of human resources may be reported separately in the published accounts. Rather than the absolute figures, the changes in the figures will be significant, showing whether or not the firm is maintaining its human resources over and above the general run of firms.

4. Two Sides of the Account:

The Credit Side: Business and industry have contributed immensely to the economic upliftment of the society.

The following are the most significant ways in which this has been done—

(i) First and foremost is the great increase in employment. In the developed countries serious unemployment is a thing of the past; even in countries like India, where unemployment certainly remains a serious problem, the situation would have been far worse but for development of industry.

Availability of work is of immense psychological and political value; the contribution of business and Industry in this regard should be freely recognised.

(ii) Another contribution is in the form of development of skills and entrepreneurial ability. There are numerous establishments which are the result of development of talent of the, employees resulting from the work and employment. An industrial house thus gives rise to many other small units some of which is turn grow big. This surely enriches the society.

(iii) To the-extent workers and employees get job satisfaction and are able to build good relations with fellow workers and superiors, work is a source of happiness. One should not imagine that such is a rare or impossible case.

(iv) The greatly improved standards of living of the people, as compared to that in the past, is the result of firstly, the development of new products, such as television, manmade fibres, etc. and secondly, of the increase in incomes which enables people to enjoy the new products. In both of these, business makes a significant contribution. It is business which takes various goods to all comers of the country.

(v) Business and industry are the instrument of change. It is necessary for a society to adapt itself to the changes that are constantly coming about; industry helps in the process India, for instance, was made aware of the importance of computers by the IBM.

An example, summarizing all of the above, is that of Sir Jamshedji Tata and his Tata Iron and Steel Company, which more than anyone else deserves the credit for creating an atmosphere in the country for development of modern industry. In terms of employment, provision of a vital product and giving an impetus to technological developments, TISCO’s record has not been beaten.

The Debit Side: On the debit side, the following points may be noted:-

(i) Since the profit motive is the dominant motive, business may ignore products and services that the society really needs and, instead, offer those that bring a quick and large profit even if they are injurious.

(ii) The product are often not thoroughly tested for safety before they are marketed and the consumers are often misled through strong advertising and sales promotion campaigns.

(iii) The prices charged are often out of proportion to costs; thus consumers are in fact robbed through combinations and through a process of hypnotization resulting from strong sales techniques.

(iv) Industry often depletes scarce national resources.

(v) There are too many cases of exploitation of labour; in India even of bonded labour

(vi) Generally, the treatment that employees and workers receive leaves them frustrated and unhappy. Often the employees have to give up their conscience since management insist upon results and does not care about the means. An employee must show result which may compel him to resort to means that are not fair,

(vii) Through dominance of the economic and political scene, large business has a corrupting influence on all concerned.

The above may perhaps be presented in the form of accounts as indicated below:

Statement Form: Admittedly, it is difficult to put money value on most of the items mentioned above. Some of the authorities, therefore, believe that until quantification and measurement becomes possible, an account of the social responsibility of the firm and its attempt at the discharge of this responsibility may be given in the form of narrative statements.

For example, the Directors may, in their annual report, touch upon the company’s attitudes and efforts towards, say;

(i) Increasing employment opportunities, specially among backward classes and backward areas,

(ii) Developing new products and the measures for testing them thoroughly,

(iii) Controlling pollution,

(iv) Measures for increasing job satisfaction among workers and giving greater satisfaction to the customers, etc.

Prof. Lee Brummet states that there is need for multi- faceted or total performance measurement technique which, inter alia, should take note of the following factors:

1. Net income.

2. Human resources contributions.

3. Contribution to the society—i.e., Interests outside the enterprise.

4. Environmental contribution.

5. Product or service contribution.

The contribution may of course be plus or minus.

One such statement (of Cement Corporation India Ltd.) is reproduced below: –

Social Income Statement for the year ended March 31, 1986 and March 31, 1987:—

The figure and the approach given above are instructive since they attempt to measure the effect on the staff, the community, the general public as also the clients. It appears that figures regarding clients are not really relevant to social responsibility since that is the direct business of the firm.

Also, as regards staff most of the items are such against which the firm derives or should derive good benefit in the form of regular attendance, better attitude towards work, etc. However, the amount stated as career advancement represents a real benefit to the staff and therefore, to the society. The exercise as a whole paves the way to measuring the discharge of or accounting for the firm’s social responsibility.

Value Added Statement. Kohler defines value added as “That part of the cost of manufactured or semi manufactured product attributable to work performed on constituent raw materials.” This is inadequate; the proper term that should have been used is “conversion cost.”

The definition given by the Bureau of Public Enterprises for value added is more appropriate; it is:”value of production less cost of direct materials consumed”. In other words, value added means the sale value of the concerned product minus the cost of direct materials consumed (through some people also deduct the cost of indirect materials and depreciation).

A statement showing value added along with its disposal (wages, expenses, taxes, profit). A statement showing value added along with its disposal (wages, expenses, taxes, profit) is called “Value Added Statement”.

The statement shows prominently the monetary contribution made to the society by the concerned organisation, longer the contribution the more efficient the firm.

Assuming the concerned product or service is one for the good of the people in general and assuming that the firm is not enjoying or exercising monopolistic powers, the statement indicates efficient use of resource or otherwise—if the value added is large there is efficiency and if it is small the level of efficiency is low.

To this extent, from the society’s point of view the value added statement is more useful than the usual profit and loss account. Some of the public sector companies have started including the value added statement in their published accounts. One such statement (or Bharat Heavy Electrical Ltd.) is reproduced below.

5. Solved Illustrations:

Illustration 1:

One the basis of the following income statement pertaining to Bee Ltd., you required to prepare:

(i) Gross Value Added Statement, and

(ii) Statement showing reconciliation of Gross Value Added with Profit with Profit before Taxation.

Illustration 2:

The following is the Statement of Profit and Loss of Grand Co. Ltd. for the year ended 31st March, 2012. Prepare a Gross Value Statement of Grand Ltd. and show also the reconciliation between Gross Value Added and Profit before Taxation.

Illustration 3:

On the basis of the following Statement of Profit and Loss of Exe Limited and the supplementary information provided thereafter, prepare Gross Value Added Statement of the company for the year ended 31st March, 2012. Also prepare another statement showing reconciliation of Gross Value Added with Profit before Taxation.


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