Valuation of Human Resources: 3 Approaches | Accounting

In this article we will discuss about the valuation of human resources with the help of three approaches namely:- 1. Historical Cost Approach 2. Replacement Cost Approach 3. Opportunity Cost Approach.

1. Historical Cost Approach:

The actual cost incurred on recruiting, selecting, training and developing the human resources of the organisation are capitalized and written off over the expected useful life of the human resources. That is the cost of acquisition viz. recruitment, placement together with development costs of personnel are capitalized and written off over their effective serviceable life. Any employee leaves the organisation the associated costs are written off to Profit and Loss Account as an expense.

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Merits:

1. Easy to work and simple to understand.

2. It follows the concept of matching cost with revenue.

Demerits:

1. It is difficult to estimate the period over which the human resource will provide service to the organisation.

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2. Assets depreciate in value for various reasons but human resources appreciate in value because of experience, efficiency etc.

2. Replacement Cost Approach:

While the historical cost method takes into consideration the costs incurred in the past, the replacement cost method considers the cost that must be incurred to replace personnel already employed. Accordingly, this method aims at adjusting historical cost to current cost.

Merits:

1. This approach takes into account the current value.

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2. The system is more representative and logical.

Demerit

1. It is difficult to ascertain correct replacement cost to existing human resources.

3. Opportunity Cost Approach:

It means that the opportunity cost is linked with scarcity. The value of an employee is determined accor4ing to his alternative use. Human resources are evaluated under this method by making an estimate of their alternative use.

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It has specifically excluded from its purview those employees who are not scarce or are not being bid by other department. This is likely to result in lowering morale and productivity of the employees, who are not covered by the competitive bidding process.

Objections:

The following are some of the common objections against HRA:

1. Tax laws do not recognise human beings as asset.

2. There is no generally accepted model for valuation of human resources.

3. Human beings cannot be owned like other assets. Thus, they cannot command any value.

4. The HRA lacks objectivity and preciseness.

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