Models of Human Resource Accounting

Models of Human Resource Accounting5 Human Resource Accounting five models are;

  1. The Lev and Schwartz Model.
  2. The Eric Flamholtz Model
  3. Morse Model.
  4. Likert Model
  5. Ogan’s Model

The Lev and Schwartz Model

Lev & Schwartz advocated the estimation of future earnings during the remaining service life of the employee and then arriving at the present value by discounting the estimated earnings at the cost of capital. The assumptions in this method are realistic and scientific.

The method has practical applicability when the availability of quantifiable and analyzable data is concerned, but this model is unable to give any method to record the value of human resources in the Books of Accounts.

According to this model, the value of human resources is ascertained in the following ways:

  • All employees are classified into specific groups according to their age, experience, and skill.
  • Average annual earnings are determined for various ranges of age.
  • The total earnings which each group will get up to retirement age are calculated.
  • The total earnings calculated as above are discounted at the rate of the cost of capital.
  • The value thus arrived at will be the value of human resources/assets.

This method has some limitations, which are as follows:

  1. This method has no indication of the accounting treatment of human resource.
  2. This method only considers wages and salary, but wages and salaries are not only the costs associated with the employees. There are other costs that are associated with the employees.
  3. The Model ignores the possibility and probability that an individual may leave an organization for a reason other than death or retirement. The model’s expected value of human capital is actually a measure of expected ‘conditional value’ of a person’s human capital. The implicit condition is that the person will remain in an organization until death or retirement. This assumption is not practical.

The Eric Flamholtz Model

Flamholtz (1996) developed this model.

This is an improvement on ‘present value of future earnings model’ since it takes into consideration the possibility or probability of an employee’s movement from one role to another in his career and also of his leaving the firm earlier, that is death or retirement.

The model suggests a five-step approach for assessing the value of an individual to the organization:

  • Forecasting the period will remain in the organization, i.e., his expected service life;
  • Identifying the services states, i.e., the roles that they might occupy including, of course, the time at which he will leave the organization;
  • Estimating the value derived by the organization when a person occupies a particular position for a specified time period;
  • Estimating of the probability of occupying each possible mutually exclusive state at specified future times; and
  • Discounting the value at a predetermined rate to get the present value of human resources.

Morse Model

Under this model, the value of human resources is equivalent to the present value of the net benefits derived by the enterprise from the service of its employees. The following steps are involved in this approach:

  • The gross value of the services to be rendered in the future by the employees in their individual and collective capacity.
  • The value of direct and indirect future payments to the employees is determined.
  • The excess of the value of future human resources over the value of future payments is ascertained. This represents the net benefit to the enterprise because of human resources.

Likert Model

Rensis Likert in the 1960s was the first to research in HRA(Human Resource Accounting) and emphasized the importance of strong pressures on HR’s qualitative variables and on its benefits in the long-run.

The Likert Model is a non-monetary value-based model. According to Likert’s model, the human variable can be divided into three categories:

  • Causal variables;
  • Intervening variables; and
  • End-result variables.

The interaction between the causal and intervening variables affect the end-result variables by way of job satisfaction, costs, productivity, and earnings.

Ogan’s Model

Pekin Ogan (1976) was the pioneer of the Net benefit model. This, as a matter of fact, is an extension of “net benefit approach” as suggested by Morse.

According to this approach, the certainty with which the net benefits in future will accrue should also be taken into account, while determining the value of human resources. The approach requires the determination of the following:

  • Net benefit from each employee.
  • Certainty factor at which the benefits will be available.
  • The net benefits from all employees multiplied by their certainty factor will give certainty-equivalent net benefits.
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