An Infosys Employee sitting in Banglore servicing a US Client may be happy earning5 Lakhs p.a. but he rarely comes to know that his value has been estimated by the Company at a whopping1.03 Crore. And these figures are not mere predictions by some Analysts, these are the official figures which have been released by Infosys.
Infosys while officially releasing these figures said that the Management believes that a company’s annual report only shows the financial parameters. It only looks at the Tangible Assets but the major strength of Infosys is not its Tangible Assets but its Intangible Assets which mainly comprises of its employee base and that is why Infosys lays huge relevance on Human Resource Accounting.
This value is computed and evaluated on the basis of ‘Present Value of Future Earnings of Employees’ and a few other factors like the Age of the Employee, Future Economic Conditions etc. This value has been computed for the purpose of Human Resource Accounting and helps a Company to be valued at its True Potential.
What is Human Resource Accounting
Human Resource Accounting is the process of identifying and measuring data about Human Resources and communicating this information to the interested parties. It is an attempt to identify and report the Investments made in Human Resources of an organisation that are currently not accounted for in the Conventional Accounting Practices.
Thus, Human Resource Accounting is a term applied by the Accountancy Profession to quantify the cost and value of employees of their employing organisation.
Objective of Human Resource Accounting
The Aim of Human Resource Accounting is to depict the Potential of the Employees in Monetary Terms. This concept can be examined from 2 directions i.e.
- Investment in Human Resources i.e. the expenditure incurred for recruiting, staffing and training the Quality of the Employees and
- Value of Human Resources i.e. the yield which the above investment can yield in the future.
Importance of Human Resource Accounting
The 21st Century has been referred to as the Century of the Service Sector. All major expansion scope seems to be happening in the service sector and the scope of expansion of the manufacturing sector is minimal.
But are the Accountants properly able to value this Service Sector and show this on the Company’s Balance Sheet?
For any Company operating in the Manufacturing Sector, its core assets are its Machinery and Fixed Assets but for a Company operating in the Service Sector, its core assets are its employees which are intangible assets. For a Service Sector Company, the value of employees gains importance as earnings are based on the per-employee per hour billing model and profitability is linked to the value added by the workforce.
This Concept which was established primarily for the service sector has now started gaining so much relevance that now Companies in all Sectors have started using the same and a good weightage is given to these reports when making any Company Analysis.
Benefits of Human Resource Accounting
- It helps the company ascertain how much Investment it has made on its Employees and how much return it can expect from this Investment
- The Ratio of Human Capital to Non-Human Capital indicates the degree of Labour Intensity of an Organisation.
- It provides a basis for planning of physical assets vis-a-vis Human Resources
- Provides valuable information to Investors interested in making Long Term Investments in Service Sector Companies