Article

Vision
18(3) 217–235
Human Resource © 2014 MDI
SAGE Publications

Accounting Disclosure Los Angeles, London,

New Delhi, Singapore,

Practices in Indian Companies

Washington DC
DOI: 10.1177/0972262914540227
http://vision.sagepub.com

Surinder Kaur
A. Venkat Raman
Monica Singhania

Abstract
Human resources with their innate pool of knowledge, skill, leadership, creativity and talent assist companies in achieving their goals.
However, the current accounting system is not able to provide the value of human resources. We find human resource accounting
(HRA) disclosures to be very low in Indian companies with only five companies reporting HRA in their annual report that is just 1 per
cent of the sample set of companies. Furthermore, HRA disclosures that are made by companies are unstructured and inconsistent,
and incomparable across companies and industries. Therefore, we examine the extent of HRA measurement and reporting practices
of selected Indian companies among the National Stock Exchange S&P CNX 500 companies. We critically analyze these and rank the
companies on the basis of the extent of disclosure of HRA information in annual reports of companies.

Key Words
Human Resource Accounting Disclosure Index (HRADI), HR Valuation Methods

Introduction physical and financial assets only; investment in HR may

be reported in a very limited way by some companies in
The success of any organization depends on the quality and annual reports. So far, the accountants in the past have
efficiency of its human resources (HR) apart from other not given due consideration to this important asset working
critical parameters. Intense market-driven competition has in the enterprise. Companies spend a lot of money on
led many organizations to increasingly appreciate the role training and development, strategies to retain and motivate
of their people and HR policies. In any organization, the their employees in order to increase their performance
most important input is the human element and nothing and efficiency.
meaningful is possible without human intervention. The Therefore, a proper system to valuate HR and measure
greater the efficiency of HR, the greater is the profit earning the effect of various managerial activities on their
capacity of a business enterprise. Generally, corporate performance, efficiency and ultimately contribution to
performance depends on the behaviour of HR it acquires. the company would help managers to identify the contribu-
But this is not reflected as per the conventional accounting tion of HR to the company’s profits and frame suitable
system. The factors that determine the capacity of a HR policies. Traditional accounting practices continue to
business enterprise for development and growth can be treat amount spent on recruiting, hiring, training and devel-
classified into two—passive factors of production (capital oping people as expenses rather than investment in ‘assets’
and natural resources) and the active factors (HR who without attempting to reformulate the rules that distinguish
accumulate capital, exploit the natural resources, build asset and expense components. This is due to the conven-
economic organization and carry forward the department). tional boundaries of the concept of what constitutes
In this way, HR is the most fundamental of all available an asset. Traditional accounting statements also tend to
resources. Non-HR can be made useful only through violate the accrual principle, matching principle, disclo-
HR. This certainly places HR at a higher level than non- sure principle because of the manner in which they treat
HR. Likert (1967) stated that every aspect of a firm’s activ- HR cost and value. This results in incomplete appraisal and
ities is determined by the competence, motivation and prediction of value of HR of an enterprise and distorts the
general effectiveness of human organization. However, decision making. This inability of accounting systems to
conventional corporate financial reports contain details of change in accordance with changes in economy has caused
218 Human Resource Accounting Disclosure Practices in Indian Companies

information asymmetry among the users and preparers of HRA means accounting for people as an organisational
accounting information. This is evident from the ever resource. It involves measuring the cost incurred by a business
increasing gap between the market value and value of enterprise and other organizations to recruit, select, hire, train
companies. The difference between the market value and and develop human assets. It also involves measuring the
economic value of people to the organisation.
book value of a company is calculated as the ratio of
Standard and Poor (S&P) 500 rating. The ratio was approx-
imately 1 in early 1980s. In 2000, it had risen to 6 times One more comprehensive definition has been given by
and in some cases even 20 times. The difference exists due Brummet, et al., (1969), which states that:
to the presence of intangibles such as the brand value, and
HRA is the process of developing financial assessment for
HR. Evidently, there is a greater need to incorporate such
people within the organisation and society and the monitoring
measures in our financial accounting reports which can of these assessments through time. It deals with investments
give a better account of a companies’ worth. Therefore, in people and with economic results of those investments.
HRA is necessary to disclose what is happening to HR in a It is a means by which managers are encouraged to give
company, its value in terms of productivity and outcome more serious consideration to human resources impacts to
from investment. Although some measures such as all of their decisions. It provides a necessary supplement to
balanced scorecard, economic value added and brand valu- conventional income measurement and thus broadens the
ation have been developed and used by companies for coverage of measure of financial well being and financial
performance evaluation, but its use and reporting are success of organisation.
limited in Indian context.
During 1960s, behavioural scientists, economists and An examination of the above definitions reveals that HRA
accountants became conscious that business and industry involves processes such as the identification of data on
had developed sophisticated techniques for managing investment in the HR, measurement and valuation of the
physical assets. But no similar kind of knowledge had economic results of such investment, and presentation of
been put to work in regard to HR which in fact is the the above valuation in the annual financial statements.
mother of all resources. In such a backdrop, HR accounting In this way, HRA can be defined as the art of identify-
(HRA) has been developed as a measurement tool that ing, valuing, recording and presenting systematically the
generates and reports quantitative control information worth of HR in books of accounts of an organization. HRA
about that contribution of HR for promoting industrial may be defined as an information system that tells the
productivity. management what changes are accruing to HR of the
The basic premises underlying the theory of HRA are to company. It is an art of evaluating the worth of HR of an
visualize people as valuable resources of an enterprise. organization in a systematic manner as a whole to the
Usefulness of manpower as an organizational resource is organization and to the society and recording them for
determined by the way in which it is managed and presenting the information in a significant manner to
information on the investment and value of HR is useful communicate their worth with changes over a period of
for decision making in the organization. The notion of time and results obtained for their utilization to the users
treating people as assets and accounting for them is logical of financial statements. As is the case of traditional
and satisfactory considering the expectation of future accounting, HRA has three steps as depicted in Figure 1.
economic benefit and their measurability. HRA is an important tool in the hands of the management
to understand long-term cost and benefit implications of
HR decisions, the absence of which may lead to decisions
Human Resource Accounting though good for the short term but may have serious
HRA, as an approach, originally evolved as a process of repercussions in the long term. HRA can also be viewed as
identifying, measuring and reporting the HR of an an important tool for investors in judging the investment
organization not presently accounted for under conventional worthiness of the company.
accounting practices. It is an information system that However, very few studies have been conducted
records the changes over time that occurs to the corporate to examine the HRA practices of the companies. The
HR and periodic reporting of these to the management. present study is undertaken with the objective to examine
The Committee on HRA of American Accounting the extent of HRA measurement and reporting practices
Association (AAA, 1973) defines HRA as the process of
identifying and measuring data about human resources Figure 1. The Process of HRA
and communicating this information to interested parties.
Flamholtz (1974) considered human being as resources
of an organization and stated:

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 219

among selected Indian companies and to critically analyse maintenance of system being heavy for a company of
them in the light of the some specific objectives such as their size. In other words, the system was not economical
companies among the National Stock Exchange (NSE) to the Barry Corporation by the time they decided to
S&P CNX 500 that report HRA in their annual reports, discard it. However, later on various accounting bodies
the objectives of reporting HRA valuations, methods of such as the Committee on HRA of AAA and the American
presentation of HRA information in annual reports and Institute of Certified Public Accountant opined in favour of
methods adopted by the companies to value their HR and HRA. According to these institutes, this concept would
other issues involved therein. influence the people of both public and private organiza-
This article has been divided into six sections. The tions. In this way, the research progressed in the field of
second section traces the historical background of HRA. developing models for valuation, accounting and reporting
The third section provides the review of the present litera- of HRA information, effect of such disclosures on deci-
ture on HR disclosures and their determinants. The fourth sions of stakeholders in companies and the disclosure
section provides research methodology and research design status of companies in this regard.
of the present study. Hypotheses to be tested in the present
study have been developed in this section along with
Literature Review
sample selection, data collection methods and limitations
as well as scope for future research. The fifth section The literature on HRA, as far as measuring and reporting
presents analysis and findings. The sixth section summa- HR is concerned, can be classified in three categories,
rizes our work and implications. Thereafter, the seventh consistent with Abheysekara and Guthrie (2004). The first
section presents summary and concluding remarks. category attempts to formulate different methods for
measuring and reporting HR value (HRV). Various tech-
niques have been evolved by researchers using cost, value
Historical Background and other components of HR as the basis. However,
First formal attempt to value the human being in monetary these methods have got little acceptance due to the subjec-
term was made by Sir William Petty as early as in 1691. tivity involved in the process of HRA except for the Lev
Sir William Petty (1690, 1691) was of the opinion that and Schwartz model as proposed by Lev and Schwartz
labour was ‘The father of wealth’ and it must be included (1971). This method is followed by most companies for
in any estimate of the national wealth. Further efforts HR valuation with some modification to suit individual
in this connection were made by William Farr in 1853 needs. The second category attempts to analyze the
(Farr, 1853) and Earnest Engel in 1883 (Engel, 1883). effect of HRA on investors and management’s decisions.
The real work on this subject was started from 1960. Various studies undertaken to understand behavioural
From here on, extensive research was carried out to develop implications of HRA disclosures on investors, managers
methods for the valuation of HR, and the inclusion of and employees also come under this category. The third
such information in reporting was emphasized. However, category of research attempts to explore the various
sincere efforts in this direction were made during the last ways in which HR and HRA information is being meas-
three decades, as a result of which only, many accountants ured and reported by companies through various means
and economists all over the world became conscious of such as annual reports, company newsletters and websites,
appropriate methodology and procedures that need to be with the content analysis of annual reports being the
developed for finding the cost and value of people working highly explored source. The research studies here seek to
in organization. Over this period, a number of experts have investigate current HRA measurement, reporting practices
worked on it. Some of them are Shultz (1960), Brummet and trends among companies across industries and coun-
et al., (1968) and Holtz (1974). In 1967, Hekimian and tries affecting the reporting practices and attempts to
Jones (1967) emphasized that the information on HRA identify the factors/explanatory variables affecting the
should be used in the planning process and also in the disclosure practices.
resource allocation decision. Our study falls in the third category where an attempt
Likert (1967) pronounced the importance of human has been made to analyze the extent of disclosures of
asset accounting and the relative consequences of account- the HRA information of the Indian companies through the
ing for HR in the organization. The HRA system is found content analysis of annual reports. After constructing
to be applied first in the annual report of R.G. Barry the HRA disclosure index (HRADI), the study aims to find
Corporation during 1969 (R.G. Barry Corporation, Annual out whether the companies differ significantly in respect
Reports, 1969–73). In 1974, however, they discarded the of HRA disclosures or not. The review of the available
system. It was observed that the benefits of the system literature in respect of the application of HRA in companies
were not encouraging when compared to the cost involved, is given below in Table 1.

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220 Human Resource Accounting Disclosure Practices in Indian Companies

Table 1. Summary of Literature Review

Research Studies Theme and Key Findings

Telia (1996) Sweden It involved the study of HRA practices followed by Swedish national telecommunication company
and revealed the submissions of the statement of HR. In addition to HR reporting, its financial
statements, namely, the profit and loss account and balance sheet also included investment in
HR as assets.
Morrow (1997) United It studies the financial reports of 18 British football clubs and found that these clubs included
Kingdom players in the balance sheet. Most clubs used the acquisition cost of players on transfer market
as the valuation method. Others valued the entire squad based on future value. After considering
various accounting treatments, the study concluded that the most appropriate policy to record
the cost of players is the historical cost of registrations for clubs.
Subbarao and Zehgal (1997) The study gave a macro-level perspective to human resource accounting disclosures in
Across six countries: USA, financial statements by analysing differences across countries in the disclosure of HR
Canada, Japan, England, information disclosure in annual reports across six countries. It reported differences
Germany and South Korea in the disclosures of HRA information across countries.
Grojer (1997) Sweden Grojer (1997) studied the reasons behind the successful implementation of HRA measures
in Sweden and other Scandinavian countries. He found that Scandinavia management and
Sweden organizational social order suits HR costing and accounting (HRCA). Thus, he
concluded from the current perspective that HRA can be introduced smoothly in the
organizations only when these measures conform to the organizational social order.
However, he cautioned that this is not an established fact and is further needed to
be researched in the light of HRA application and social order in the organization to
understand the full implication of this factor. Sometimes HR directors as members of
executive board opt for the use of HRCA to legitimize their positions. HRCA is now
used as a new approach to strategic thinking.
Swedish Civil Aviation The study was directed at analysing the adoption of HRA in the civil aviation sector. The study
Administration, Statement revealed that it provided the HR income statement and HR balance sheet showing the changes
of HR (1998) Sweden in the value of human capital, number of employees and the calculated value of human capital in
addition to other key personnel indicators.
Khatik and Kohle (2003) India It studied a profit-making heavy engineering public sector company [Bharat Heavy Electricals
Ltd (BHEL)] which used the Lev and Schwartz model to evaluate HRA measures. They examined
the correlation between the total HR and personnel expenses for their fitness and impact on
production. The study found that HRA valuation was important for decision making in order
to achieve organizational objectives and improve output.
Shah and Khedkar (2006) India The study analyzed the HRA practices of three selected companies, namely, Infosys, Satyam
Computers and Rolta India Ltd, and found the HRA valuations and reporting to be highly
subjective.
Narayanankutty(2006) India It studied HRA practices of Indian companies and found a growing trend towards the
measurement and reporting of HR, particularly in public sector companies such as BHEL,
Cement Corporation of India (CCI), Oil and Natural Gas Corporation (ONGC), Engineers
India Ltd (EIL), National Thermal Power Corporation (NTPC), Minerals & Metals Trading
Corporation (MMTC), Oil India Limited, Southern Petrochemical Industries Corporation
Ltd (SPIC), etc. However, many of these companies have stopped reporting HRA data
presently. For the valuation of HR, the Lev and Schwartz model is most popular though
adjusted by companies to suit their needs. Some companies have also shown interest in
the Flamholtz stochastic reward model.
Sonara and Patel (2009) They attempted to evaluate and report the present scenario of HRA concerns. The study
India was aimed at analysing the methods and practices adopted by the selected set of companies
for the valuation and reporting of HR. The study revealed that most of these companies
follow the Lev and Schwartz model for the valuation of HR in their organization. Further in
this study, it has been revealed that, although the companies were trying to fit available
models for the valuation of HR as per their own requirements, they did not deal with the
mode of recording and reporting of accounting information relating to HR in the books of
accounts of financial statements.
Narayan (2010) India The study examined the reporting of tangible assets by the selected set of companies and found
out that the Lev and Schwartz model is applied in most public sector companies and IT-based
sectors. However, the study revealed that the application of the method suffers from many
limitations such as there is no suitable basis for selecting the rate of discounting of salary.
There is no standard method for dealing with employees’ turnover in the valuation of HR.

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 221

Research Studies Theme and Key Findings

Dalwadi (2010) India It studied the HRA practices of select companies from 2003–04 to 2007–08 to examine
the practices followed by select companies in India, to compare and contrast HR valuation
methods followed by select public and private companies in India. The study concluded that
the measurements were subjective. He also concluded that it should be made mandatory to
value and discloses the HR-related information in the annual report.
Joshi and Mahel (2012) India They examined the HRA disclosure practices of four selected companies using a 15-item index
and ranked the companies on the basis of their HRA disclosure scores. The study concluded that
the measurements were subjective.
Kashive (2013) He studied the HRA systems of three Indian companies, namely, BHEL, NTPC and Infosys, and
India compared it with the systems followed by two selected foreign companies, namely, Skandia AFS
and WM-data AB/LogicaCMG, and found that Indian companies are far behind their European
and American counterparts in terms of the extent and quality of Intellectual Capital (IC)
measurement, reporting and disclosures.
Source: Author’s own.

Apart from these studies, many other studies have been a. Which companies among the NSE S&P CNX
conducted by researchers such as Gupta (1990), Bhatia and 500 companies are reporting HRA in their annual
Singh (1992), Rao (1993), Batra and Bhatia (1994), reports?
Prakash (1997), Verma (1999), Patra and Khatik (2003), b. What is the industry type and sector of the compa-
Seth (2009) and Sharma and Shukla (2010) to find out nies formally reporting HRA?
current practices followed by Indian companies for HRA. c. What are the objectives of reporting HRA
The studies have revealed that, although the companies are valuations?
trying to fit available models for the valuation of HR as per d. What is the method of presentation of HRA
their own requirements, they do not deal with the mode of information in annual reports?
recording and reporting of accounting information relating e. What methods are adopted by companies to value
to HR in the books of accounts of financial statements. their HR and what are the significant deficiencies
This has been left to the accounting bodies, which have to and discrepancies/inconsistencies in the measure-
develop a generally accepted basis for the valuation, ment and reporting of HRA?
recording and reporting of information related to HR infor- 2. To rank the companies on the basis of the extent of
mation. However, no research evidence has been found to disclosure of HRA information in annual reports.
examine the extent of HRA application in a larger set of 3. To analyze whether there is any significant differ-
companies. Available studies are limited to select few com- ence among the disclosure practices of selected
panies only. Therefore, the present study has been under- companies.
taken to assess the adoption of HRA systems in a sample
of the NSE CNX 500 set of companies. Further, an
attempt has been made to develop HRADI that can be used Research Methodology
as a benchmark for framing suitable guidelines for HRA
For this purpose, the exploratory research design based on
valuation and reporting.
secondary data contained in annual reports of the selected
set of companies was chosen. The study was conducted for
Research Design the period of five years from the financial year 2007–08 to
the financial year 2011–12. In the first step, the annual
Objective reports of the companies were examined to find out those
Our objective is to examine/investigate the extent of companies which are actually measuring and reporting
HRA application among selected Indian companies. The HRA information. Then a 20-item HRADI was developed
present study is aimed to achieve the following specific to find out the extent of HRA disclosures and to rank the
objectives. selected companies on the basis of the disclosure index.
The items were chosen on the basis of past empirical work
1. Our primary objective is to examine/investigate on HRA disclosure practices and the content analysis of
the extent of HRA measurement and reporting annual reports of the selected companies. These indicators
practices among selected Indian companies and were divided into three groups: HRA model specifications
critically analyze them in the light of the following and reporting; HR variables forming the base of HRA
specific objectives: measurements and HRA-related ratios.

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222 Human Resource Accounting Disclosure Practices in Indian Companies

Table 2 elaborates the list of HRA disclosure items chosen seven variables have been included to find out the extent of
for the study as forming HRADI, their meaning and signifi- HR disclosures as forming the base of HRA measurements.
cance. Of these, the first seven variables relate to disclosures Finally, remaining variables relate to the ratios that these
in respect of HRA valuation and reporting practices. Next companies disclose in respect of HRA measurements.

Table 2. HRA Disclosure Items Forming HRADI

HRA Disclosure Item Description Remarks/Significance

Model used for Description of the model used This disclosure is very important as there is no single standardized
valuation by the company to value HR method for valuation. As different methods give different values,
stakeholders need this information.
Discount rate used Rate used by companies to Discount rate is used to discount the future flow of benefits from
discount the future inflow of employees. This rate becomes very important as a slight change in
benefits from/earnings of employees rate can bring significant changes in values.
Criteria for discount rate Criteria used for selecting a Discount rate can be cost of capital, rate of inflation or weighted
particular discounting rate average cost of capital. The criteria used by companies to select a
particular rate are very important.
Determinants of earnings Variables forming the base of Value of employees is based on benefits to be derived from them
calculations relating to future during their tenure in company. The proxy of the same can be the
earnings of employees present pay scale and promotional policies or the present value of
future earnings with the assumption of compensation considering
incremental basis. Hence, the disclosure of this aspect is very
important.
Category-wise HRA Disclosures of HR values for Since companies spend different amounts on training and
disclosures different categories of employees retention of employees, it is important to examine the effect of
such as technical office, professional, such spending on their values. The category-wise HRA disclosures
support staff, management– are important as it will provide information about the value of
non-management staff and such employees in various categories.
other categories
Explanatory statements Statements given to explain various As the awareness of HRA methods is less, it is very important
given calculations undertaken to measure to give statements regarding various aspects of calculation as
HRV mere reporting of amount might not be understandable to
stakeholders.
Balance Sheet with Disclosure of the combined Since the HRA disclosures are voluntary in nature, so companies
HRA balance sheet wherein HR are tend to follow different formats for disclosures. In this way, it
shown forming the part of all is important to observe whether the HRA disclosures are
assets made through separate statements or are embedded in the
balance sheet.
Employee strength Total number of employees in a This variable refers to the total number of employees. It is stated
company at close of year, also as on the last day of the financial year and is a good proxy for the
referred to as the total number size of the company.
of employees, manpower and
personnel strength
Category of employees Staff break-up based on hierarchal This is usually given as employee classification in male/female,
order, nationality, professional in different age groups, nationality and the organizational
qualification, caste, gender, management level.
experience, age, education
Average age/experience/ Disclosure of average age/ This variable is important as it tells about employees’ profile which
education of employees experience/education of is relevant for determining the future direction of the company
employees in total and like highly experienced employees are more competent to predict
category-wise and manage organizational uncertainties.
Attrition/turnover rate It is the rate at which employees It is the rate at which employees leave a company out of their
leave their company out of their own will. Companies need to maintain it to low levels to reduce
own will, also referred to as the costs on reemployment, retraining through various employee
turnover rate or voluntary engagements and other activities to improve their satisfaction
retirement of employees levels.
Employee performance The variable indicates the An overview of employees’ performance indicators over
Indicators performance per employee based time throws light on under/effective utilization of HR of the
on profit or sales or output organization.

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 223

HRA Disclosure Item Description Remarks/Significance

Employee cost as % to This is the ratio of the total employee This indicates the efficiency with which the employees are utilized
revenue cost to total revenue by a company. Decline in this ratio overtime is beneficial for the
company.
HRV per employee This represents HRV per employee This ratio indicates value per employee. An increase in this ratio
implies that the company is able to create more value through its
activities.
HR cost as % to HRV This is the ratio of HR cost to HRV This ratio indicates the current scenario of costs and value. The
lower the ratio, the better for the company.
Net profit as % to HRV It refers to the ratio of net profit The analysis of this ratio overtime indicates the ability of a
after tax to HRV company to generate more revenue from available resources.
Turnover as % to HRV This is the ratio of turnover to HRV This ratio indicates how much HRV is translated in terms of the
turnover of the company.
HRV as % to total This is the ratio of HRV to total This ratio can explain the gap between the book value of the
resources resources company and its market capitalization to some extent.
Source: Author’s own.

The HRADI has been constructed to quantify the level measured by free float market capitalization, and it suffi-
of HRA disclosures in annual reports of selected companies. ciently represents the overall population of companies.
An index of 1 has been awarded to company if it has As the purpose of the study is to examine the status of
disclosed the concerned disclosure item in its annual report HRA measurement and reporting practices of Indian com-
and 0 otherwise. After completing scoring for each of the panies, the annual reports of the sample set of companies
items in the disclosure index, the indexes of each company from 2007–08 to 2011–12 have been downloaded from the
have been added to find the composite index, reflecting the respective websites and thoroughly scanned to examine
number of disclosure items against which disclosures have HRA reporting practices of these companies.
been made through annual reports.
The unweighted disclosure method to measure the
disclosure index of a company as suggested by Cooke Technique of Analysis and
(1992) is as follows: Hypothesis Development
n
Di = | di, The data have been analyzed from three different angles.
i=1 First, HRA disclosure practices followed by companies
with regard to the year of starting the HRA measurement,
where di is the disclosure index for each item (1 if the item the reporting format and its medium have been studied.
is disclosed else 0) for item ‘i’ and n is the number of items. Thereafter comparative analysis has been undertaken
The integrated disclosure index so obtained for to analyze the industry sector and ownership sector of
companies in a sample has been divided by 5 that is the the companies disclosing the HRA information also. Also,
number of years under consideration for study to find out the disclosures relating to the model used for HRA
mean disclosure indexes. In this way, the mean index has measurement and background parameters being used to
been calculated as calculate values such as the rate of discount used, reason
for the selection of rate, determinants of income, category-
Mean Disclosure Index = Total Disclosure Index/Total wise disclosure, supplementary/explanatory statements
Number of Years that is 5. regarding valuation have been analyzed. Finally, compa-
nies have been ranked according to their HRADI as
The same has been used as a basis to rank the companies calculated from their disclosures of the selected 20-item
on the HRADI. index sheet. Through the descriptive analysis, an effort
has been made to identify the difference in disclosure
practices of companies by classifying them on the basis of
Sample Selection and Data
selected variables.
Collection In the third step, an attempt has been made to find
The set of companies listed on the NSE forming the part out whether there is a significant difference among the
of the S&P CNX 500 index has been used as a sample in average disclosure indexes of the selected companies or
the study. The CNX 500 index is designed to reflect the not. The data have been tested using one sample t-test. This
behaviour and performance of the top 500 companies is an important test to find out whether the given data are

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224 Human Resource Accounting Disclosure Practices in Indian Companies

coming from the same population or not. Furthermore, an company’s performance through certain ratios such
attempt has been made to find out whether the companies as income per employee, HR cost per employee,
differ significantly in respect of HRA disclosures or not. HRV created per employee and HR cost as a
For this purpose, the following hypothesis has been formed: percentage of HRV only since the sample size is
very small. However, in future, an attempt can be
H0: There is no significant difference among the HRA made to relate levels of HR disclosures with com-
disclosures of selected companies pany’s performance using the Human Capital Index
as used by the consulting firm Watson Wyatt in the
H1: There is significant difference among the HRA annual survey of HR practices in the United States.
disclosures of selected companies The survey measures organization performance
with the following two criteria: TRS1 and Market
premium2. However, such an analysis will provide
Limitations useful results only when the number of companies
The study suffers from some limitations calling for future in the sample is large. Therefore, such a study can be
work to be carried in the following directions: undertaken for HR disclosures as many companies
disclose a lot of HR-related information.
1. The study has focussed on only one medium of dis-
closure that is annual reports. However, the compa-
Analysis and Findings
nies disclose information through press releases,
websites and media reports. In this way, these can The results of the analysis of HRA disclosures of companies
also be included to understand HR disclosure are given below.
practices.
2. The study is limited to the five-year period from
Descriptive Analysis—HRA Disclosures
2006–07 to 2011–12. A longer period of study can
explain the trends in HR disclosure practices better. A thorough study of annual reports of the selected set of
3. Presently the study has measured HRA Disclosure companies revealed that, although most companies shower
Index using dichotomous procedure indicating the praises on the excellent HR they possess, their competitive
presence of an item of disclosure. Therefore, a score skills and importance of HR in overall success of the
of 1 is awarded to the company if it has disclosed the companies, the number of companies actually reporting
concerned disclosure item in its annual report and information on HR is very less and the number of companies
no score (0) is assigned if such item has not been actually including HRA in their annual reports is even
disclosed. However, the value relevance to each of lesser. Only five companies have been found to have been
the items can be further studied from investors as reporting HRA in their annual reports that is just 1 per cent
well as management point of view. of the sample set of 500 companies. These companies are
4. Voluntary disclosure of HRA requires a great deal of Cement Corporation of India (CCI), Hindustan Petroleum
effort and it costs a lot. In such a scenario, compa- Corporation Limited (HPCL), Infosys, ONGC and Rolta
nies shall be reporting it only when the benefit of India Ltd. Of these companies, two companies are from the
such disclosures outweighs the cost and effort private sector, namely, Infosys and Rolta India Ltd, and
involved. We need to investigate the opposite rela- remaining three companies namely CCI, HPCL and ONGC
tionship as well that is the effect of HRA disclosures are from public sector. Further these companies are from
on the performance of the company. different sectors except for Infosys and Rolta both of which
5. The study has focussed on only one aspect that is are from computer software industry. In the absence of a
HRA disclosures. However, it is crucial to relate it to larger sample (as only five companies from the list of NSE
other financial variables such as profitability, indus- CNX 500 companies are reporting HRA), no conclusive
try type and ownership structure also to understand generalizations can be made with regard to the ownership
variations in the HRADI of companies. and industry sector of the HRA reporting companies.
6. The study is based on secondary data and there is a HRA measurement and reporting practices of the
need to understand the management viewpoint in selected companies as observed in their annual reports are
respect of the relevance to HRA disclosures through as follows.
interviews/questionnaires to understand their HRA
practices to evolve better HRA systems. 1. Cement Corporation of India (CCI). Cement
7. Presently, the study has attempted to analyze Corporation of India Limited is a wholly owned
the effect of HRA application and disclosures on government company. It was incorporated by the

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 225

Government of India on 18 January 1965 with the HR valuation through a separate statement with
objective to become a pioneering and leading com- title ‘Human Resource Accounting’. However, the
pany in the field of exploration of cement grade company does not incorporate the HR valuations in
limestone reserves and to emerge as a dominant its balance sheet.
leader in cement production in the country. CCI 3. Infosys Technologies Limited (ITL). Infosys is a
has branded HR as mother resources through leading information technology company that
the medium of which other scare resources such was incorporated in 1981 by seven people with US$
as material, machine and money are organized, 250 as Infosys Consultant Private Limited. In 1992,
co-ordinated, directed and controlled. CCI has elab- the company was converted into a public limited
orated the importance of HR by suggesting that company. Today it is a global leader in consulting,
the maximum realization of the potentials of this technology and outsourcing with revenues of
mother resource is of crucial importance not only US$ 7.126 billion. In 1995–96, it became the first
for the success of an enterprise but also for a sus- software company to value its HR in India. Infosys
tainable increase in shareholder’s value because recognizes the value of HR as a source of income.
employees possess value as providers of services Considering the definition of wealth as a source of
resulting in future profits. CCI started reporting HR income, HR can be categorized as one of the several
valuations from 1979–80. In the absence of a clear- forms of the wealth along with money, securities
cut, well-defined and universally accepted model and physical capital. Previously, Infosys was using
for the evaluation of the economic worth of human the Lev and Schwartz model for the valuation of
assets of a company, CCI has attempted to assess HR, but from 2011–12 it has adopted the Greenwich
the same, by working out the present value of the in Service Training-Human Capital Externality
anticipated future earnings of the employees taking (GIST-HCX) model for the valuation of HR. The
into account the present pay scales and promotional new method is based on the present value calcula-
policies being followed. The calculations have been tions of the increase in future earnings of employees
based on the guidelines and principles enunciated in during their employment in Infosys. It also accounts
the economic models developed by Lev and for the impact of attrition on our human capital
Schwartz (1971), Flamholtz (1974) and Jaggi and value and, therefore, quantifies the positive human
Lau (1974) with appropriate modifications as neces- capital externality (HCX) being generated by
sary. The company discloses its HR valuation Infosys. HCX refers to the benefits derived by the
through a separate statement with the title ‘Our society when employees whose human capital value
Employees-Our Greatest assets’. Though the com- is enhanced due to training and employee develop-
pany does not incorporate the HR valuations in its ment at Infosys leave the company. The company
balance sheet, it reports its social accounts (social discloses its HR valuation through a separate
income statement and social balance sheet) wherein statement with the title ‘Human Resource Valuation’.
it shows HR valuations under the heading ‘Human The company also reports a separate balance sheet
Assets’ along with other social assets. including intangible assets.
2. Hindustan Petroleum Corporation Limited (HPCL). 4. Oil and Natural Gas Corporation (ONGC). ONGC
HPCL is one of the major integrated oil refining was formed as an oil and gas division, under
and marketing companies in India. It is a public Geological Survey of India, in 1955 with the vision of
sector undertaking accorded with the status of great leaders to make our country energy-efficient. It
‘Navratna Company’ and a Fortune 500 and Forbes was converted into Commission and christened Oil
2000 Company. HPCL was incorporated after the and Natural Gas Commission on 14 August 1956. In
takeover and merger of Esso Standard and Lube 1994, Oil and Natural Gas Commission was con-
India Limited in 1974. HPCL considers human verted into a Corporation, and in 1997 it was recog-
dimension as a key to organization’s success. nized as one of the Navratnas by the Government of
Recognizing the value of its HR who are committed India. Subsequently, it was conferred with the
to achieve excellence in all spheres, HPCL started Maharatna status in the year 2010. ONGC is aimed to
valuing and reporting its HR from 1981–82. HPCL explore newer avenues for a greener planet, excel in
uses the Lev and Schwartz model to compute the its exploratory endeavours and evolve into a com-
value of HR. The evaluations are based on the plete energy solution provider. Recognizing the value
present value of future earnings of the employees of its HR who are committed to achieve excellence in
after considering the company policies on superan- all spheres, it started valuing and reporting its HR
nuation and increments. The company discloses its from 1981–82. The company uses the Lev and

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226 Human Resource Accounting Disclosure Practices in Indian Companies

Schwartz model to compute the value of HR which is separate statement with the title ‘Human Resources
a cost-based valuation of employee expenditure. The Valuation’. However, the company does not incor-
evaluations are based on the present value of future porate the HR valuations in its balance sheet.
earnings of the employees after considering the com-
pany policies on superannuation and increments. The
HR and Company Performance Indicators
company discloses its HR valuation through a sepa-
rate statement with the title ‘Human Resource Value’ Table 3 shows that the companies which practice HRA are
in an annexure to the director’s report. However, the reaping immense benefits in terms of the increase in
company does not incorporate the HR valuations in income per employee, reduced HR costs and increase in
its balance sheet. the value of HR. It is observed that during the five-year
5. Rolta India Limited. Rolta is a multinational soft- period under study, CCI with an increase in HR cost
ware development and services company estab- (2.7 lakhs per employee) is able to improve income per
lished in 1989. Rolta recognizes employees as the employee by 12.3 lakhs. On similar lines, HPCL is able to
most valuable resource of the companies in the ser- improve its income per employee by 652.03 lakhs with an
vices and knowledge sector. Like all other resources, increase of 6.17 lakhs per employee. The same is the case
employees possess value because they provide with other companies. Over the period under study, the
future services resulting in future earnings. It started value of HR has also increased many folds and this had
valuing and reporting its HR from 2002. Rolta uses resulted in a decline in the ratio of HR cost to HRV. This
Lev and Schwartz’s Economic Approach Model to findings confirm the point argued by many theorists and
compute the value of HR. The evaluations are based researchers that HRA is important in improving companies
on the present value of future compensation of the performance not only by altering the management approach
employees including all direct and indirect benefits from taking employees as cost to an asset/investment to be
being earned in India and abroad after considering nurtured and developed but also by creating an awareness
the company policies on retirement and increments. among employees that the company is taking so much
The company discloses its HR valuation through a effort in improving their knowledge and skills. Thus, the

Table 3. HR and Company Performance Indicators

Company Name 2007–08 2008–09 2009–10 2010–11 2011–12

Income per employee (rupees in lakhs)
CCI 21.39 23.47 31.40 33.56 33.69
HPCL 1023.82 1172.00 1017.52 1265.97 1675.85
ITL 18.31 20.69 19.98 21.02 22.32
ONGC 182.26 193.58 183.41 204.78 231.32
Rolta 22.81 29.71 33.91 46.48 53.65
HR cost per employee (rupees in lakhs)
CCI 2.36 2.53 4.94 4.26 5.06
HPCL 7.93 10.11 14.32 17.93 14.10
ITL 9.74 10.88 10.62 11.36 12.23
ONGC 18.33 14.35 17.42 20.22 20.65
Rolta 7.08 11.48 11.05 13.62 15.92
HRV per employee (rupees in lakhs)
CCI 7.58 10.98 17.50 22.03 25.95
HPCL 85.71 61.14 55.49 60.26 61.29
ITL 108.00 97.00 100.00 75.00 84.00
ONGC 88.00 117.00 131.00 147.00 152.00
Rolta 227.00 295.00 340.00 440.00 515.00
HR cost to HRV (%)
CCI 3.12 2.30 2.82 1.94 1.95
HPCL 0.68 0.87 1.03 1.09 0.74
ITL 0.90 1.12 1.07 1.51 1.38
ONGC 2.08 1.23 1.33 1.37 1.36
Rolta 0.31 0.39 0.33 0.31 0.31
Source: Author’s own.

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 227

whole process of measurement of HRV and its reporting report, although the HR statement is mentioned in the
will lead to improved motivation, morale and loyalty of index of the annual report. Another important observation
employees, thereby increasing their sense of belonging is that the companies measure the value of their employees
with the company, and they will show greater interest in and report it too, but it is in the form of the lone statement
their work. Bullen and Eyler (2010) suggested that when only and no attempt is made to link this inventory of intan-
managers go through the process of HRA measurement gible assets with the tangible assets with the only exception
treating HR as capital assets, they are more likely to make of Infosys which prepares a combined balance sheet
decisions that treat employees as the long-term investment showing all assets including HR assets and brand values.
of the company. Therefore, the application of HRA in com- However, the values shown under the head HR value has
panies leads to improved employees’ performance, thereby been counter-balanced with capital reserves for intangible
improving company’s profitability and growth prospects. assets. Although CCI prepares its balance sheet showing
human assets, it is in the form of social accounts and does
not qualify to be included in this category.
Comparative Analysis of HRA: Measurement The findings indicate that even though the companies
and Reporting Practices of Selected are measuring and reporting HR as assets, the systems are
yet not in place for proper accounting for HR costs such as
Companies and Ranking of Companies recruitment, training and development, and their allocation
An attempt has been made to analyze various parameters over the period of their use/tenure in a company and these
relating to HRA reporting systems adopted by the selected continue to be written off in years of occurrence which is
set of companies. These are listed in Table 4. It clearly indi- against the basic tenets of HRA and also that of generally
cates that the companies report HRA information in a sepa- accepted accounting principles (GAAP) which suggest that
rate section with the only exception being ONGC which all costs should be written off against their period of use in
reports this information in an annexure to the director’s organization irrespective of their occurrence and payment.

Table 4. Parameters Relating to HRA Reporting Systems Adopted by Companies

Company CCI HPCL Infosys ONGC Rolta

Year of incorporation 1965 1974 1992 1995 1989
Industry Cement production Refineries Computer software Oil exploration/ Computer software
production
Sector Public Public Private Public Private
Year of introduction 1979–80 1981–82 1995–96 1981–82 2002
Method of Separate statement Separate statement Separate statement Separate Separate statement
presentation along with financial along with the statement
statements and combined balance
social accounts sheet
including HRA
Title of statement Our Employees— Human Resource Human Resource Human Resource Human Resources
Our Greatest Assets Accounting Valuation Value Valuation
Medium/place Separate section Separate section Additional information Annexure to Separate section
of disclosure director’s report
Reasons for To realize full HR key to To achieve success, Not given Sustainable increase
disclosure potential of HR, organizational improve profitability, in shareholders’
awareness for success, and competence, to adapt value, employees
the training and recognizes the value to environment change, possess value as
development of HR, of its human assets evaluate market providers of services
to achieve individual worthiness for investors resulting in future
and organizational to quantify the value of profits
goals HR
HRA valuation Lev and Schwartz Lev and Schwartz GIST-HCX model Lev and Schwartz Economic approach
model (1971), Flamholtz model (1971) including the valuation model: cost- model, Lev and
(1974) and Jaggi of human capital based valuation Schwartz (1971)
and Lao (1974) externalities of employee
with suitable expenditure
modifications
Source: Author’s own.

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228 Human Resource Accounting Disclosure Practices in Indian Companies

In this way, HRA information is not forming the part of the fact, Infosys was also using this method till the financial
income statement and balance sheet. Not only this, but also year 2010–11. It is from the financial year 2011–12 that
the values reported in HRA are shown in supplementary the company has switched over another method called the
statements and not in main financial statements. In such a Infosys GIST-HCX model which is again based on the
backdrop, HRA information is unaudited and lacks authen- same approach of valuing HR on the basis of their present
ticity. Hence, the use of this information for investment value of future earnings with the assumption of compensa-
decision making by the investors or otherwise is highly tion considering incremental basis with the additional
suspicious. So, there is a strong need to set up proper adjustment of incorporating the value of externalities in the
systems in place to ensure that the HRA information is value of HR. HCX refers to the benefits derived by the
objective, true and free from the bias in order to make it society when employees whose human capital value is
useful for decision making. enhanced due to training and employee development at
The main reason behind the disclosure of such Infosys leave the company. In this way, the method
information is the increased awareness about the role of accounts for the impact of attrition on human capital value
HR as service providers and as a bundle of competencies and, therefore, quantifies the positive HCX being gener-
which is needed to be continuously nurtured and developed ated by Infosys. In such a backdrop, it can be said that the
to improve organizational efficiency. Another reason for Lev and Schwartz model is most preferred in India for the
reporting such information is to improve market worthiness valuation of HR, though it has its own limitations.
of the company to attract better finances. All companies have disclosed the rate of discount being
Table 5 attempts to analyze various aspects of HRA used to calculate the present value of future earnings of
measurement as adopted by companies. On the basis of the employees along with the reason for the same except CCI.
examination of HRA measurement and reporting practices, All of the companies have taken the present value of future
the Lev and Schwartz model has been found to be used by earnings (direct and indirect benefits earned in India and
the companies, although certain modifications are being abroad by employees) after considering the company
done by the companies to make this method suitable. This policies on superannuation and increments as a proxy to the
method has been found to be used by all companies. In value of employees. All companies except Rolta provide

Table 5. Aspects of HRA Measurement Considered by Companies

Company CCI HPCL Infosys ONGC Rolta

Model used Economic worth of human Lev and Schwartz GIST-HCX model Lev and Schwartz Economic
assets: Lev and Schwartz model (1971) including the valuation model: cost- approach
(1971), Flamholtz (1974) of human capital based valuation model, Lev
and Jaggi and Lao (1974) externalities of employee and Schwartz
with suitable modifications expenditure (1971)
Discount rate used N 8.50% 5% 8.50% 9.67%
Criteria for discount N N Long-run inflation rate N Weighted
rate consistent with the average cost
RBI target for inflation of capital
expectation. Earlier it
was the cost of capital
Determinants of Present pay scale and Present value of Future earnings of Aggregate N
earning promotional policies future earnings employees future earnings
with the assumption incremented at 4%
of compensation per annum
considering
incremental basis
Category-wise 7 categories on the basis Management–non- Software and support Technical–non- N
disclosure of management and skill management staff classification technical and
levels executive–non–
executive
Explanatory Y Y Y Y Y
statements given
Reporting format: N N Y N N
balance sheet with
HRA
Source: Author’s own.

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 229

category-wise HR value information and in most cases the improve themselves. The value of HR per employee has
HR have been categorized on the basis of the management also increased in all cases.
and skill levels. All companies have preferred to give explan- Now an attempt has been made to measure the HRADI
atory statements regarding the method, rate of discount used, for a given set of companies and to rank them on its basis.
determinants of earning and categories of HR considered. Table 7 provides an overview of all items of disclosure and
Table 6 gives a snapshot of HR values, number of the HRADI of all companies under consideration.
employees and HR value per employee of the selected In this way, it is found that all companies are reporting
companies—table 5 reveals employee strength and their the model used for the valuation of HR and determinants of
values for the selected companies for the relevant period earnings. The companies are also giving explanatory
under consideration. This clearly indicates that value of statements regarding valuations. However, data relating to
employees is increasing over the years. This is partially employees’ education level, experience and attrition are
due to the increase in benefits provided to employees over least reported. Furthermore, HRA statements are lone
the years and partially because HRA, that is, the valuation statements and effort has not been made to combine them
and reporting of values of HR have instilled awareness in financial statements. Figure 2 shows the mean HRADI
among management and employees to strive hard to of the selected companies.

Table 6. Employee Strength and Value of HR of Selected Companies from 2007–08 to 2011–12

Company Variables 2007–08 2008–09 2009–10 2010–11 2011–12

CCI Employees strength 1460 1159 1078 988 907
HR value (total in ` crores) 160.31 202.85 237.53 256.41 269.30
HRV per employee 0.11 0.18 0.22 0.26 0.30
HPCL Employees strength 10949 11246 11291 11248 11226
Human resources value 12730 13147 15654 18493 21412
(total in ` crores)
HRV per employee 1.16 1.17 1.39 1.64 1.91
Infosys Employees strength 91187 104850 113796 130820 149994
HR value (total in ` crores) 98821 102133 113287 98147 132548
HRV per employee 1.08 0.97 1 0.75 0.84
ONGC Employees strength 32996 33035 32826 33273 32909
HR value (total in ` crores) 29052.8 38516.9 43135.4 48955.5 50097.4
HRV per employee 0.88 1.17 1.31 1.47 1.52
Rolta Employees strength 4700 4620 4520 3885 3409
HR value (total in ` crores) 10671 13644.2 15321.7 17093 17547
HRV per employee 2.27 2.95 3.4 4.4 5.15
Source: Author’s own.

Table 7. HRADI of Companies

Company/Variables CCI HPCL Infosys ONGC Rolta Total Disclosure Average Disclosure
Model used for valuation 5 5 5 5 5 25 5
Discount rate used 0 5 5 5 5 20 4
criteria for discount rate 0 0 5 0 5 10 2
Determinants of earning 5 5 5 5 5 25 5
Category-wise disclosure 5 5 5 5 0 20 4
Explanatory statement given 5 5 5 5 5 25 5
Balance sheet with HR values 0 0 5 0 0 5 1
Employees strength 5 5 5 5 0 20 4
Hierarchal categories 5 5 5 5 0 20 4
Average age of employees 5 5 5 0 0 15 3
Average experience 0 0 0 0 0 0 0
Attrition 0 0 5 0 5 10 2
Staff education 5 0 5 0 0 10 2
Employee performance indicators 5 5 5 0 5 20 4
Employee cost as % to revenue 0 0 5 0 5 10 2
HR value per employee 0 0 5 5 5 15 3
(Table 7 continued)

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230 Human Resource Accounting Disclosure Practices in Indian Companies

(Table 7 continued)
Company/Variables CCI HPCL Infosys ONGC Rolta Total Disclosure Average Disclosure
HR cost as % to HR value 0 5 5 0 0 10 2
Net profit as % to HR value 0 5 5 0 0 10 2
Turnover as % to HR value 0 5 5 0 5 15 3
HR value as % to total resources 0 5 5 0 0 10 2
Total index 45 65 95 40 50 295 59
Mean index 9 13 19 8 10 59 11.8
Rank 4 2 1 5 3
Source: Author’s own.

Figure 2. Mean HRADI of the Selected Companies Table 8. Shapiro–Wilk Test Results of Normality

Shapiro–Wilk Test
Statistic df Sig.
HRA disclosure mean index 0.869 5 0.264
Source: Author’s own.

HRADI follows the normal distribution. Hence, t-test can

be used for the analysis.
Randomness of the HRA Disclosure Index
H0: HRADI is randomly distributed. The run test using the
median as the base parameter has been used to test the
randomness of data. The results of the run test are given in
Table 9. The run test shows that the data are random.
Hence, one sample t-test can be conducted to test whether
the HRADI is significantly different for the given set of
companies.

From the chart, it is evident that Infosys has the maximum H0: There is no significant difference in the HRADI
index among all companies. It is disclosing as many as 19 H1: There is a significant difference in the HRADI
items out of 20. Hence, Infosys has been ranked first on the
The results of the t-test are given in the Tables 10 and 11.
HRADI, followed by HPCL which is disclosing 13 items in
all. Rolta has been ranked 3rd with the disclosure index of
Table 9. Run Test Results
10. ONGC has been found to be disclosing the least number
of items, that is, eight items only and, hence, been ranked HRA Disclosure Mean Score
5th. CCI with the disclosure index of 9 has been ranked 4th. Test value 10
Cases < Test value 2
Test of Significance Cases $ Test value 3
Total cases 5
Now, it has been analyzed to examine whether these Number of runs 4
companies differ significantly as regards the HRADI. Z 0.109
However, before conducting t-test, data have been checked Asymp. significance (2-tailed) 0.913
for normality and randomness using the Shapiro–Wilk test Source: Author’s own.
for normalcy and histogram for randomness.
Table 10. One Sample Statistics
Normal Distribution of the HRA Disclosure Index
Standard Standard
H0: HRADI is normally distributed. N Mean Deviation Error Mean
Table 8 shows the Shapiro–Wilk test results. The Shapiro– HRA disclosure 5 11.80 4.438 1.985
Wilk test has been applied as the size of the sample is very mean score
small. As p-value is greater than 0.05, it indicates that the Source: Author’s own.

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Surinder Kaur, A.  Venkat Raman and Monica Singhania 231

Table 11. One Sample t-test Results

95% Confidence Interval of Difference

t df Significance (2-tailed) Mean Difference Lower Upper
HRA disclosure 5.945 4 0.004 11.800 6.29 17.31
mean score
Source: Author’s own.

Tables 10 and 11 reveal that the p-value of the test selecting the rate of discounting of salary. The study also
is 0.004 which is less than the level of significance revealed that the companies do not have a system for proper
(0.05) and the value of t-statistic fall outside the critical accounting for capital costs relating to HR. These costs con-
values. Therefore, the test fails to accept null hypotheses. tinue to be reported as expenses. Therefore, it can be con-
Hence, there is a significant difference in the HRADI cluded that the companies are trying to fit available models
of companies. for the valuation of HR as per their own requirements, but
they do not deal with the mode of record­ing and reporting of
Summary of Findings and Discussions accounting information relating to HR in the books of
accounts of financial statements. HR disclosures are volun-
The main findings of the study are stated in Table 12. tary in nature. In such a backdrop, the HR disclosures that
The findings of the study are in conformity with other are made by companies are unstructured and inconsistent
research studies such as Shah and Khedkar (2006), and incomparable across companies and industries. There is
Narayanankutty (2006), Dalwadi (2010), Narayan (2010) a significant difference among the disclosure practices and
and Joshi and Mahel (2012) which also concluded that average HRA disclosures of the selected companies. Thus,
measurements and reporting are highly subjective. HRA information is not forming the part of financial state-
The studies revealed that measurement methods suffer ments. The findings are in conformity with findings of other
from many limitations such as there is no suitable basis for research studies such as Sonara (2009) and Narayan (2010).

Table 12. Findings of Study

Findings Detailed Explanation

Low level of HRA The study of annual reports has revealed that HRA disclosures are very low in Indian companies
disclosures in Indian with only five companies being found to be reporting HRA in their annual report that is just 1% of the
companies sample set of companies. These companies are CCI, HPCL, Infosys, ONGC and Rolta India Ltd.
Format of disclosure- The above stated five companies do collect and report HRA information, but this is just a
supplementary statement supplementary statement and not a part of main financial statements.
Most preferred model for These companies have followed the Lev and Schwartz model for the valuation of HR, but that adaptation
HR valuation—Lev and of the model is somewhat arbitrary as there is no standard grouping of HR, selection
Schwartz model of the rate of discount is discretional, selection of ratios to describe the relationship between
employees and profitability is also arbitrary.
Place of disclosure- Companies report HRA information in a separate section with ONGC being the only exception
separate section which reports this information in an annexure to the director’s report, although the HR statement
finds its mention in the index of the annual report.
Main reasons for The main reason behind the disclosure of such information is increased awareness about the role
HRA disclosures of HR as service providers and as a bundle of competencies which is needed to be continuously
nurtured and developed to improve organizational efficiency. Another reason of reporting such
information is to improve the market worthiness of a company to attract better finances.
Discontinuance of HRA It has also been found that many of the companies which originally started HRA such as BHEL,
practices SAIL, EIL, MMTC, NTPC, MRL and KRL have discontinued the practice because there is no
compulsion of such valuation and the task involved is very tedious.
No link of HRA Companies measure the value of its employees and report it too, but it is in the form of the lone
valuations with other statement only and no attempt has been made to link this inventory of intangible assets with the
tangible assets tangible assets with the only exception being Infosys which prepares a combined balance sheet
showing all assets, including HR assets and brand values. However, the values shown under the
head HR value has been counter-balanced with capital reserves for intangible assets. Although
CCI prepares its balance sheet showing human assets, it is in the form of social accounts and
does not qualify to be included in this category.
(Table 12 continued)

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232 Human Resource Accounting Disclosure Practices in Indian Companies

(Table 12 continued)
Findings Detailed Explanation
HRA information not Even though the companies are measuring and reporting HR as assets, the systems are as yet not
incorporated in traditional in place for proper accounting for HR costs such as recruitment, training and development, and their
statements allocation over the period of their use/tenure in the company, and these continue to be written off
in the year of occurrence which is against the basic tenets of HRA and also that of GAAP which
suggest that all costs should be written off against their period of use in organization irrespective
of their occurrence and payment. In this way, HRA information is not forming the part of the
income statement and balance sheet.
Main drawbacks of the •  Unreliable disclosures:Values reported in HRA are shown in supplementary statements and not in
HRA system adopted main financial statements; HRA information is unaudited and, hence, lacks authenticity. Hence, the use
by companies of this information for making investment decisions by investors or otherwise is highly suspicious.
So, there is a strong need to set up proper systems in place to ensure that the HRA information is
objective, true and free from the bias in order to make it useful and reliable for decision making.
•  Incomparable HRA disclosures: HR disclosures are voluntary in nature. In such a backdrop, HR
disclosures that are made by companies are unstructured and inconsistent and incomparable
across companies and industries. There is a significant difference among the disclosure practices
and average HRA disclosures of the selected companies.
Source: Author’s own.

The study has revealed that the application of HRA in is positively correlated with the performance and value of
companies has resulted in an increase in income per companies (Edvinsson and Sullivon, 1996; Bontis, 2003;
employee, reduced HR costs and an increase in the value of Anam, Fatima and Majdi, 2011). Garcia-Ayuso, Moreno-
HR. Over the period, under study, the value of HR has also Campos and Sierra-Molina (2007) concluded that investors
increased many folds and this had resulted in the decline have higher expectations on the future earning potential of
of the ratio of HR cost to HR value. The findings are in firms with a higher quality of HR and vice versa. Huang,
conformity with the results of other studies such as Gul Abidin and Jusoff (2008) found that investors particularly
(1984), Steven and Hannie (1993) and Bullen and Eyler institutional those such as fund managers and financial
(2010). Gul (1984) emphasized HR to be a profit lever of analysts seek information on company management and
a knowledge economy. According to him, employees human capital but most disclosures are qualitative and not
of organizations possess knowledge and skills necessary uniform which requires them to rely on alternative sources
to perform useful functions and achieve the firm’s goals to get the desired information—a costly process for private
and objectives. Steven and Hannie (1993) in their work shareholders. Hence, HRA is important not only for
placed the argument in favour of HRA that the employees managers but also for investors.
interact together and transform other resources of the firm Although not many companies valuate their HR and
so as to add value. What results from this transformation disclose such information, it has been observed that there is
through ‘a pool of human resources’ is reflected in the an increasing trend in the reporting of HR-related informa-
profit of the firm. tion by companies. Several research studies such as
Various research studies such as Ansari and Flamholtz Christopher and Kong (1998), Epstein and Wisner (2001),
(1978), Oliver and Flamholtz (1978), Spiceland and Bontis (2003), Pettersson and Rylme (2003), Abeysekera
Zaunbrecher (1977), Harrell and Click (1980), Malik and Guthrie (2004), Abeysekera and Murthy (2007), Huang
(1993), Flamholtz, Bullen and Hua (2003), Tomassini et al. (2008), Alam and Deb (2010) and Ragini (2012) have
(1997) and Bayes (1978) have focussed on the use of HRA attempted to analyze HR-related disclosure practices of
in internal management decisions. The studies have ana- companies in India and HRADI abroad. The studies have
lysed the impact of HRA data on HR-related decisions, revealed that most commonly disclosed items relating to
such as turnover, lay-off and personnel selection decisions, HR are employee strength, attrition/turnover rate, training
and found that there was a significant difference between and development, staff distribution, HR awards, employee
the decisions with and without HRA data. In this way, HRA satisfaction survey, retirement benefits, whistle blower
disclosures help managers in taking improved managerial policy, HRA statement, EVA disclosure, health, safety and
decisions. Therefore, it can be concluded that HRA meas- welfare of employees, employees’ acknowledgement,
urements and disclosures lead to the improved perfor- career development plans, HR policy, management succes-
mance and increase in the wealth of a company. sion plans, cost per employee, employees’ stability ratios,
HRA disclosures are useful for investors as well. Many employees’ profitability ratios, equity issues, and entrepre-
studies suggest that the management and reporting of HR neurial spirit and innovation.

Vision, 18, 3 (2014): 217–235

Surinder Kaur, A.  Venkat Raman and Monica Singhania 233

Managerial and Policy Implications considered to be the key elements for monitoring the
of Research business activities to attend their goals successfully, HRA
can help organizations achieve their targets. Hence,
While HRA as a concept has been present in India for more considering the great significance of HRA proper initiation
than a decade, with BHEL taking a lead, it is only now that should be taken by government along with that other
the awareness is being translated into application. However, professional and accounting bodies both at national and
it has been pointed out that in terms of awareness and international levels for the measurement and reporting of
acceptance, the level is still low as many companies take such valuable assets.
little initiative to make the numbers public to shareholders,
despite having the data. A major deterrent in this respect is
the lack of an industry standard. This means that every Summary and Concluding Thoughts
company has to evolve its own standard, which can become With so many frauds and scandals propping up in the last
a tedious process, considering that most of them are still decade, there is a pressing need to have not just more
involved in improving their business. Industry bodies like disclosures but also to have better rules and practices for
Nasscom can help set a standard. Another aspect working the disclosure of information to improve trust in account-
against the acceptance of HRA is the need for extensive ing. The accounting bodies and academic communities are
research that it entails. Many companies do not want to also aware of this and the importance of issuing guidelines
go into the intricacies of finding the value of their HR. to improve financial and non-financial reporting. However,
While most big companies (with a large manpower) can the study has revealed the sorry state of HRA and its
afford to dwell into such best practices, it is not an eco- application in Indian companies. The HRA application and
nomically viable option for small and medium companies.
disclosures are not only low but also inconsistent, incom-
Furthermore, many people are still doubtful regarding the
parable and unreliable as HRA statements are unaudited.
usefulness of HRA in managerial decision making as
This leaves a lot to be done in respect of HRA disclosures.
Naresh Taneja, the head of HR of HCL Technologies
There is a pressing need on behalf of accounting bodies,
(Mumbai, formerly Gulf Computers), has pointed out that
government agencies and regulatory bodies to come
one cannot totally rely on this concept. Considering the
forward and issue accounting guidelines in relation to
dynamism of this industry, it is very difficult to predict as
disclosures being more objective and user worthy. The
to what is going to be your future requirements and how
HRADI as constructed in the study can be used as a bench-
technology is going to shape in the near future. This only
mark by companies to improve their HRA disclosures.
raises the question on benefits of HRA. Besides this, HR
It can also be used by accounting bodies and company
disclosures are voluntary in nature. In such a backdrop,
regulators while deciding about standards about HRA dis-
HR disclosures that are made by companies are unstruc-
closures. Investors can also use HRA disclosures made by
tured, inconsistent and incomparable across companies and
companies as a basis to understand its financial standing
industries. Even these HRA disclosures offer little help in
and future potentials.
decision making as these are unaudited and unreliable.
However, in order to overcome these problems, it is
necessary that since there is no industrial norm or standard, Notes
every company has to evolve its own standard which can 1. TRS refers to total return to shareholders. It is measured by
become a tedious process. However, industry bodies such the change in the company’s share price over a period of time,
as Nasscom and Assocham can help in setting a standard. plus dividends, expressed as a plus or minus percentage of the
share’s opening value.
As there is no law or rule in Companies Act 1956, nor does
2. Market premium refers to the extent to which the company’s
the Institute of Charted Accountants of India (ICAI) market value exceeds the cost of its assets, expressed as a
provide any accounting standard on this vital issue, some percentage of assets. This represents the market’s assessment
of the companies have discontinued such practice. ICAI of the company’s ability to generate future profits from intan-
and other regulatory and accounting bodies should come gible assets, such as brand equity and human capital.
up with some guidelines regarding the valuation and
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titles/1677
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Professor at Acharya Narendra Dev College, University of
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Japanese companies. Vikalpa, 17(3), 51–72. papers of accounting and finance at undergraduate level.
Schultz, T.W. (1960). Capital formation by education. Journal of She received Mamta Gupta Memorial Gold Medal for
Political Economy, 68(6), 571–583. being the best women candidate in M.Com at University of
Seth, N. (2009). Human resource accounting practices adopted Delhi and Professor A. B. Ghosh and Jai Narayan Vaish
in Indian Industries. ASBM Journal of Management, 2(2), prize for being the topper in M.Com in 1991 at the
103–113. University of Delhi.
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Indian experience (Case study). Ahmedabad: IIPM. A. Venkat Raman (avr@fms.edu) is an Associate
Sharma, S., & Shukla, R.K. (2010). Application of human Professor (HRM) at the Faculty of Management Studies
resource accounting in heavy industries. SAMRIDDHI— (FMS), University of Delhi.
A Journal of Physics Sciences, Engineering and Technology, Monica Singhania (monica@fms.edu) is an Associate
1(2), 131–133. Professor, Faculty of Management Studies (FMS),
Singh, A.K., & Gupta, N. (2010). Contribution based measure-
University of Delhi. She is a graduate from Shri Ram
ment of human asset for strategic decision making using
HCIS. International Journal of Business and Management
College of Commerce, post-graduate from Delhi School of
Studies, 2(1), 97–105. Economics and a Fellow Member (FCA) of the Institute of
Sonara, C.K. (2009). Valuation and reporting practices of human Chartered Accountants of India. She has been awarded
resource accounting in India. JIMS8M: The Journal of Indian PhD in the area of corporate finance and taxation from the
Management and Strategy, 14(3), 47–52. University of Delhi.

Vision, 18, 3 (2014): 217–235

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