Analysis of the case



HUMAN RESOURCE ACCOUNTING

JUST A THOUGHT:

“Though your balance sheets’ model of what balance sheet should be;

Typed and ruled with great precision in a type that all can see;

Though the grouping of the assets is commendable and clear;

And the details, which are given more than usually appear;

Though investments have been valued at the sale price of the day;

And the auditors’ certificate shows everything o.k.;

One asset is omitted – and its’ worth I want to know;

The asset is the value of the men who run the show.”

The progress of any organisation is absolutely dependent on its skillful utilization of its human capital. It’s not a machine but man – thoroughly motivated and absolutely dedicated – that helps a company’s profit curve soaring upwards. But this apparently simple truth is not a recent discovery. Classical economists like Adam Smith, Veblen; Marshall et al have time and again stressed the importance of human capital in an organisation. But the strange irony is that no organisation discloses its most vital asset, human asset in its financial statements while capital invested in other assets is shown. This is one of the severest limitations of conventional financial statements, which hinders the user of the statements from making full use of them.

Human Resource Accounting is defined as the process of recognizing, measuring and communicating useful information relating to human resources.

According to the American Accounting Association, HRA is “a process of identifying and measuring data about human resources and communicating this information to interested parties.”

Rensis Likert, one of the earliest proponents of HRA has listed the following as the objectives of HRA:

1. To furnish cost value information for making management decision and maintaining human resources in order to attain cost effective organisational objectives.

2. To allow management personnel to monitor effectively the use of human resources.

3. To provide a sound and effective basis for asset control.

To aid the development of management principles by classifying the financial consequences of various practices.

Human Resource Accounting in India

“The dichotomy in accounting of Human Capital and the Non Human Capital is Fundamental. The Latter is recognised as an asset and is, therefore, recorded in the books and reported in the financial statements, whereas the former is ignored by accountants”

-----From the annual report of Infosys Technologies Ltd

A brief background

Conventionally the value of people to the organisation has been royally ignored over a period of time. Even in the service intensive industries like IT (Information technologies) the concept of HRA was not being applied. In India, Infosys Technologies (Infosys) was the first software company to value its human resources starting from the financial year 1995-96. In that year, the company used the Lev & Schwartz Model and valued its human resources assets at Rs 186 crore. Infosys had always given utmost importance to the role of employees in contributing to the company’s success. Human resources accounting (HRA) was a step further in Infosys’ focus on its employees.

Narayana Murthy, the then CMD of Infosys, said: “Comparing this figure over the years will tell us whether the value of our human resources is appreciating or not. For a knowledge intensive company like ours, that is vital information.”

However, the concept of HRA was not new in India. HRA was practiced by public sector companies like Bharat Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way back in the 1970s. But the concept did not gain much popularity and acceptance during that time. It was only in the mid-1990s, after Infosys started valuing its employees, that the concept gained popularity in India. By 2002, HR accounting had been introduced by leading software companies like Satyam Computers and DSQ Software, as well as leading manufacturing firms like Reliance Industries, Tata Motors, ACC, ONGC and Cement Corporation of India.

Definition of Accounting

Accounting is an Art of Recording, Classifying and Summarizing in a significant manner, in terms of money, transaction and events of financial character and interpreting the results thereof.

-----Institute of Certified Public Accountants

Accounting is a process of Identifying, measuring and communicating the economic information to permit informed Judgment by the users of accounts.

HRA Perspective

Human Resources are the energies, skills, talents and knowledge of people which are, or which potentially can be applied to the production of goods or rendering useful services. Such investment in human resources refers to all forms of investments directed to raise knowledge, skills and aptitudes of the organizations workforce.

HRA is an investor-friendly disclosure, and assures stakeholders that the company has the right human capital to meet its future business requirements.

Why HRA?

• In the conventional accounting system not much is available about Human Resources.

• Inaccurate information in the Financial Statements

• Conventional treatment of HR may lead to erosion of Investors interest

• No record of the human assets corresponding to the human capital of the organization

• Expenses on HR treated as current cost thus a cost reduction drive would mean cutting of expenditure on HR

• The impact of management decision on Hr assets cannot be clearly perceived if value of HR is not reported in the F/S.

Benefits of HRA

• Regarding HR as an asset ensures CARE of the employee

• Proper disclosure of the value of HR leads to correct interpretation of return on capital expenditure

• Quantification of HR gives an insight into the potential of the company

• HRA helps in identifying the right person for the right job, based on the person’s specialized skills, knowledge, capabilities and experience

• Maintenance of detailed record improves managerial decision making in the areas of recruitment, promotion, transfers, retrenchment and training

• Helps in Budgetary control

• Improves the quality of management

• Helps in increasing productivity of HR by boosting morale and loyalty

• Identification of talent and the skills available

• The following information can also become available by following HRA system

✓ Cost per employee

✓ Human Capital Investment ratio

✓ Wealth created by the employee

✓ Profit created by the employees

✓ Ratio of salary paid to total revenue generated

✓ Average salary of employee

✓ Employee absenteeism ratio

✓ Employee turn over rate and retention rate

Methods of HRA

Basically HRA can be tracked through two methods:

1. Cost-Based Method

2. Value Based Method

1. Method based on Cost:

• Historical Cost: Under this method, the cost of acquisition i.e. selection, hiring, training costs of employees are capitalized and written off over the expected useful life of the employees. In case, the personnel leave the company before the anticipated period of service, then the unamortized portion of costs remaining in the company’s books is written off against the profit and loss account in that year.

• Replacement Cost: Under this method, the HR are valued at their replacement cost i.e. the monetary implications of replacing personnel. Replacement costs could be positional i.e. replacing personnel for particular positions or personal i.e. replacing specific talent of ability of particular persons.

• Competitive Bidding: Under this method, standard costs of recruiting, hiring, training and developing per grade of employees are determined annually. The total standard cost for all personnel of the company is the value of human resources.

• Standard Cost: Under this method, standard costs of recruiting, hiring, training and developing per grade of employees are determined annually. The total standard cost for all personnel of the company is the value of human resources.

2. Method based on Value:

• Lev & Schwartz (L&S): developed in 1971, it is based on the likely future earnings of an employee till his retirement. L&S advocated the estimation of future earnings during the remaining life of the employee and then arriving at the present value by discounting the estimated earnings at the employee’s cost of capital.

• Economic Value Addition: Under this method, the net present value of incremental cash flows attributed to human resources is taken as the asset value.

Indian Scenario

The concept of HRA in India is of recent origin and is struggling for acceptance. It is said that this concept does not hold good for labour surplus economies of developing countries like India. An analysis of present day situations prevailing in India makes it clear that this concept is of paramount importance here than perhaps to the west.

The Accounting Standards Board of the Institute of Charted Accountants of India has issued twelve accounting standards on most of the important accounting areas. But they have not formulated any specific accounting standards on measurement and reporting of cost and value of human resources and presentation of significant information about human resources in the financial statements of companies. In India, HRA has not been introduced so far as a system.

The Indian Companies Act does not provide any scope for furnishing any significant information about human resources in financial statements. But a growing trend towards the measurement and reporting of human resources, particularly in the public sector is noticeable during the past decade or so. Following are the companies in India which had/have started showing the value of HR in their books

• Bharat Heavy Electricals Ltd.,

• Steel Authority of India Ltd

• Cement Corporation of India,

• Oil and Natural Gas Corporation,

• Engineers India Ltd.,

• National Thermal Power Corporation,

• Minerals and Metals Trading Corporation,

• Madras Refineries,

• Oil India Ltd.,

• Associated Cement Companies.

• SPIC (Southern Petro Chemical Industries corporation )

• Metallurgical and Engineering Consultants India Ltd.,

• Cochin Refineries Ltd.

• Tata Motors

• Reliance Industries etc.

• Infosys technologies Ltd

• Satyam Computers Ltd

Road Blocks

One of the major reasons for not adopting HRA was that the Companies Act, 1956, did not have a provision for the inclusion of human assets value in the financial statements.

Moreover, there was no legal requirement for Indian companies to publish their HR accounting information, due to the absence of a prescribed format and guidelines. The awareness level of this concept seemed to be very low. The HR departments of some companies in India were reported to be completely unaware of this concept and its utility.

Most of the companies in India valued human assets on the present value of the individual’s future earnings. However, some critics argued that placing an amount or value on the individuals might offend them, and that it was unethical. They felt that adopting this approach would amount to treating humans as commodities and doubting an individual’s abilities, knowledge, skills and experience.

They further felt that assigning a definite value to each individual may not be proper because the knowledge of each individual differed from that of another.

Analysts also argued that various companies used various models of HRA and that comparing two companies using two different models would be difficult.

Some analysts also felt that companies could misuse HRA to enhance their image. Bharati Gupta Ramola, Senior Director, Price Waterhouse, explained, “A company could use this information to prop up its image in the investor’s mind, and change assumptions, to keep the value positive. Therefore care must be taken to ensure that it is an honest exercise.”

The Trend in India

In India more and more corporates are now adopting the concept of HRA to know true value of their HR Capital and to take advantage of many benefits available through Human Resource Accounting.

CASE STUDY I – BARTER AUTOMOTIVE PRODUCTS LTD.

Barter Automotive Products Ltd. has national coverage in the automotive supply industry. The Toronto branch has grown to be very profitable. The population of the city of Toronto and surrounding area was expanding rapidly and was going to require more extensive service. Barter had to choose between enlarging the present branch or sub-dividing Toronto into two separate branches. A decision was made to divide the city and area in to two distinct distribution centres. The existing branch was retained in it’s present location in the east end of Toronto as well as Eastern Metropolitan Toronto. The other branch was in the west end of Toronto.

The operating results and financial position of the two branches for the year ended on 31st Dec. 1 & 2 are presented in the table I and table II

Barter was extremely disappointed with the result turned in by the western branch. They were seriously considering reconsolidating the two branches. They realised that if the consolidation were to occur, some of these volumes probably would be lost to competitors. Because they wished to avoid this possibility, they decided to have an analysis performed on the Toronto operations.

The Problem

Situation was unique in that the Toronto west branch had been started in year 1. Only the Branch Manger having had an experience with Barter’s operations. The Toronto east branch was comprised primarily, of the salesmen from the original Toronto branch. The Toronto west branch was still in the process of developing a cohesive sales force and would be incurring large expenditures for this purpose for a number of years. The Toronto east branch on the other hand had already developed a solid cohesive sales force. Unfortunately, they had not maintained sufficient records to indicate the actual amounts they had expended on developing the human resources to the present stage.

Table (I) INCOME STATEMENT FOR TORONTO BRANCHES

| |TORONTO-EAST 31-DEC |TOTONTO-WEST 31-DEC |

| |$ Year 1 |$ Year 2 |$ Year 1 |$ Year 2 |

|SALES |1,600,000 |2,000,000 |1,200,000 |1,800,000 |

|COST OF SALES |910,000 |1,070,000 |750,000 |1,000,000 |

|GROSS MARGIN |690,000 |930,000 |450,000 |800,000 |

|SALES & ADMIN EXPENSE |290,000 |430,000 |390,000 |710,000 |

|PBT |400,000 |500,000 |60,000 |90,000 |

|TAX |200,000 |250,000 |30,000 |45,000 |

|PAT |200,000 |250,000 |30,000 |45,000 |

Table (II) BALANCE SHEETS FOR TORONTO BRANCHES AS ON 31 DEC

| |TORONTO-EAST 31-DEC |TOTONTO-WEST 31-DEC |

|CURRENT ASSETS: | | | | |

|CASH |10,000 |10,000 |10,000 |10,000 |

|ACCOUNTS RECEIVABLE |160,000 |255,000 |120,000 |180,000 |

|INVENTORY |80,000 |150,000 |60,000 |90,000 |

|TOTAL CURRENT ASSETS: |250,000 |415,000 |190,000 |280,000 |

|WAREHOUSE NET |400,000 |390,000 |400,000 |390,000 |

|TOTAL ASSETS |650,000 |805,000 |590,000 |670,000 |

|ACCOUNTS PAYABLE |150,000 |205,000 |90,000 |170,000 |

|DUE TO HEAD OFFICE |500,000 |600,000 |500,000 |500,000 |

|TOTAL LIABILITIES |650,000 |805,000 |590,000 |670,000 |

|RETURN ON INVESTMENT |30.80% |31.10% |5.10% |6.70% |

Valuation of Human Assets

They decided to employ an outlay cost approach to determine the current cost of the sales force of the Toronto west branch. However, to determine the current worth of the Toronto east sales force they decided to utilize some form of present value approach.

The Toronto East Branch

To value the human assets of the Toronto east branch they considered a present value concept utilizing the following three decision factors.

• Future wage payments for the next five years.

• Discount rate based on the rate of return on owned assets in the economy for the most recent years.

• The company’s efficiency ratio- the firm’s rate of return in relation to the average rate of return for the industry.

They believed that there would be a meaningful co-relation between salesmen’s salaries and value to the company, since the salesmen’s remuneration was dependent on performance. Hence, they believed that this method would be a reasonable approach for determining the economic value of the sales force of the Toronto east branch. They prepared the data to compute the economic value of Toronto east human resources as given in the Table III and IV.

Table (III) EXPECTED SALESMEN’S COMPENSATION

TORONTO EAST BRANCH

|YEAR |ESTIMATED COMPENSATION $ |

|1 |70,000 |

|2 |80,000 |

|3 |90,000 |

|4 |100,000 |

|5 |110,000 |

|6 |120,000 |

Table (IV) CALCULATION OF ECONOMIC VALUE OF HUMAN RESOURCES

|8% DISCOUNT FACTOR |EXPECTED REMUNERATION $ |PRESENT VALUE OF REMUNERATION $ |

| |Year 1 |Year 2 |Year 1 |Year 2 |

|0.926 |70,000 |80,000 |64,820 |74,080 |

|0.857 |80,000 |90,000 |68,560 |77,130 |

|0.794 |90,000 |100,000 |71,460 |79,400 |

|0.735 |100,000 |110,000 |73,500 |80,850 |

|0.681 |110,000 |120,000 |74,910 |81,720 |

|Total |353,250 |393,180 |

|ECONOMIC VALUE = PRESENT VALUE X EFFICIENCY RATIO |

| |

|Year 1: 353,250 X 31/24 = 456,300 Year 2: 393,180 X 31/20 = 609,400 |

The Toronto West Branch

Since the Toronto west branch was still attempting to develop and strengthen its sales force in to cohesive unit, they thought that an outlay cost concept would be a realistic approach to valuing the human resource assets.

A detailed analysis of the Toronto west records for the two years yielded the information with regards to human resources shown in Table V.

Table (V) INVESTMENTS IN HUMAN ASSETS BY TORONTO WEST

|YEAR |DSCRIPTION |EXPENDITURE $ |

|1 |START-UP COSTS INCURRED |60,000 |

| |TRAINING, FAMILIARIZATION, DEVELOPMENT | |

| | |20,000 |

| |Total |80,000 |

|2 |START-UP COSTS INCURRED |30,000 |

| |TRAINING, FAMILIARIZATION, DEVELOPMENT | |

| | |60,000 |

| |Total |90,000 |

Table (VI) INCOME STATEMENTS FOR TORONTO BRANCHES

|$ |TORONTO-EAST 31-DEC |TOTONTO-WEST 31-DEC |

| |Year 1 |Year 2 | Year 1 |Year 2 |

|SALES |1,600,000 |2,000,000 |1,200,000 |1,800,000 |

|COST OF SALES |910,000 |1,070,000 |750,000 |1,000,000 |

|GROSS MARGIN |690,000 |930,000 |450,000 |800,000 |

|SALES & ADMIN EXPENCE |290,000 |430,000 |310,000 |620,000 |

|PBT |400,000 |500,000 |140,000 |180,000 |

|TAX |200,000 |250,000 |30,000 |45,000 |

|PAT |200,000 |250,000 |110,000 |135,000 |

(1) TORONTO-WEST’S TAXABLE INCOME ESTIMATED TO BE

|$ |Year 1 |Year 2 |

|NET INCOME BEFORE TAXES |140,000 |180,000 |

|LESS: CAPITALIZATION OF HUMAN RESOURCES |80,000 |90,000 |

|TAXABLE INCOME |60,000 |90,000 |

|(TAX RATE OF 50% IS ASSUMED) |

Table (VII) BALANCE SHEETS FOR TORONTO BRANCHES

|$ |TORONTO (E) AS ON 31-DEC | TOTONTO (W) AS ON 31-DEC |

|CURRENT ASSETS: | | | | |

|CASH |10,000 |10,000 |10,000 |10,000 |

|ACCTS. RECEIVABLES |160,000 |255,000 |120,000 |180,000 |

|INVENTORY |80,000 |150,000 |60,000 |90,000 |

|TOTAL CURRENT ASSETS |250,000 |415,000 |190,000 |280,000 |

|WAREHOUSE NET |400,000 |390,000 |400,000 |390,000 |

|HUMAN RESOURCES |450,000 |600,000 |80,000 |170,000 |

|TOTAL |1,100,000 |1,405,000 |670,000 |840,000 |

|CURRENT LIABILITIES: | | | | |

|ACCOUNTS PAYABLE |150,000 |205,000 |90,000 |170,000 |

|DUE TO HEAD OFFICE |500,000 |600,000 |500,000 |500,000 |

|HUMAN CAPITAL |450,000 |600,000 |80,000 |170,000 |

|TOTAL |1,100,000 |1,405,000 |670,000 |840,000 |

Table (VIII) REVISED CALCULATION OF RETURN ON INVESTMENT

|$ | TORONTO –EAST | TOTONTO –WEST |

| |Year 1 |Year 2 |Year 1 |Year 2 |

|NET INCOME |200,000 |250,000 |110,000 |135,000 |

|TOTAL ASSETS |1,100,000 |1,405,000 |670,000 |840,000 |

|RATE OF RETURN |18.20% |17.80% |16.40% |16.10% |

Report to The Management

The consultant’s report to the management included the Financial Statements shown in Table VI, VII and VIII. The report recommended maintaining both branches. It stated that operating results were good considering the enlarged asset bases.

Lessons from the Case Study

Though the idea of Human Resource Accounting was originated in 1960’s, it again gained popularity in 1990’s. In Indian context, though not much work has been made, companies are now at least showing the willingness to go the HRA way. Case Study like the one we just discussed will be helpful as the period of the case is that of in the introduction phase in US, which the Indian companies are now undergoing.

CASE STUDY II - INFOSYS TECHNOLOGIES

Infosys Technologies, employing 1172 people has been using Human Resources Accounting and have valued their Human Assets at Rs. 186 Crores as against their net current assets of Rs. 84 Crores in their Annual Report of 1995-96.

Infosys has used the following equation for the valuation:

N T

V= Sum {Sum In (t) / (1+r) t-an}

N=1 t=an

Where,

V = Discounted Current Human Capital Value for all persons in the organisation

r = Discount rate specific to the cost of capital to the company

N = Total number of revenue earning employees in the company

In(t) = Annual earnings for employee N for the year t

T=Retiring age

An = Present age of employees

The method used to do the valuation using the above formula is as follows:

Infosys’ 1172 employees were divided into 5 groups with different average ages and, the different average compensation of each group was computed. To calculate compensation at the time of retirement, Infosys used an average rate of increment for each employee – based on software industry standards – coupled with a productivity-linked incentive till the age of 40.

The collective compensation for each group was calculated, and then discounted at the rate of 27.36% per annum. The results were totaled leading to the value of Rs. 186 Crores.

CASE STUDY III – NATIONAL THERMAL POWER CORPORATION (NTPC)

In this case study an effort has been made to make an in-depth study of NTPC, a leading organisation in the power generation and distribution industry, in respect of its application of HRA systems and evaluation of productivity and performance of the human resources of the company during the years 1987-88 to 1992-93. As such this case study may also be used to understand the basics of Human Resource Audit.

Human Resource Accounting in NTPC

NTPC Ltd. has grown to be one of the leading public sector undertakings and one of the key factors for this growth is the strength of its human resources. NTPC decided on measuring and communicating the value of human resources on an annual basis in the financial year 1986-87. Since then it has continuously disclosed the details of its human resources in its annual reports. In NTPC in order to work out the value of human resources Lev and Schwartz Economic Model has been employed. The company has computed the present value of future direct and indirect payments to its employees as a measure of its human resources. While doing so, the assumptions set by NTPC are as follows:

1. Continuity of present pattern in employee compensation

2. Career growth as per the company’s present policy.

3. Discount factor @12%

For the purpose of HRA, all the employees have been classified into three categories such as executives, supervisors, and workmen. The present worth of future earnings of all employees given through salary and other welfare expenses made by NTPC on its employees has been calculated to arrive at the present value of its human resources.

TABLE 1: ANALYSIS OF STRENGTH OF PERSONNEL OF NTPC

| |1987-88 |1988-89 |1989-90 |

| |No. |% |No. |% |No. |% |

|Executives |5,290 |29.44 |5,949 |29.77 |6,373 |30.12 |

|Supervisors |2,752 |15.30 |2,987 |14.95 |3,091 |14.61 |

|Workmen |9,930 |52.25 |11,047 |55.28 |11,692 |55.27 |

|Total |17,972 |100.00 |19,983 |100.00 |21,156 |100.00 |

| |1990-91 |1991-92 |1992-93 |

| |No. |% |No. |% |No. |% |

|Executives |6,717 |30.46 |6,401 |29.78 |6,499 |29.82 |

|Supervisors |3,202 |14.52 |3,021 |14.05 |3,040 |13.95 |

|Workmen |12,133 |52.02 |12,076 |56.17 |12,258 |56.23 |

|Total |22,052 |100.00 |21,498 |100.00 |21,797 |100.00 |

Analysis of Major Findings of the Study

1. In Table 1, analysis regarding strength of personnel of NTPC during the period of study has been shown. This table shows that in the year 1987-88, the total numbers of executives were 5,290, which ultimately increased to 6,499 in the year 1992-93, although many executives have resigned under the voluntary retirement scheme. The % of executive’s in total number of personnel has slightly increased during the period of study. Table 1. also depicts the total number of supervisory personnel, which were 2,752 in the year 1987-88 increasing to 3,040 in the year 1992-93. The % of supervisors in the total number of staff came down from 15.31 in the year 1987-88 to 13.95 in 1992-93. From Table 1 we see that the % of workmen in the total number of staff has shown an upward trend during the years of study. It stepped up from 52.25% in 1987-88 to 56.23% in 1992-93. This rising trend speaks of the increasing relative importance of workmen in the company. The total number of employees increased by 3825 in the year 1992-93 (the ultimate year of the period of study) over the figure of the year 1987-88 (the starting year of the study period). This is due to the increase in the size of the business/scale of operations of the company during the study period.

2. In Table 2, an attempt has been made to analyse productivity and performance of the human resources of NTPC by selecting a few important parameters such as value of human resources per employee, value added per employee, net worth per employee, profit before tax per employee, value added to human resources ratio and human resources to total resources ratio. These ratios are discussed below

(a) Value of human resources per employee:

There was an upward trend in the value of human resources per employee over the period of study, the value of human resources increased 2.33 times during the study period. The % increment over the last year in the value of human resources/ employee varies from 3.27 to 33.48. The lowest increase over

the last year was in the year 1992-93 and the highest increase over the last year was in the year 1991-92.

Table 2 PRODUCTIVITY AND PERFORMANCE RATIOS OF NTPC LTD

| |1987-88 |1988-89 |1989-90 |1990-91 |1991-92 |1992-93 |

|Value of HR/employee (Rs. lacs) |5.45 |6.36 |8.43 |9.20 |12.28 |12.68 |

|Value added /employee (Rs. lacs) |2.98 |3.64 |5.34 |6.39 |10.72 |10.54 |

|Net Worth/ employee (Rs. lacs) |27.25 |28.05 |32.16 |39.89 |48.72 |54.55 |

|PBT/ employee (Rs. lacs) |1.68 |1.66 |2.53 |3.18 |4.68 |4.07 |

|Value added to HR (2/1) |0.54 |0.57 |0.63 |0.70 |0.87 |0.83 |

|HR to Total Resources |0.11 |0.11 |0.13 |0.12 |0.12 |0.11 |

1. Value added per employee:

a. The value added per employee stepped up from Rs. 2.98 lakhs in 1987-88 to Rs. 10.54 Lakhs in 1992-93. The value added per employee increased by 254% in 1992-93 over the figure of 1987-88. Due to frequent pay revisions, the value added per employee has an erratic trend.

2. Net worth per employee:

a. The net worth per employee has shown a continuous trend during the period of study. It increased from Rs. 27.25 lakhs in 1987-88 to Rs. 28.05 lakhs in 1988-89, to Rs. 32.16 lakhs in 1989-90, to Rs. 39.89 lakhs in 1990-91, to Rs. 48.72 lakhs in 1991-92 and further to Rs. 58.55 lakhs in 1992-93. This rising trend speaks of an increasing dominance of reserves in the net worth. It depicts the policy of ploughing back of profits of the enterprise.

3. Profit before tax per employee:

a. The profit before tax per employee is also an indicator of the productivity of human resources. It shows that there was a significant improvement in the profit before tax per employee from Rs. 1.68 lakhs in 1987-88 to Rs. 4.07 lakhs in 1992-93. The PBT/ employee was maximum in the year 1991-92. It indicates the increased productivity of human resources of NTPC.

4. Value added to human resources:

a. The ratio of value added to human resources increased from 0.54 in 1987-88 to 0.83 in 1992-93. This shows the increase in the productivity of human resources of NTPC Ltd.

5. Human resources to total resources:

a. The ratio of human resources to total resources shows the level of investment in human resources vis-à-vis total resources. It also is a very useful predictor of future profit performance of the concern. The ratio of NTPC shows that the value of human resources forms an average of 11.67% of the total resources. It reveals the importance of human resources in a capital-intensive organisation like NTPC.

6. Information relating to human resources has been reported by NTPC as supplementary information in its annual reports. The human resources information is not included in the financial statements of the company. These data are un-audited and have no significant value at all.

7. The model adopted by NTPC for the purpose of valuing human resources ignores:

a. Service states of each individual

b. The probability of an individual leaving the organisation before retirement

c. Such considerations as seniority, bargaining capacity, skill, experience etc. which may result in the payment of higher or lower salaries.

Employee Turnover Cost- A Calculator

[pic]

Impact of retention on ROI

In measuring the effectiveness of any retention program, a cost benefit analysis needs to be done. Comparing the implied cost of turnover with the cost to be incurred in the retention programs will give us insight into the Return on Investment.

ROI = Saving made in cost of T/O

Costs incurred in retention programs

To quote Stephen R. Covey:

“Financial accounting supplants human resource accounting because the former appears to be hard, precise, scientific, systematic, objective, while the later appears to be soft, subjective, imprecise, malleable, nebulous, messy, pandora’s box stuff. Assessment instruments can be as accurate, hard and objective as financial accounting, but ultimately all accounting and information systems are subjective, because they are based on certain assumptions. Anyone who understands the roots of financial accounting knows that it is highly subjective; it only has the appearance of objectivity

Financial accounting only tells you about things that are measurable. A “thing paradigm” does not deal with people problems and challenges. Things are programs; people are the programmers. Using financial accounting to deal with people problems is like playing golf with a tennis racket: the tool is not suited to the sport. Financial accounting is not suited to understanding the chronic causes and sources of problems. It focuses almost exclusively on acute problems and surface effects: revenues, cost, etc”.

BALANCE SHEET OF LIFE

What Comes You Credit

What Goes You Debit

Our Birth is our Opening Balance!

Our Death is our Closing Balance!

Your Behaviour Is Your Journal Entry

Bad Things You Should Always Depreciate

Your Duties Are Your Outstanding Expenses

Your Friendship Is Your Hidden Adjustment

The Happiness Is Your Profit

The Sorrow Is Your Loss

Our Prejudiced Views are our Liabilities

Our Creative Ideas are our Assets

Heart is our Current Asset

Soul is our Fixed Asset

Brain is our Fixed Deposit

Thinking is our Current Account

Achievements are our Capital

Character & Morals, our Stock-in-Trade

Friends are our General Reserves

Values & Behavior are our Goodwill

Patience is our Interest Earned

Love is our Dividend

Children are our Bonus Issues

Education is Brands / Patents

Knowledge is our Investment

Experience is our Premium Account

The Aim is to Tally the Balance Sheet Accurately.

The Goal is to get the Best Presented Accounts Award.

Notes to the Accounts of Life...

The most destructive habit......................Worry

The greatest Joy...............................Giving

The greatest loss................Loss of self-respect

The most satisfying work...............Helping others

The ugliest personality trait.............Selfishness

The most endangered species.........Dedicated leaders

Our greatest natural resource...............Our youth

The greatest "shot in the arm"..........Encouragement

The greatest problem to overcome.................Fear

The most effective sleeping pill........Peace of mind

The most crippling failure disease............Excuses

The most powerful force in life..................Love

The most dangerous pariah..................A gossiper

The world's most incredible computer........The brain

The worst thing to be without................... Hope

The deadliest weapon.......................The tongue

The two most power-filled words..............."I Can"

The greatest asset..............................Faith

The most worthless emotion..................Self-pity

The most beautiful attire......................SMILE!

The most prized possession................Integrity

The most powerful channel of communication.....Prayer

The most contagious spirit.................Enthusiasm

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Source: Published Annual Reports of NTPC Ltd.

Source: Published Annual Reports of NTPC Ltd.

Compiled By: Chhaya Sehgal

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The Winning Edge

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