The Importance of Human Resources Accounting in Valuing Employees

Every evening, a company’s most valuable resource walks out the front door, and if all goes well, walks back in the next morning. Yet open any balance sheet and you won’t find a single line for employee skill, loyalty, or judgment. Human resources accounting (HRA) exists to close that gap. It puts a rupee value on people, the same way a business values machinery, land, or a brand. For sectors like IT and heavy manufacturing, where trained people are the actual engine of profit, this is not an academic exercise. It shapes how firms plan, invest, and even how investors read their financial statements.

What is human resources accounting 🔗

The American Accounting Association describes human resource accounting as the process of identifying and measuring data on people within an organisation and communicating that information to whoever needs it, whether that’s a manager, a shareholder, or a bank. In simpler terms, HRA tries to answer two questions: how much did it cost to build this workforce, and how much is this workforce actually worth to the company going forward. It brings together the idea of a person as an investment made by the organisation, rather than just a name on a payroll register.

Why conventional accounting looks past people 🔗

Traditional financial statements treat salaries, training budgets, and recruitment costs as expenses. They get written off against revenue in the same year they’re spent, exactly like electricity bills or stationery costs. This works fine for a photocopier, since the photocopier doesn’t get better at its job with experience. But it fails badly for people. A software engineer who has spent five years learning a company’s systems, or a plant supervisor who knows every quirk of a production line, is worth more to the firm than a fresh recruit, even though the accounts show no difference between them. HRA argues that money spent developing employees should be treated more like capital expenditure than a routine cost, because it builds an asset that keeps generating value over several years.

Two ways to put a number on people 🔗

Since no single method has been officially standardised, HRA generally splits into two broad families of approach, and most models you’ll come across in your textbook fall somewhere within these two buckets.

The cost-based approach 🔗

This approach measures what the company spent, not what the employee is worth. It usually shows up in two forms. The historical cost method, developed by Brummet, Flamholtz and Pyle, adds up acquisition costs, such as recruitment and selection, along with learning costs like induction and training, and then spreads that total across the employee’s expected years of service, much like depreciating a machine. It’s simple and fits neatly into standard accounting logic, but it says nothing about how productive the employee actually turns out to be. The replacement cost method instead asks what it would cost today to replace this person with someone of similar skill and experience. This gives a more current, market-linked figure, but finding a truly identical replacement is rarely straightforward, and the number can vary sharply depending on who is doing the estimating.

The value-based approach 🔗

Where the cost approach looks backward, the value approach looks forward. It tries to estimate the future economic benefit an employee will bring to the organisation, then discounts that stream of future value back to today’s rupees. The best-known version of this is the Lev and Schwartz model, published in 1971, which groups employees by age and skill level, projects their earnings up to retirement, and then discounts those projected earnings using the company’s cost of capital. It’s popular because it’s relatively easy to apply using payroll data, but critics point out that it only accounts for salary, ignoring the possibility that an employee might resign early, get promoted, or contribute in ways that go beyond their pay packet.

HRA in the real world: Infosys and BHEL 🔗

Textbook theory is one thing, but a handful of Indian companies have actually put HRA into practice, which is what makes this topic worth paying attention to.

Infosys is usually the first name that comes up. It was among the earliest Indian IT companies to voluntarily disclose the value of its human resources in its annual reports, at a time when the Companies Act didn’t require any such disclosure. Over the years, Infosys refined its approach and, in 2011-12, moved to an internally developed model known as GIST-HCX, which calculates the present value of the expected increase in employees’ future earnings during their time with the company. Infosys has consistently described its professionals as its most important assets, and its early adoption of HRA reporting was as much a signal to investors about the quality of its talent pool as it was an internal management tool.

BHEL, a public sector heavy engineering major, took an earlier and different route. It is widely credited as one of the first Indian companies to formally introduce HRA, adopting the Lev and Schwartz model in the mid-1970s, using a discount rate close to its cost of capital. Being a manufacturing-heavy public sector unit with tens of thousands of engineers and technicians, BHEL had every reason to track how much value its trained workforce added over and above the value of its physical plant and equipment. Other public sector enterprises such as SAIL, ONGC and NTPC later followed a similar path, mostly using variations of the same model.

Why it matters for managers and investors 🔗

HRA is not just a reporting exercise for its own sake. Internally, it gives management a sharper basis for decisions around recruitment, promotion, training budgets, and even layoffs, because it forces a company to think about the return it is getting on money spent on people, rather than treating that spending as a black box of cost. Externally, HRA disclosures can influence how investors read a company. Research on Indian corporate disclosure has found that when firms report human resource information alongside financial statements, it can genuinely shift how present and potential investors evaluate the organisation, since it fills in a gap that standard balance sheets leave completely blank. For knowledge-driven businesses in particular, where physical assets are modest compared to intellectual and human capital, this extra layer of information can materially change how the market prices the stock.

The limits of measuring people in rupees 🔗

None of this comes without real friction. There is still no globally accepted accounting standard for HRA, which means every company that attempts it ends up choosing its own method, discount rate, and assumptions, making comparisons across firms unreliable. Critics also raise a more human concern: once an organisation starts assigning a number to each employee, there’s a risk of employees feeling reduced to a line item, which can dent morale rather than improve it. Add to this the practical difficulty of forecasting how long someone will stay, how their productivity will change, or when they might resign, and it becomes clear why HRA, despite decades of academic interest, has stayed largely voluntary rather than becoming a mandatory reporting requirement in India.

What do you think? If you were setting HR policy at a company like Infosys or BHEL, would you rely more on the cost-based approach or the value-based approach to judge whether your training spend is paying off? And do you think putting a rupee value on employees changes how a company treats them, for better or worse?

References

1. https://www.ijraset.com/research-paper/imminent-impact-of-human-resource-accounting-in-indian-public-sector-industries
2. https://en.wikipedia.org/wiki/Human_resource_accounting
3. https://taggd.in/hr-glossary/human-resource-accounting/
4. https://www.mbaknol.com/human-resource-management/cost-based-approaches-to-human-resource-accounting/
5. https://www.infosys.com/content/dam/infosys-web/en/investors/reports-filings/annual-report/annual/documents/integrated-annual-report2021-22/pdf/directorsreport.pdf
6. https://www.iiste.org/Journals/index.php/RJFA/article/download/17595/17881