Page 84 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 7: Approaches of HRA

at human resources as assets and tries to identify the stream of benefits flowing from the Notes
asset.

7.1 Cost Approach

The cost approaches includes the following approaches:
7.1.1 Historical Cost Approach

According to this approach, the actual cost incurred on recruiting, selecting, hiring, training and
developing the human resources of the organisation are capitalised and written off over the
expected useful life of the human resources. The historical cost of human resources in case of this
method is thus treated in the same manner as the cost of any other physical asset. Any expenditure
incurred for training or development of the human resources increases the value of human
assets like any other physical asset and is therefore capitalised in a similar manner. Amortization
of the human assets is also done in a similar manner. In case the human asset expires before the
end of the expected service life period, the whole of the amount not written off is charged
against the revenue of the year in which such an event takes place.

!
Caution In case the useful life is recognised to be longer than the original expected,
amortization is appropriately rescheduled.

Merits of Historical Cost Approach

The method has the following merits:
The method is simple to understand and easy to work out.

The method follows the traditional accounting concept of matching cost with revenue.
The method can provide a basis for valuing a firm’s returns on its investment on human
resources.

Limitations of Historical Cost Approach

The method suffers from the following limitations:
The method takes into account only a part of acquisition cost of employee. It does not
consider the aggregate value of their potential services.
It is difficult to estimate the period over which the human resource will provide service to
the organisation. It thus creates problems in determining the amount to be amortized
over the year.
The value of human assets according to this method goes on decreasing every year due to
amortization. However, in reality, the value of human assets increases over time on
account of people gaining experience.

7.1.2 Replacement Cost Approach

This approach was developed by Rensis Likert and Eric G. Flamholtz. This approach values the
human resources at their present replacement cost. In other words, human resources of an
organisation are to be valued on the basis of the assumption of what it would cost the firm if the
existing human resources need to be replaced with others of equivalent talents and experience.

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