Page 87 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes (d) The total earnings calculated as above are discounted at the rate of cost of capital.
(e) The value thus arrived at will be the value of human resources/assets.
(f) The following formula has been suggested for calculating the value of an employee
according to this model.

Vr = ∑ T 1(t)
tr (1 R) tr −
+
−
where
Vr = the value of an individual r years old.
I (t) - the individual’s annual earnings up to the retirement
t = retirement age

r = present age of the employee
R = discount rate
Limitations: The method suffers from several limitations:
(a) A person’s value to an organisation is not entirely determined by the salary paid to
him. A person may like to work at a salary that is less than what he actually deserves.
Moreover, salary does not remain constant over a period of time.

(b) The model ignores the possibility that an individual may leave the organisation for
reasons other than death or retirement. Thus, it overstates an employee’s prospected
service life and his future earnings.
(c) The model does not take into account the changes that people make during their
career, from one role to another, at one or more times within the organisation itself.

(d) The model also ignores other considerations such as seniority, bargaining capacity,
etc.
2. Reward Valuation Model: This model has been suggested by Flamholtz (1971). This is an
improvement on ‘present value of future earnings model’ since it takes into consideration
the possibility or probability or an employee’s movement from one role to another in his
career and also of his leaving the firm earlier than his death or retirement.

!

Caution The realisable value is estimated on the basis of the present worth of the set of
future services he is projected to provide during the period he is likely to remain with the
organisation.
The model suggests a five-step approach for this purpose.
(a) Identification of ‘service states’ (i.e. roles or posts) that the employee might occupy
during his service career including the possibility of his quitting the organisation.
(b) Estimation of the probable period for which a person will occupy each possible
‘service state’ (posts or roles) in future in the organisation.

3. Net Benefit Model: This approach has been suggested by Morse (1973). According to this
approach, the value of human resources is equivalent to the present value of net benefits
derived by the organisation from the service of its employees. The method involves the
following steps:

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