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A CASE STUDY ON HUMAN RESOURCE ACCOUNTING IN INFOSYS

In the financial year 1995-96, Infosys Technologies (Infosys) became the first software
company to value its human resources in India. The company used the Lev & Schwartz
Model and valued its human resources assets at Rs 1.86 billion. Infosys had always given
utmost importance to the role of employees in contributing to the company's success.
Analysts felt that human resources accounting (HRA) was a step further in Infosys' focus on
its employees. Narayana Murthy (Murthy), the then chairman and managing director 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."
The concept of HRA was not new in India. HRA was pioneered by public sector companies
like Bharat Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way
back in the 1970s. However, 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.
HR managers were quick to respond on the above developments by stating that more and
more organizations had now started to realize the importance of skilled workforce. They felt
that to be successful in highly competitive markets, the Company requires to continuously
improve the level of performance of its workforce.
HRA enabled the Company to understand whether the skill sets of its human capital was
appreciating or not. R. Krishnaswamy, an actuarial accountant, said, "The value can be used
internally by an organization to make comparisons from unit to unit, from year to year, as
well as within its industry."
Stock market analysts felt that the 'comprehensive disclosure policy' was becoming a
differentiating factor among companies in various industries. Yezdi H. Malegam, managing
director, S.B. Billimoria & Company commented, "In the last few years, people are realizing
that their intangible assets are worth much more than their tangible ones. Now an attempt is
being made to put a value to these intangibles, and to bring these hidden values to book."
Analysts felt that HRA was an investor-friendly disclosure, and assured stakeholders that the
company had the right human capital to meet its future business requirements.
Use of the Lev and Schwartz Method to Value HR in Infosys
A fundamental dichotomy in accounting practices is between human and non-human capital.
As a standard practice, non-human capital is considered as assets and reported in the financial
statements, whereas human capital is mostly ignored by accountants. The definition of wealth
as a source of income inevitably leads to the recognition of human capital as one of the
several forms of wealth such as money, securities and physical capital.
Infosys have used the Lev & Schwartz model to compute the value of human resources. The
evaluation is based on the present value of future earnings of employees and on the following
assumptions:

a)
Employee compensation includes all direct and indirect benefits earned both in India
and overseas.
b)
The incremental earnings based on group / age have been considered
c)
The future earnings have been discounted at the cost of capital of 10.60% (previous
year 12.18%).
The method is as follows:

All the employees of Infosys were divided into five groups, based on their average
age .Each groups average compensation was calculated.

Infosys also calculated the compensation of each employee at retirement by using an


average rate of increment.

The increments were based on industry standards, and the employees performance and
productivity.

Finally the total compensation of each group was calculated. This value was discounted
at the rate percent per annum which was the cost of capital at Infosys to arrive at the total
human resources of Infosys.
Benefits experienced By Infosys by valuing its human resources
The benefits of adopting HRA were manifold. It helped an organization to take managerial
decisions based on the availability and the necessity of human resources. When the human
resources were quantified, it gave the investors and other clients true insights into the
organization and its future potential. Proper valuation of human resources helped
organizations to eliminate the negative effects of redundant labour. By adopting and
implementing Human Resource Accounting in the Organization,
a) Infosys could determine whether its human asset was appreciating over the years or not.
This information was important for the company as its success depended solely on the
knowledge of the employees.
b) The company could also use this information internally to compare the performance and
productivity of employees in various departments.
c) HRA also helped Infosys to decide the compensation of employees. The company
ensured that it compensated each employee according to his / her net worth.
d) HRA also helped Infosys in indentifying and retaining valuable employees.
e) It helped organization to take managerial decisions based on the availability and the
necessity of human resources.
f) When human resources get quantified it gave Infosys investors and other clients true
insights into the organization and its future potential. It restored faith amongst shareholders.
g) BY adopting HRS the following information could be obtained:

Cost per employee

Human capital investment ratio

The amount of wealth created by each employee

The profit created by each employee.

The ratio of salary paid to the total revenue generated.


To sum up, HRA in Infosys helped in identifying the right person for the right job, based on
the persons specialized skills, knowledge, capabilities experience, etc.
Disadvantages of evaluation of human capital

Companies use various HRA models and comparing two companies using two different
models was difficult.
Companies could also misuse HRA to enhance their image .A company could use this image
to prop up its image in the investors mind, and change assumption to keep the values positive.
There could be a concern of the creditability of the numbers reported.
The model was based on assumptions and was subjective. Hence figures could be totally
ambiguous.
Some employees may be underestimated since a numeric figure did not clearly quantify
what their true capabilities are.
Ethical Considerations
It cannot be considered that HRA is unethical on the part of an organization to place a
monetary value on its values. In fact employees are shown as assets to an organization and
valuing them would show their true worth which everyone should appreciate. If employees
are considered as assets of an organization then why not show their productivity in the
balance sheet. The company would be able to boost its investor confidence and it would be
considered a great place to work (like Infosys)
Companies should make it clear that its the employees who define the company and it also
shows a highly performance based organization. There may be a downside with respect to
falsified information but on the whole it cannot be considered as an unethical practice.
CONCLUSION
The conceptual thinking about valuation of human resources is still in a developing stage. No
model of HR accounting is accepted by the accounting bodies all over the world. However,
still we find some application of Lev & Schwartz model in most of the public sector units and
IT based sectors. The case of Infosys gives as a clear picture about the merits and de-merits
of this model. However, in other knowledge based sectors where human resources are
considered to be the key elements for monitoring the business activities to attend their goals
successfully, may not be overlooked this side. Hence, considering the great significance of
HRA proper initiation should be taken by the government along with that other professional
& accounting bodies both at the national & international levels for the measurement &
reporting of such valuable assets

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