hello, can anyone guide me how to implement lev and schwartz model ithe organization
From India, New Delhi
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From India, New Delhi
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Dear Atikshh
may this will help u a bit....
Lev and Schw artz’s model is based on human capital theory,
which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital. In this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor explaining
and predicting the future economic growth of the company.
Lev and Schw artz’s accounting model is based on the measurement of human capital using the formula:
Vr = ÓTt=r I(t)/(1+r)t-r,
where Vr = the human capital value of a person “r” years old;
I(t) = the person’s annual earnings up to retirement;
r = a discount rate specific to the person;
T =retirement age
The formula uses an earnings profile, which is a graphic mathematical
representation of the income stream generated by a person. Typically, earnings increase with age. As the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.
This model postulated in 1971 remains largely unused as a result of criticism from Accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset. Additionally, critics of human capital theory state that labor force does not have a “service potential”; meaning employees are paid for rendering current services and no asset is formed by these
payments. (posted in Aug,07)
or clock the following link
<link outdated-removed>
Rajesh Kumar
09899974507
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Sharing with you what was shared with me on this forum
From India, Delhi
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59may this will help u a bit....
Lev and Schw artz’s model is based on human capital theory,
which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital. In this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor explaining
and predicting the future economic growth of the company.
Lev and Schw artz’s accounting model is based on the measurement of human capital using the formula:
Vr = ÓTt=r I(t)/(1+r)t-r,
where Vr = the human capital value of a person “r” years old;
I(t) = the person’s annual earnings up to retirement;
r = a discount rate specific to the person;
T =retirement age
The formula uses an earnings profile, which is a graphic mathematical
representation of the income stream generated by a person. Typically, earnings increase with age. As the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.
This model postulated in 1971 remains largely unused as a result of criticism from Accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset. Additionally, critics of human capital theory state that labor force does not have a “service potential”; meaning employees are paid for rendering current services and no asset is formed by these
payments. (posted in Aug,07)
or clock the following link
<link outdated-removed>
Rajesh Kumar
09899974507
--------------------------------------------------------------------------------------
Sharing with you what was shared with me on this forum
From India, Delhi
Acknowledge(0)Amend(0)
Dear Atikshh
may this will help u a bit....
Lev and Schw artz’s model is based on human capital theory,
which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital. In this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor explaining
and predicting the future economic growth of the company.
Lev and Schw artz’s accounting model is based on the measurement of human capital using the formula:
Vr = ÓTt=r I(t)/(1+r)t-r,
where Vr = the human capital value of a person “r” years old;
I(t) = the person’s annual earnings up to retirement;
r = a discount rate specific to the person;
T =retirement age
The formula uses an earnings profile, which is a graphic mathematical
representation of the income stream generated by a person. Typically, earnings increase with age. As the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.
This model postulated in 1971 remains largely unused as a result of criticism from Accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset. Additionally, critics of human capital theory state that labor force does not have a “service potential”; meaning employees are paid for rendering current services and no asset is formed by these
payments. (posted in Aug,07)
or click the following link
<link outdated-removed>
Rajesh Kumar
09899974507
--------------------------------------------------------------------------------------
Sharing with you what was shared with me on this forum
From India, Delhi
Acknowledge(0)Amend(0)
may this will help u a bit....
Lev and Schw artz’s model is based on human capital theory,
which recognizes human capital as one of several forms of holding wealth for a business enterprise, such as money, securities and physical capital. In this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor explaining
and predicting the future economic growth of the company.
Lev and Schw artz’s accounting model is based on the measurement of human capital using the formula:
Vr = ÓTt=r I(t)/(1+r)t-r,
where Vr = the human capital value of a person “r” years old;
I(t) = the person’s annual earnings up to retirement;
r = a discount rate specific to the person;
T =retirement age
The formula uses an earnings profile, which is a graphic mathematical
representation of the income stream generated by a person. Typically, earnings increase with age. As the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration.
This model postulated in 1971 remains largely unused as a result of criticism from Accounting professionals who argue that human capital cannot be purchased or owned by the firm and therefore would not be recognized as an asset. Additionally, critics of human capital theory state that labor force does not have a “service potential”; meaning employees are paid for rendering current services and no asset is formed by these
payments. (posted in Aug,07)
or click the following link
<link outdated-removed>
Rajesh Kumar
09899974507
--------------------------------------------------------------------------------------
Sharing with you what was shared with me on this forum
From India, Delhi
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Hello Raj,
Thank you very much. I have gone through it, but I was looking for an example and to understand how to calculate the discount rate. What are the criteria we consider when calculating the discount rate? It's confusing, and I am eagerly waiting for your help.
Thank you.
From India, New Delhi
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Thank you very much. I have gone through it, but I was looking for an example and to understand how to calculate the discount rate. What are the criteria we consider when calculating the discount rate? It's confusing, and I am eagerly waiting for your help.
Thank you.
From India, New Delhi
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Hello Simmy,
I just went through the site you recommended. I haven't found much for what I am looking for. I need to know the calculation of the discount rate regarding the L&S model.
Thanks and regards,
Atikshh
From India, New Delhi
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I just went through the site you recommended. I haven't found much for what I am looking for. I need to know the calculation of the discount rate regarding the L&S model.
Thanks and regards,
Atikshh
From India, New Delhi
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Hi Atikshh,
What Raj described is correct. The discounted rate in HR is calculated in reverse order. For example, a person of 20 years of age is placed in an organization where the superannuation age is 58 years. He has a 38-year probability of continuing in the service. So, in the second year while he gains experience, the probability of leaving is to the extent of 38 - 1 / 21 X 1 to the power of 2, which indicates the value of the employee in the first year of service. Similarly, for the rest of the years, it has to be calculated year by year. Commutation of service will not provide the correct result in calculating the value, as V = sigma v1, v2, v3 vi.
Hope you have understood.
You may refer to my article in "i-Manager" management journal of the Feb-April 2009 issue Vol. 3 for details on this model application, implemented by many organizations.
Gopan
From India, Kochi
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What Raj described is correct. The discounted rate in HR is calculated in reverse order. For example, a person of 20 years of age is placed in an organization where the superannuation age is 58 years. He has a 38-year probability of continuing in the service. So, in the second year while he gains experience, the probability of leaving is to the extent of 38 - 1 / 21 X 1 to the power of 2, which indicates the value of the employee in the first year of service. Similarly, for the rest of the years, it has to be calculated year by year. Commutation of service will not provide the correct result in calculating the value, as V = sigma v1, v2, v3 vi.
Hope you have understood.
You may refer to my article in "i-Manager" management journal of the Feb-April 2009 issue Vol. 3 for details on this model application, implemented by many organizations.
Gopan
From India, Kochi
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Dear Atikshh,
I was going through a website and found the article below. This may help you in implementing the Lev & Schwartz Model HR Accounting - A Strategic Use of the Lev & Schwartz Model - By Sumanta Dutta, Lecturer at South City College (Evening), Kolkata, and Visiting Faculty at NSHM Business School.
Abstract: Human is the core factor that needs to be recognized before any other 'M's. However, an urgent need-based modification is required when identifying and measuring data about human resources. The objective of this paper is to identify the extensive use of the Lev & Schwartz model of Human Resource Accounting, despite several criticisms from various sides regarding its applicability. Furthermore, it also portrays the applicability in a wide variety of organizations, such as some public sector units and IT-based sectors.
Human is the buzzword in modern knowledge-based society. It is the most vital input on which the success and failure of the organization depend. From classical economists to modern human capital economists, such development is considered a continuous process.
It is one of the most important 'M's associated with any organization, alongside money, machines, and materials. The interesting thing is that the first three are recognized and find a place on the asset side of the balance sheet, while ambiguity prevails among accountants regarding the fourth one. Despite being acclaimed for its usefulness in various literature over the decades, its application still remains a questionable issue. The IASB and the ASB in different countries have not been able to formulate any specific accounting standard for the measurement and reporting of such valuable elements.
It is a popular phenomenon among Indian corporate worlds to disclose information relating to human resources in annual statements. In this context, it is necessary to conduct a study to assess the disclosure pattern of HRA information in the Indian corporate world.
It was first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public enterprise, during the financial year 1972-73. Later, it was also adopted by other leading public and private sector organizations in the subsequent years, such as Hindustan Machine Tools Ltd. (HMTL), Oil and Natural Gas Corporation Ltd. (ONGC), NTPC, Cochin Refineries Ltd. (CRL), Madras Refineries Ltd. (MRL), Associated Cement Company Ltd. (ACC), and Infosys Technologies Ltd. (ITL).
However, the adaptability of various models (mainly Lev and Schwartz model, Flamholtz model, and Jaggi and Lev model) and the fixation of discount rates and disclosure patterns, whether age-wise, skill-wise, etc., in BHEL, SAIL, MMTC (Minerals & Metals Trading Corporation Of India Ltd.), HMTL, NTPC make it clear that there has been no uniformity among Indian enterprises regarding HRA disclosure.
Meaning Of Human Resource Accounting: HRA has been defined by American Accounting Association's committee as "the process of identifying and measuring data about human resources and communicating this information to interested parties." Stephen Knauf defined HRA as "The measurement and quantification of human organizational inputs such as recruiting, training, experience, and commitment."
According to Eric. G Flamholtz, HRA represents "Accounting for people as an organizational resource. It is the measurement of the cost and value of people for the organization."
Hence, it can be said that it is the process of developing financial assessments for people within the organization and society and monitoring these assessments through time.
Although HR valuation has important implications for external financial reporting, in the contemporary economic scenario, valuing HR has been of greater significance for internal HRM decisions.
Problem Statement: Understanding the way of valuation of human resources by using the Lev & Schwartz model and how the valuation of such assets is related to the other financial variables for financial reporting purposes.
Research Objectives: The main objectives of the study are:
i) To assess the way of presenting HRA information in the financial statement by selected companies.
ii) To identify HRA methods and models (mainly the extensive use of the Lev & Schwartz model) that are used to arrive at human resource value.
iii) How human resources are related to the other accounting variables for the purpose of human financial reporting in selected companies.
The ways of presentation of HRA information disclosed by some of the companies:
| Organization | HRA Introduced | Model | Discount Rate (in%) |
|--------------|----------------|-------|----------------------|
| BHEL | 1973-74 | Lev & Schwartz model | 12 |
| SAIL | 1983-84 | Lev & Schwartz model with Some refinements as suggested by Eric.G. Flamholtz & Jaggi and Lev | 14 |
| MMTC | 1982-83 | Lev & Schwartz model | 12 |
| ONGC | 1981-82 | Lev & Schwartz model | 12.25 |
| NTPC | 1984-85 | Lev & Schwartz model | 12 |
| INFOSYS | 1999, 2006-07 | Lev & Schwartz model | 12.96, 14.97 |
Source: Secondary
PRODUCTIVITY & PERFORMANCE INDICATORS
Source: Secondary
Terminology used:
1) PBT - Profit Before Tax
2) HR - Human Resource
3) TA - Total Assets
4) Turn - Turnover (or Sales)
5) FA - Fixed Assets
6) VA - Value Added
Models of Human Capital Valuation: Many models have been created to value human capital. Some are based on historic costs, while some are based on future earnings. Each has its own limitations, and one model has proved to be more valid than others. Although the Lev and Schwartz model has been the most widely used model for its ease of use and convenience.
The Lev & Schwartz Model: The Lev and Schwartz model states that the human resource of a company is the summation of the value of all the Net Present Value (NPV) of expenditure on employees. The human capital embodied in a person of age r is the present value of his earnings from employment.
Under this model, the following steps are adopted to determine HR Value:
i) Classification of the entire labor force into certain homogeneous groups like skilled, unskilled, semiskilled, etc., and in accordance with different classes and age-wise. For example, at Infosys, the classification is based on software professionals and support staff, etc.
ii) Construction of an average earning stream for each group. For instance, at Infosys, incremental earnings based on group/age have been considered.
iii) Discounting the average earnings at a predetermined rate to get the present value of human resources of each group.
iv) Aggregation of the present value of different groups, which represents the capitalized future earnings of the concern as a whole.
Where:
Vr = the value of an individual r years old
I(t) = the individual's annual earnings up to retirement
t = retirement age
r = a discount rate specific to the cost of capital to the company.
Critical appraisal of the Lev & Schwartz model:
1. It is essentially an input measure. It ignores output, i.e., productivity of employees.
2. Service state of each individual employee is not considered.
3. The training expenses incurred by the company on its employees are not considered.
4. The attrition rate in the organization is also ignored.
5. Factors responsible for the higher earning potentiality of each individual employee, like seniority, bargaining capacity, skill, experience, etc., which may cause a differential salary structure, are also ignored.
Conclusion: The conceptual thinking about valuation of human resources is still in a developing stage. No model of HR accounting is accepted by accounting bodies worldwide. However, we find some application of the Lev & Schwartz model in most public sector units and IT-based sectors. In knowledge-based sectors where human resources are considered key elements for monitoring business activities to achieve goals successfully, this aspect should not be overlooked. Hence, considering the great significance of HRA, proper initiatives should be taken by the government, along with other professional and accounting bodies at national and international levels, for the measurement and reporting of such valuable assets.
From India, Delhi
Acknowledge(0)Amend(0)
I was going through a website and found the article below. This may help you in implementing the Lev & Schwartz Model HR Accounting - A Strategic Use of the Lev & Schwartz Model - By Sumanta Dutta, Lecturer at South City College (Evening), Kolkata, and Visiting Faculty at NSHM Business School.
Abstract: Human is the core factor that needs to be recognized before any other 'M's. However, an urgent need-based modification is required when identifying and measuring data about human resources. The objective of this paper is to identify the extensive use of the Lev & Schwartz model of Human Resource Accounting, despite several criticisms from various sides regarding its applicability. Furthermore, it also portrays the applicability in a wide variety of organizations, such as some public sector units and IT-based sectors.
Human is the buzzword in modern knowledge-based society. It is the most vital input on which the success and failure of the organization depend. From classical economists to modern human capital economists, such development is considered a continuous process.
It is one of the most important 'M's associated with any organization, alongside money, machines, and materials. The interesting thing is that the first three are recognized and find a place on the asset side of the balance sheet, while ambiguity prevails among accountants regarding the fourth one. Despite being acclaimed for its usefulness in various literature over the decades, its application still remains a questionable issue. The IASB and the ASB in different countries have not been able to formulate any specific accounting standard for the measurement and reporting of such valuable elements.
It is a popular phenomenon among Indian corporate worlds to disclose information relating to human resources in annual statements. In this context, it is necessary to conduct a study to assess the disclosure pattern of HRA information in the Indian corporate world.
It was first promulgated by BHEL (Bharat Heavy Electrical Ltd), a leading public enterprise, during the financial year 1972-73. Later, it was also adopted by other leading public and private sector organizations in the subsequent years, such as Hindustan Machine Tools Ltd. (HMTL), Oil and Natural Gas Corporation Ltd. (ONGC), NTPC, Cochin Refineries Ltd. (CRL), Madras Refineries Ltd. (MRL), Associated Cement Company Ltd. (ACC), and Infosys Technologies Ltd. (ITL).
However, the adaptability of various models (mainly Lev and Schwartz model, Flamholtz model, and Jaggi and Lev model) and the fixation of discount rates and disclosure patterns, whether age-wise, skill-wise, etc., in BHEL, SAIL, MMTC (Minerals & Metals Trading Corporation Of India Ltd.), HMTL, NTPC make it clear that there has been no uniformity among Indian enterprises regarding HRA disclosure.
Meaning Of Human Resource Accounting: HRA has been defined by American Accounting Association's committee as "the process of identifying and measuring data about human resources and communicating this information to interested parties." Stephen Knauf defined HRA as "The measurement and quantification of human organizational inputs such as recruiting, training, experience, and commitment."
According to Eric. G Flamholtz, HRA represents "Accounting for people as an organizational resource. It is the measurement of the cost and value of people for the organization."
Hence, it can be said that it is the process of developing financial assessments for people within the organization and society and monitoring these assessments through time.
Although HR valuation has important implications for external financial reporting, in the contemporary economic scenario, valuing HR has been of greater significance for internal HRM decisions.
Problem Statement: Understanding the way of valuation of human resources by using the Lev & Schwartz model and how the valuation of such assets is related to the other financial variables for financial reporting purposes.
Research Objectives: The main objectives of the study are:
i) To assess the way of presenting HRA information in the financial statement by selected companies.
ii) To identify HRA methods and models (mainly the extensive use of the Lev & Schwartz model) that are used to arrive at human resource value.
iii) How human resources are related to the other accounting variables for the purpose of human financial reporting in selected companies.
The ways of presentation of HRA information disclosed by some of the companies:
| Organization | HRA Introduced | Model | Discount Rate (in%) |
|--------------|----------------|-------|----------------------|
| BHEL | 1973-74 | Lev & Schwartz model | 12 |
| SAIL | 1983-84 | Lev & Schwartz model with Some refinements as suggested by Eric.G. Flamholtz & Jaggi and Lev | 14 |
| MMTC | 1982-83 | Lev & Schwartz model | 12 |
| ONGC | 1981-82 | Lev & Schwartz model | 12.25 |
| NTPC | 1984-85 | Lev & Schwartz model | 12 |
| INFOSYS | 1999, 2006-07 | Lev & Schwartz model | 12.96, 14.97 |
Source: Secondary
PRODUCTIVITY & PERFORMANCE INDICATORS
Source: Secondary
Terminology used:
1) PBT - Profit Before Tax
2) HR - Human Resource
3) TA - Total Assets
4) Turn - Turnover (or Sales)
5) FA - Fixed Assets
6) VA - Value Added
Models of Human Capital Valuation: Many models have been created to value human capital. Some are based on historic costs, while some are based on future earnings. Each has its own limitations, and one model has proved to be more valid than others. Although the Lev and Schwartz model has been the most widely used model for its ease of use and convenience.
The Lev & Schwartz Model: The Lev and Schwartz model states that the human resource of a company is the summation of the value of all the Net Present Value (NPV) of expenditure on employees. The human capital embodied in a person of age r is the present value of his earnings from employment.
Under this model, the following steps are adopted to determine HR Value:
i) Classification of the entire labor force into certain homogeneous groups like skilled, unskilled, semiskilled, etc., and in accordance with different classes and age-wise. For example, at Infosys, the classification is based on software professionals and support staff, etc.
ii) Construction of an average earning stream for each group. For instance, at Infosys, incremental earnings based on group/age have been considered.
iii) Discounting the average earnings at a predetermined rate to get the present value of human resources of each group.
iv) Aggregation of the present value of different groups, which represents the capitalized future earnings of the concern as a whole.
Where:
Vr = the value of an individual r years old
I(t) = the individual's annual earnings up to retirement
t = retirement age
r = a discount rate specific to the cost of capital to the company.
Critical appraisal of the Lev & Schwartz model:
1. It is essentially an input measure. It ignores output, i.e., productivity of employees.
2. Service state of each individual employee is not considered.
3. The training expenses incurred by the company on its employees are not considered.
4. The attrition rate in the organization is also ignored.
5. Factors responsible for the higher earning potentiality of each individual employee, like seniority, bargaining capacity, skill, experience, etc., which may cause a differential salary structure, are also ignored.
Conclusion: The conceptual thinking about valuation of human resources is still in a developing stage. No model of HR accounting is accepted by accounting bodies worldwide. However, we find some application of the Lev & Schwartz model in most public sector units and IT-based sectors. In knowledge-based sectors where human resources are considered key elements for monitoring business activities to achieve goals successfully, this aspect should not be overlooked. Hence, considering the great significance of HRA, proper initiatives should be taken by the government, along with other professional and accounting bodies at national and international levels, for the measurement and reporting of such valuable assets.
From India, Delhi
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Hello Gopan,
Thank you very much for the post; it was really nice. I understood it, but there's still some confusion. I would like to know how a company or organization determines the discount rate used in calculating the present value of a human resource. What measures are taken to find the appropriate discount rate? Is it a specific process, such as using a 10% or 15% discount rate?
Thanks and regards,
atikshh
From India, New Delhi
Acknowledge(0)Amend(0)
Thank you very much for the post; it was really nice. I understood it, but there's still some confusion. I would like to know how a company or organization determines the discount rate used in calculating the present value of a human resource. What measures are taken to find the appropriate discount rate? Is it a specific process, such as using a 10% or 15% discount rate?
Thanks and regards,
atikshh
From India, New Delhi
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