flowchart LR
HRA[Human Resources<br/>Accounting] --> Topic[Specialised Branches]
INF[Inflation<br/>Accounting] --> Topic
ENV[Environmental<br/>Accounting] --> Topic
Topic --> Limit[Address Limitations<br/>of Historical Cost]
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16 Human Resources Accounting; Inflation Accounting; Environmental Accounting
16.1 Three Branches Outside the Traditional Balance Sheet
This topic groups three specialised branches of accounting that the conventional balance sheet does not capture well — people, prices and the planet. Human Resources Accounting (HRA) tries to measure the value of employees as an asset; Inflation Accounting adjusts financial statements for the changing purchasing power of money; Environmental Accounting measures and discloses the environmental costs and impact of business activity. All three are responses to the limitation of historical-cost accounting that ignores qualitative and dynamic realities.
16.2 Human Resources Accounting (HRA)
16.2.1 Concept and Origins
The American Accounting Association (1973) defined HRA as “the process of identifying and measuring data about human resources and communicating this information to interested parties”. The pioneering work was by R. Likert (1967) and R.H. Hermanson (1964). The first Indian company to publish HRA disclosures (in its annual report) was Bharat Heavy Electricals Ltd (BHEL), followed by SAIL, MMTC, ONGC, Infosys.
16.2.2 Objectives
TipObjectives of HRA
- Provide information to managers about acquisition, training and retention of human resources.
- Help investors assess the true worth of an enterprise.
- Measure return on investment in employees.
- Improve human-resource planning.
- Promote managerial decision-making about layoffs, transfers, training.
16.2.3 Approaches to HRA
TipMethods of Valuing Human Resources
| Approach | Method | Originator |
|---|---|---|
| Cost-based | Historical cost — capitalise hiring, training, development costs (Hermanson 1964) | R.H. Hermanson |
| Replacement cost — what it would cost to replace the workforce today | Flamholtz | |
| Opportunity cost — bidding among managers for scarce employees | Hekimian and Jones | |
| Standard cost — based on standard staffing patterns | David Watson | |
| Value-based | Present value of future earnings of the employee until retirement | Lev and Schwartz (1971) |
| Unpurchased goodwill — assign to staff the firm’s excess profit over normal | Hermanson | |
| Stochastic-rewards valuation model | Flamholtz |
The Lev and Schwartz (1971) model is the most widely cited in Indian disclosure practice — used by BHEL, SAIL, Infosys.
\[V = \sum_{t=r}^{T} \frac{I(t)}{(1+R)^{t-r}}\]
where V = value of an employee aged r; I(t) = expected earnings at age t; T = retirement age; R = discount rate.
16.2.4 Indian Position
HRA is not mandated by AS or Ind AS — it is voluntary supplementary disclosure. AS 26 (Intangible Assets) and Ind AS 38 explicitly exclude internally generated workforce from recognition as an asset.
16.3 Inflation Accounting
16.3.1 Concept
Inflation accounting — also called price-level accounting — is the adjustment of historical-cost financial statements for changes in the general price level (purchasing power) or specific prices of assets. The motivation: in periods of significant inflation, historical cost overstates profits and understates the replacement cost of assets, leading to erosion of capital if dividends are paid on inflated profits.
16.3.2 Limitations of Historical Cost Under Inflation
TipDistortions Under Inflation
- Depreciation on outdated cost under-recovers the true replacement need.
- Cost of goods sold is understated (FIFO) → profit overstated → higher tax.
- Inventory on the balance sheet does not reflect current value.
- Inter-year comparisons are misleading because rupees of different vintages are added.
- Dividends paid out of inflated profits erode real capital.
16.3.3 Methods of Inflation Accounting
TipTwo Main Inflation-Accounting Methods
| Method | Working content | Origin |
|---|---|---|
| Current Purchasing Power (CPP) | Restate all historical-cost items in units of current purchasing power using a general price index (CPI or WPI) | Sweeney (1936) — Stabilised Accounting |
| Current Cost Accounting (CCA) | Replace historical cost of each asset with current (specific) cost; depreciation based on current cost | Sandilands Committee, UK (1975) |
| Combination / Specific Price Method | Mix of CPP and CCA | Various |
| Replacement Cost | Value assets at replacement cost | Edwards and Bell (1961) |
16.3.4 CPP Method in Detail
CPP restates non-monetary items by applying:
\[\text{Restated value} = \text{Historical cost} \times \frac{\text{Closing CPI}}{\text{CPI at date of acquisition}}\]
Monetary items (cash, debtors, creditors, loans) are not restated, as they are already in current units. A gain/loss on monetary items is computed — holding cash during inflation produces a loss in purchasing power; net monetary liability produces a gain.
16.3.5 Sandilands Report (UK 1975) and CCA
The Sandilands Committee in the UK (1975) and the subsequent SSAP 16 in the UK (1980) recommended Current Cost Accounting. Indian regulators have not mandated inflation accounting; ICAI issued only guidance notes.
16.3.6 Indian Approach
The Institute of Chartered Accountants of India (ICAI) issued Accounting Standard (AS) 6 — Depreciation and standards on related areas but does not require full inflation-adjusted statements. Some Indian PSUs voluntarily provide supplementary inflation-adjusted disclosures.
16.4 Environmental / Green Accounting
16.4.1 Concept
Environmental accounting is “the identification, measurement and allocation of environmental costs, the integration of these costs into business decisions and the reporting of relevant environmental information to stakeholders” (US EPA, 1995). The term Green Accounting is sometimes used interchangeably.
16.4.2 Three Levels
TipThree Levels of Environmental Accounting
| Level | Working content |
|---|---|
| National Environmental Accounting | Adjust national income statistics for resource depletion and environmental degradation — Green GDP |
| Corporate Environmental Accounting | Firm-level: identify, measure, allocate environmental costs |
| Environmental Reporting | Sustainability reports, GRI Standards, integrated reports |
16.4.3 Categories of Environmental Cost
TipHansen-Mowen Four-Category Model
| Category | Examples |
|---|---|
| Prevention costs | Pollution-prevention equipment; emission-free design |
| Detection costs | Monitoring, audit, inspection, testing |
| Internal failure costs | Disposing waste, treating wastewater, recycling |
| External failure costs | Damages to communities, fines, restoration of contaminated sites |
16.4.4 Frameworks and Standards
TipReporting Frameworks
- GRI Standards — Global Reporting Initiative — most widely adopted voluntary framework.
- TCFD — Task Force on Climate-related Financial Disclosures — emerged 2017.
- ISSB — International Sustainability Standards Board (under IFRS Foundation) — IFRS S1 and S2, issued 2023.
- SEBI BRSR — Business Responsibility and Sustainability Report — mandatory for top 1,000 listed companies in India since FY 2022-23.
-
Integrated Reporting (
) Framework — IIRC (2013) — six capitals: financial, manufactured, intellectual, human, social-relationship, natural. - UN System of Environmental-Economic Accounting (SEEA) — for national accounts.
16.4.5 Indian Position
- The Companies Act 2013 §135 mandates CSR spend of 2 % of average net profits for qualifying companies.
- SEBI BRSR mandatory for top 1,000 listed companies; aligned with GRI and TCFD.
- The National Voluntary Guidelines (now National Guidelines on Responsible Business Conduct) have laid out nine principles.
- The Comptroller and Auditor General has piloted environmental audits of public-sector undertakings.
16.5 Practice Questions
Q 01
HRA
Easy
The first Indian company to publish Human Resource Accounting disclosures in its annual report was:
View solution
Correct Option: B
**BHEL** is widely cited as the first Indian company to publish HRA disclosures (1973-74), followed by SAIL, MMTC, ONGC, Infosys.
Q 02
Lev-Schwartz
Medium
The Lev and Schwartz model values human resources at:
View solution
Correct Option: C
**Lev & Schwartz (1971)** discount future expected earnings to present value.
Q 03
HRA Authors
Medium
Match each HRA proponent with the method:
| Author | Method | ||
| (i) | R.H. Hermanson | (a) | Replacement cost / Stochastic rewards |
| (ii) | Lev and Schwartz | (b) | Historical cost; unpurchased goodwill |
| (iii) | Flamholtz | (c) | Present value of future earnings |
| (iv) | Hekimian and Jones | (d) | Opportunity cost |
View solution
Correct Option: A
Hermanson — historical/goodwill; Lev-Schwartz — PV of earnings; Flamholtz — replacement/stochastic; Hekimian-Jones — opportunity cost.
Q 04
AS 26
Medium
Under AS 26 / Ind AS 38, the value of an internally trained workforce is:
View solution
Correct Option: C
Both AS 26 and Ind AS 38 specifically **exclude** internally generated workforce from being recognised as an asset.
Q 05
CPP
Medium
In Current Purchasing Power (CPP) method of inflation accounting:
View solution
Correct Option: C
In **CPP**, non-monetary items are restated using a general index; monetary items already in current units are left as is (with a P/L gain or loss computed).
Q 06
CCA
Medium
Current Cost Accounting (CCA) was recommended by the:
View solution
Correct Option: A
**Sandilands Report 1975** led to UK SSAP 16 (1980) on Current Cost Accounting.
Q 07
Monetary
Hard
During inflation, holding a **net monetary liability** results in:
View solution
Correct Option: B
Net monetary *liability* (you owe in nominal currency) — repaid in cheaper rupees → **gain** in purchasing power. Net monetary *asset* → loss.
Q 08
Hansen-Mowen
Medium
Under the Hansen-Mowen classification, **monitoring, audit, inspection** costs are:
View solution
Correct Option: B
Monitoring/audit/inspection = **Detection** costs. Prevention is design; failure is post-event.
Q 09
BRSR
Medium
SEBI's Business Responsibility and Sustainability Report (BRSR) is mandatory for the top:
View solution
Correct Option: C
BRSR is mandatory for the **top 1,000** listed companies (by market capitalisation) since FY 2022-23.
Q 10
CSR
Medium
Under §135 of Companies Act 2013, qualifying companies must spend at least:
View solution
Correct Option: B
CSR spend = **2 %** of average net profits over preceding three years.
Q 11
GRI
Easy
The most widely adopted *voluntary* sustainability-reporting framework is:
View solution
Correct Option: B
**GRI Standards** dominate global voluntary sustainability reporting.
Q 12
ISSB
Hard
The International Sustainability Standards Board (ISSB) — under the IFRS Foundation — issued its first standards (IFRS S1 and S2) in:
View solution
Correct Option: C
IFRS S1 (general sustainability) and IFRS S2 (climate) were issued by the ISSB in **2023**.
Q 13
Integrated
Hard
The *International Integrated Reporting (
View solution
Correct Option: C
**Six capitals**: financial, manufactured, intellectual, human, social-relationship, natural.
Q 14
CPP Restate
Hard
An asset purchased for ₹4,00,000 when CPI was 200; the CPI today is 300. Under CPP method, the restated cost is:
View solution
Correct Option: D
Restated cost = 4,00,000 × 300/200 = **₹6,00,000**.
Q 15
National
Medium
"Green GDP" adjusts conventional GDP for:
View solution
Correct Option: B
Green GDP = GDP − natural-resource depletion − environmental degradation.
Q 16
TCFD
Medium
The Task Force on Climate-related Financial Disclosures (TCFD) was established under the auspices of the:
View solution
Correct Option: B
TCFD (2015-2017) was created by the **Financial Stability Board** under G20.
Q 17
HRA Definition
Medium
"The process of identifying and measuring data about human resources and communicating this information to interested parties" is the definition of HRA given by:
View solution
Correct Option: B
**AAA (1973)** — Committee on Human Resource Accounting.
Q 18
Inflation Author
Hard
"Stabilised Accounting" — the early formulation of CPP method — was developed by:
View solution
Correct Option: A
**Henry Sweeney** — *Stabilised Accounting* (1936) — early articulation of CPP.
Q 19
Env Cost
Medium
A fine imposed by the pollution-control board for effluent discharge is classified as:
View solution
Correct Option: D
Fines, restoration of contaminated sites, damages to third parties are **external failure** costs.
Q 20
Indian Framework
Medium
India's first mandatory sustainability-reporting framework for large listed companies is:
View solution
Correct Option: A
**BRSR** (Business Responsibility and Sustainability Report) is India's mandatory sustainability framework for top 1,000 listed companies (FY 2022-23 onward).
16.6 Quick Recall
ImportantQuick recall
- HRA (AAA 1973): measure and report value of people. Cost-based — Hermanson (historical); Flamholtz (replacement); Hekimian-Jones (opportunity); Value-based — Lev & Schwartz (1971) PV of future earnings (used by Indian PSUs).
- First Indian HRA reporter — BHEL; followed by SAIL, MMTC, ONGC, Infosys.
- AS 26 / Ind AS 38 exclude internally generated workforce from asset recognition.
- Inflation accounting: CPP (general index; Sweeney 1936) vs CCA (specific current cost; Sandilands 1975, UK SSAP 16). Monetary items not restated under CPP; gain on net monetary liability, loss on net monetary asset.
- Restated value = HC × (Closing CPI / Acquisition-date CPI).
- Environmental accounting: 3 levels — national (Green GDP), corporate, reporting. Hansen-Mowen 4 categories — Prevention, Detection, Internal failure, External failure.
- Frameworks: GRI Standards (voluntary global), TCFD (climate, FSB), ISSB IFRS S1/S2 (2023),
6 capitals , UN SEEA. - India: §135 CSR (2 %), SEBI BRSR mandatory for top 1,000 listed companies since FY 2022-23.