flowchart LR P1[People<br/>Social impact] --- P2[Planet<br/>Environmental impact] P2 --- P3[Profit<br/>Economic impact] P3 --- P1 TBL[Triple<br/>Bottom Line] --> P1 TBL --> P2 TBL --> P3 style P1 fill:#FFF3E0,stroke:#EF6C00 style P2 fill:#E8F5E9,stroke:#2E7D32 style P3 fill:#E3F2FD,stroke:#1565C0 style TBL fill:#F3E8FD,stroke:#8430CE
15 HR, Inflation and Environmental Accounting
This topic groups three specialised branches of accounting that the conventional balance sheet does not capture well — people, prices and the planet. Each branch tries to bring an important but unrecorded reality into the financial statements.
15.1 Part A — Human Resource Accounting
15.1.1 Meaning and origin
Human Resource Accounting (HRA) is “the process of identifying, measuring and communicating information about human resources to facilitate effective management” — Eric Flamholtz’s working definition (flamholtz1985?). The American Accounting Association set up its Committee on Human Resource Accounting in 1973; the foundational work in the 1960s was done at the University of Michigan by Rensis Likert, R. Lee Brummet, Eric Flamholtz and William C. Pyle.
The premise is that conventional accounting treats employees as an expense of the period (salaries, wages) rather than as an asset. HRA argues that a firm’s people generate future economic benefits and so satisfy the asset definition; they should be reported on the balance sheet, not just the P&L.
15.1.2 Objectives
TipFive Objectives of HR Accounting
| Objective | Working content |
|---|---|
| Furnish cost-value information | About investment in human resources |
| Aid managerial decisions | Recruitment, training, promotion, termination |
| Monitor the use of human resources | Detect under-utilisation and over-utilisation |
| Help in framing personnel policies | Wage, training, retention strategies |
| Improve the quality of corporate reporting | A truer picture of intangible value |
15.1.3 Methods of HR Accounting
HR-accounting methods divide into cost-based and value-based approaches.
TipMethods of HR Accounting
| Approach | Method | Proponent | Working idea |
|---|---|---|---|
| Cost-based | Historical Cost | Brummet, Flamholtz, Pyle (1968) | Capitalise actual cost of recruitment, hiring, training |
| Replacement Cost | Flamholtz (1971) | Cost to replace the existing workforce today | |
| Opportunity Cost | Hekimian and Jones (1967) | Bidding price for an employee in the next-best alternative use | |
| Standard Cost | David Watson | Pre-set standard cost per category of employee | |
| Value-based | Lev and Schwartz Model | Lev & Schwartz (1971) | Present value of future earnings up to retirement |
| Stochastic Rewards Valuation Model | Flamholtz | Probabilistic value of employee in different service states | |
| Economic Value Method | Likert | Capitalised value of contribution to firm earnings |
15.1.4 Lev and Schwartz model — the formula
The most cited valuation model in Indian textbooks is the Lev and Schwartz model (lev1971?):
\[ V_{r} = \sum_{t = r}^{T} \frac{I(t)}{(1 + R)^{t-r}} \]
where V_r is the value of an employee aged r, I(t) is the expected annual earnings of the employee in year t, T is the retirement age, and R is the discount rate. The total value of the workforce is the sum of V_r over all employees.
Indian companies that have published HR-accounting disclosures using this model include Infosys, BHEL, SAIL, ONGC, NTPC, Tata Steel. India does not have a mandatory HR-accounting standard; disclosures are voluntary.
15.1.5 Limitations
- Uncertainty of future earnings.
- People are not “owned”; can leave at will.
- No standard valuation method.
- Subjective discount rate and service period.
- Not yet recognised by Ind-AS or IFRS as a balance-sheet item.
15.2 Part B — Inflation Accounting
15.2.1 The problem
Conventional accounting follows the historical cost convention and the stable monetary unit assumption. In a period of rising prices, both assumptions break down. Profit measured on historical cost overstates real income; depreciation on historical cost is inadequate to replace the asset; balance-sheet values understate replacement cost.
Inflation Accounting (also called Price-Level Accounting) restates the financial statements in terms of current prices or constant purchasing power so that the figures are economically meaningful (maheshwari2022?).
15.2.2 Methods
Two main systems and a hybrid have been formalised.
TipMethods of Inflation Accounting
| Method | Approach | What is restated |
|---|---|---|
| Current Purchasing Power (CPP) | General price-level adjustment using a general index (CPI) | All historical figures restated to current rupee purchasing power |
| Current Cost Accounting (CCA) | Specific price-level adjustment using specific indices | Each asset restated to its current replacement cost |
| Hybrid / Real Terms System | Combines CPP for monetary items and CCA for non-monetary | Different items restated by appropriate index |
The Sandilands Committee Report (UK, 1975) recommended the CCA method and was followed by SSAP-16 (now withdrawn). The Financial Accounting Standards Board (FASB) in the United States issued FAS 33 (also withdrawn).
15.2.3 CPP method — working steps
- Choose a general price index (typically the CPI).
- Classify items into monetary (cash, debtors, creditors, loans — fixed in money terms) and non-monetary (inventory, fixed assets, equity).
- Restate non-monetary items by the ratio of closing index ÷ historical index.
- Recognise monetary gain or loss: holding monetary assets in inflation produces a loss; owing monetary liabilities produces a gain.
15.2.4 CCA method — working idea
- Replace historical cost of fixed assets with their current replacement cost.
- Compute depreciation on the replaced amount.
- Recognise cost of sales at current cost (not historical) — known as the Cost of Sales Adjustment.
- The differences between historical and current cost are routed through a Current Cost Reserve.
15.2.5 India’s position
India has not formally adopted inflation accounting for routine reporting. Selective disclosures appear in price-sensitive industries such as oil, sugar and cement, where replacement costs of inventory and assets matter for strategic and tariff decisions.
15.3 Part C — Environmental and Sustainability Accounting
15.3.1 Meaning
Environmental Accounting — also called Green Accounting or Sustainability Accounting — is the recognition, measurement and reporting of the environmental and social impact of a firm’s economic activity. The goal is to make visible the externalities (pollution, resource depletion, climate impact) that the conventional profit calculation ignores.
15.3.2 Three levels
TipThree Levels of Environmental Accounting
| Level | Focus | Output |
|---|---|---|
| Environmental Financial Accounting (EFA) | Recognition of environmental costs and liabilities in financial statements | Provisions, contingent liabilities, capitalised clean-up costs |
| Environmental Management Accounting (EMA) | Internal information for managers | Cost of environmental compliance, savings from energy efficiency |
| National / Macro Environmental Accounting | National-income accounts | Green GDP, depletion-adjusted national income |
15.3.3 The Triple Bottom Line
John Elkington’s Triple Bottom Line (1997) reframes corporate success along three dimensions — People, Planet, Profit — sometimes called the 3 Ps. The framework underlies most modern sustainability reporting (elkington1997?).
15.3.4 Sustainability-reporting frameworks
TipInternational Sustainability-Reporting Frameworks
| Framework | Issued by | Year | Focus |
|---|---|---|---|
| GRI Standards | Global Reporting Initiative (Amsterdam) | 1997 onward | Multi-stakeholder; widest used |
| SASB Standards | Sustainability Accounting Standards Board | 2011 | Industry-specific, investor-focused |
| TCFD recommendations | Task Force on Climate-related Financial Disclosures (FSB) | 2017 | Climate risk and governance |
| ISSB Standards (IFRS S1, S2) | International Sustainability Standards Board | 2023 | Convergent global baseline |
| Integrated Reporting |
International Integrated Reporting Council | 2013 | Integrated thinking; six capitals |
15.3.5 India — BRSR
The Securities and Exchange Board of India (SEBI) requires the top-listed companies (currently the top 1,000 by market capitalisation) to file the Business Responsibility and Sustainability Report (BRSR) along with their annual report. The BRSR aligns with the National Guidelines on Responsible Business Conduct (NGRBC) and reports against nine principles covering governance, environment, social and product responsibility. A BRSR Core set of indicators must be assured by the top 150 listed entities (and is being progressively extended).
15.3.6 Carbon accounting
Greenhouse-gas emissions are reported under the GHG Protocol in three scopes: Scope 1 (direct emissions from owned sources), Scope 2 (indirect emissions from purchased energy) and Scope 3 (other indirect emissions across the value chain). Disclosure of all three scopes is the global trajectory; Indian BRSR currently mandates Scope 1 and 2, with Scope 3 voluntary.
15.4 Exam-Pattern MCQs
Q 01
Which of the following is not a method of Human Resource Accounting?
View solution
Correct Option: D
FIFO is an inventory valuation method, not an HR-accounting method.
Q 02
Match each HR-accounting method with its principal proponent:
| Method | Proponent | ||
| (i) | Historical Cost | (a) | Hekimian and Jones |
| (ii) | Replacement Cost | (b) | Lev and Schwartz |
| (iii) | Opportunity Cost | (c) | Brummet, Flamholtz and Pyle |
| (iv) | Present Value of Future Earnings | (d) | Eric Flamholtz |
View solution
Correct Option: A
Q 03
"An employee is currently aged 30 and will retire at 60. The expected annual earnings stream is discounted at 10 per cent to compute her value." Which model is being applied?
View solution
Correct Option: B
The Lev and Schwartz model values an employee at the present value of expected future earnings until retirement.
Q 04
Match the inflation-accounting method with what it does:
| Method | Working content | ||
| (i) | CPP method | (a) | Hybrid — combines general and specific indices |
| (ii) | CCA method | (b) | Restates non-monetary items by ratio of closing to historical general index |
| (iii) | Real-Terms / Hybrid | (c) | Restates assets at current replacement cost |
| (iv) | Sandilands Committee | (d) | UK 1975 report recommending the CCA method |
View solution
Correct Option: A
Q 05
During inflation, holding cash produces:
View solution
Correct Option: B
Cash is a monetary asset fixed in money terms; its real purchasing power falls when prices rise — a monetary loss.
Q 06
The Triple Bottom Line of John Elkington (1997) consists of:
View solution
Correct Option: B
The 3 Ps — People, Planet, Profit.
Q 07
Arrange the following sustainability-reporting frameworks in chronological order of issuance: (i) ISSB Standards (IFRS S1 and S2) (ii) GRI Standards (iii) SASB Standards (iv) TCFD recommendations
View solution
Correct Option: A
GRI (1997) → SASB (2011) → TCFD (2017) → ISSB (2023).
Q 08
Match the term with its content:
| Term | Content | ||
| (i) | EMA | (a) | Direct emissions from owned sources |
| (ii) | BRSR | (b) | Internal environmental information for management |
| (iii) | Scope 1 GHG emissions | (c) | Indirect emissions from purchased energy |
| (iv) | Scope 2 GHG emissions | (d) | SEBI-mandated sustainability report for top-listed Indian firms |
View solution
Correct Option: A
ImportantQuick recall
- HR Accounting treats people as an asset, not just an expense. Foundational work at Michigan by Likert, Brummet, Flamholtz, Pyle (1960s).
- HR methods — Cost-based: Historical (Brummet/Flamholtz/Pyle), Replacement (Flamholtz), Opportunity (Hekimian & Jones), Standard. Value-based: Lev & Schwartz, Stochastic Rewards (Flamholtz), Likert’s Economic Value.
- Lev and Schwartz model = present value of expected future earnings to retirement.
- HR disclosures by Infosys, BHEL, SAIL, ONGC, NTPC, Tata Steel; voluntary in India.
- Inflation Accounting methods: CPP (general index, restate non-monetary), CCA (specific index, replacement cost), Hybrid. UK Sandilands Committee 1975 recommended CCA.
- During inflation: monetary asset (cash, debtors) → loss; monetary liability (creditors, loans) → gain.
- Triple Bottom Line (Elkington 1997) = People, Planet, Profit.
- Frameworks: GRI (1997), SASB (2011), TCFD (2017), ISSB / IFRS S1, S2 (2023), Integrated Reporting (2013).
- India: SEBI BRSR for top 1,000 listed; BRSR Core assured for top 150.
- GHG Protocol scopes: Scope 1 direct, Scope 2 purchased energy, Scope 3 value chain.