Pooja Nahar

Models|Methods of Valuation of Human Resources

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Models of Valuation of Human Resources–

Human resources have much importance in the service sector. That’s why for quantify the knowledge, skills and workforce of employees, various models were suggested by various experts.

Some of the models of valuation of human resources are:-

  • Cost based Model
  • Economic Value based Model

Cost based models focused on the cost of employees i.e., expenses incurred by enterprises on employees.

Historical Cost Method

This method was developed by Payle Brummet, Flumholts. Firstly, this was adopted by R.G Bary Corporation, a leisure footwear company in Colombus, Ohio, U.S.A.

Under this method actual cost incurred on recruitment, selection, training and development are capitalized and amortized over the future expected useful life of human resources.

Merits:-

1. This method is simple to use and easily understandable.

2. This is based on old accounting techniques.

3. This follows the matching concept (i.e., cost is related to revenue).

4. This evaluates both human and physical asset in the same manner.

5. This method is helpful in the evaluation of return on investment in human resources.

Demerits:-

1. Difficult to estimate the exact life of human resources.

2. It covers only acquisition and development cost not potentiality.

3. Difficult to determine rate of amortization.

4. It does not cover the economic value of human resources.

5. It is not helpful in taking right decision.

Replacement Cost Method:-

  • Replacement Cost method- This method was propounded by Rensis Likert and Eric G. Flamholtz. Under this method, cost is to be calculated on the basis of replacement i.e., value of employee is estimated on the cost of replacement with a new employee of equivalent knowledge and experience. Cost includes:-
    • Cost of Recruitment
    • Cost of Selection
    • Cost of Training
    • Cost of Development
    • Advantages:-
      • It signifies the current value of human resources.
      • It is considered more realistic in comparison of historical cost approach.
      • It takes into account individual skills of every employee
    • Disadvantages:-
      • Difficult to calculate replacement cost.
      • difficult to replace employee with equivalent knowledge and exxperience.
      • It is irelevant.

Opportunity Cost Method

This method was advocated by Hekimian and Jone. This method is based on Economic concept of Opportunity cost. Under this method cost is to be determined on the basis of alternative use of employees. If employees are not scarce then there will not be opportunity cost. It implies that employees who are scarce can be included in human asset.

Example– Mrs. Sheetal Nahar works in ABC Co. Ltd. as an accounts manager and gets a monthly salary of Rs. 45000/- and other company offers her Rs. 48000/- for the same post. Hence, the opportunity cost would be Rs. 3000/-

  • Advantages:-
    • It is easy to apply.
    • It is suitable for scarce employees.
    • it encourages employees.
    • It is helpful in proper distribution of human resources.
  • Disadvantages:-
    • It discourages other employees.
    • It is subjective method.
    • It can not be adopted by every business enterprise.
    • It considers competitive bid price that may misleading and inaccurate.

Standard Cost Method

This method was suggested by David Watson. Under this method Companies use standard cost for the valuation of human asset. Standard cost is predetermined and fixed cost for each category of employees. Every year cost of recruitment, training and development of employees are determined.

  • Advantages:-
    • It is easy and simple to use.
    • It is determined by team of experts.
    • It is helpful in controlling because of variances.
  • Disadvantages:-
    • It is not realistic.
    • This makes categories of employees.
    • It may lower the morale of employees.
Economic Value based Methods

These methods are based on present value of human resources and determination of future contribution of employees.

  • Present value of Future Earning Method:- This method was developed by Lev & Schwartz. Under this method present value of future earning of human resources in an organization are determined. This is also known as Lev & Schwartz model.
    • Important Points:-
      • The employees are classified in specific group based on their age and skill.
      • Average earning are determined for various range of age.
      • Total earnings upto retirement age for each group are determined.
      • Total earnings are discounted @ rate of cost of capital and result would be the value of human resources.
        • Formula– Vr=I (t)/(1+R)t-r
          • Where
          • Vr = Value of individual r year old.
          • I(t) = The individual annual earning upto the age of retirement.
          • t= retirement age.
          • r= present age of employees.
          • R = Discount rate
        • Advantages:-
          • It considers the time value of money.
          • It considers the expected future earnings.
          • It considers the discount rate on the basis of cost of capital which is justifiable.
        • Disadvantages:-
          • It is based on future i.e., no accuracy and precision.
          • It ignores the possibility that employees may leave the organization before death or retirement.
          • It does not consider the progress of employees and salary that does not remain same over a period of time.
Harmonson’s Model

This model had given by Roger H. Hermonson. Under this method earning is calculated by applying discount rate. This is also called Adjusted Discount Future Wage Model. The key point of this model is efficiency ratio.

Efficiency Ratio- is the weightage average of return on investment of firm to the return of all firms of the industry.

Flamholtz Model

This model was developed by Flamholtz in 1971. This is an improvement on present value of future earning model, it takes into consideration the possibility that employee may leave the organization before the death or retirement and move from one role to another. Under this model the ultimate measure of employee’s value is expected realizable value depend on conditional value and probability of remain stay in the organization. The following steps suggested in this model:-

  • Period is determined for which an employee is expected to serve in the organization.
  • Estimate the circumstances under which employee may retain or leave the organization.
  • value can be determined either by multiplying the price of services to rendered or expected income derived from the service rendered.
  • Total value of service is determined.
  • Total value of services is discounted with a certain rate to find out the present value of human resources.

Aggregate Average Payment Model

This model was advocated by Prof. S.K Chakraborty in 1976. Under this model value of human resources is determined in aggregate not an individual basis and classified the manpower in two parts. The average salary of the group is multiplied by average period of employment.

Unpurchased Goodwill Model

This model was discussed by Hermonnson. As per this model the value of human resources can be assessed by taking into consideration the excess profit over normal profit i.e., super profit and super profit is capitalized at normal rate of return.

Giles and Robinson’s Human Asset Multiplier Model

This model emphasized that human resources may be valued at going concern like other assets. Remuneration of employee of a particular category is multiplied by the factor of their contribution in the organization.

Morse Net Benefit Model

This model was propounded by Morse in 1973. Under this model value of human resources is determined on present value of net benefits derived from the services of employees.

This method suggested the following steps:-

  • The gross value of services of employees is determined.
  • The value of future payments is determined.
  • The excess value of human resources over the value of payment is determined.
  • The present value of net benefits derived is calculated with the help of discount rate.

Deductions from Salary-Sec.16

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Deductions from Salary

As per section 14 of Income Tax Act, 1961, there are five heads of income.

  • Salaries
  • Income from house property
  • Profits and gains of business or profession
  • Capital gains
  • Income from other sources

While computing income under the head Salary, the following deductions are available from Gross Salary under section 16.

Standard deduction [Section 16(ia)]

Rs. 50000/- OR the amount of salary whichever is less.

[Standard deduction had been introduced in place of transport allowance Rs. 19200/- (1600 per month) and medical reimbursement of Rs. 15,000 per annum].

example- Mr. Vinod gets from his employer basic salary Rs. 20000 per month, D.A Rs. 5000 per month, Transport allowance Rs. 1800 per month and HRA Rs. 1000 per month. Calculate deduction from gross salary.

basic salary =20000*12 =240000/-

DA = 5000*12 =60000

T.A = 1800*12 = 21600/-

HRA = 1000*12 =12000/-

Total Gross Salary =240000+60000+21600+12000 = 333600/-

Deduction will be 50000 OR 333600 whichever is less i.e., 50000/-

Note:-HRA is partly exempt u/s 10(13A) but in this example HRA has been included fully.

Entertainment allowance [Section 16(ii)]

Entertainment allowance received by employee from employer is fully taxable. Firstly, it is to be included in the salary. Only Government employees shall be eligible to get deduction.

  • The least of the following amount shall be deductible:-
    • One-fifth of his basic salary or
    • Entertainment allowance received.
    • Rs. 5000/-
      • Note-actual amount spent by the employee towards entertainment is not relevant.

Professional tax [Section 16(iii)]

Professional tax [(tax on employment- (maximum Rs. 2500/-)] is levied by a State under Article 276 of the Constitution of India and if employer pays this tax on behalf of the employee, the amount paid is first included in salary then deduction is available on paid basis.

Mutual Funds

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Introduction:

Mutual fund creates an important investment opportunity for small investors who do not have knowledge about market and face a lot of problems in taking investment decision because of volatile market. This is one of top solution for the problems of small investors and the history of mutual fund industry started in 1963 with the formation of Unit Trust of India in 1963 by an Act of Parliament under the control of RBI. In 1978 it came under the control of the Industrial Development Bank of India and Unit Scheme 64 was the first scheme of UTI in 1964.

In 1987 public sector mutual funds came into existence and these funds set up by public sector banks, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). Private sector mutual funds came in 1993. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund under the SEBI (Mutual Fund) Regulations 1996. In 2003, UTI converted into two different entities.

Meaning:-

Mutual fund is a financial intermediary that pools money from investors for collectively investment in stocks, bonds and other securities.

Mutual Fund Operation Flow Chart

  1. Investors invest the amount in mutual fund.
  2. Fund manager of mutual fund invest in securities (shares, debentures).
  3. Earn returns redistributed to investors.

Organizational Structure of Mutual Fund in India

  1. Sponsor– is the entity who creates a mutual fund. According to SEBI(Mutual Fund) Regulations, 1996 the sponsor contributes at least 40% of net worth of AMC.
  2. Trust– The Mutual Fund is a trust under the Indian Trusts Act, 1882.
  3. Trustees– The Board of Trustees manage the trust and safeguard the interest of the unit holders. The fund sponsor appoints trustees and trust is created through a document called the Trust Deed executed by the fund sponsor in favour of trustees. Trustees are primary guardian of the unit holders.
  4. Asset Management Company (AMC)- Trustee appoints the AMC manages the funds ,operations and investments of the MF and provide advisory services.
  5. Custodian-safekeeping of the investors’ fund and securities.

Types of Mutual Funds

On the basis of Structure-

  1. Open Ended Funds (Schemes)- Most of the funds are open ended as there is no defined maturity date. The key feature is liquidity round the year. Investors can buy and sell (redeem) at any time. An open ended fund comes into existence through the New Fund Offer.
  2. Closed Ended Funds- have a defined maturity date. Close ended funds are listed on the stock Exchange.

Types of Mutual Fund Schemes:-

Equity Schemes:- Small Cap Fund, Mid Cap Fund, Large & Mid Cap Fund, Large Cap Fund, Multi Cap Fund, Sectoral / Thematic and ELSS.

Debt Schemes:- Liquid Fund, Gilt Fund, Money market Fund, Duration Fund.

Hybrid Schemes:- Conservative/Aggressive/Balanced Hybrid fund, Arbitrage Fund.

Other Schemes:- Index Funds / ETFs.

Net Asset Value

Net asset value is the market value of the securities. Market value of securities changes every day.

The NAV is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

Formula:-

Net Asset of the Scheme/Number of units outstanding

Net Asset of the Scheme- Market Value of Investments held by the Fund+ Value of Current Assets-Value of Current Liabilities and other payables.

Mutual Fund Terminology:-

  • NFO- New Fund Offer
  • SID- Scheme Information Document
  • SAI- Statement of Additional Information
  • KIM- Key Information Memorandum
  • AUM- Assets under Management
  • KYC Know Your Client
  • FATCA- Foreign Account Tax Compliance Act
  • SIP- Systematic Investment Plan
  • NAV- NET ASSET VALUE

Foregoing of Salary V Surrender of Salary

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Difference between Foregoing Salary and Surrender of Salary

Foregoing of Salary:-

Once salary accrues , its subsequent waiver does not make it exempt from tax liability. Such waiver is treated as only an application of income and hence, it is chargeable to tax.

Example- Mr. Raj is an employee in XYZ Pvt. Ltd. In the month of March 2021, he says to his employer that he is not interested in getting salary for April 2021 and it might be donated to a charitable institution.

Here, the salary for the month of April 2021 will be taxable in the hands of Mr. Raj. However, he is entitled to get deduction under chapter VIA (section 80G of the Income Tax Act, 1961).

Surrender of Salary:-

If an employee surrenders his salary to the Central Government u/s 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961,the salary so surrendered would be exempt.

Difference between advance salary and advance against salary

Advance Salary:- advance salary is taxable on receipt basis.

Advance against Salary:-

it is treated as loan. Loan is different from salary. Advance is generally adjusted with salary over a specified time period. Hence, it is not taxable.

Salary Income from Income Tax Point of View

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What is Salary Income under Income Tax Act, 1961?

For the purpose of Income Tax Act, 1961 the term salary defined under Section 17. Generally, it includes monetary as well as non-monetary items.

Whatever is received whether in cash, kind or as a facility [i.e. perquisite] by an employee from employer is considered as salary.

What are allowances?

Allowances are fixed periodic amount which are paid by employer to employee to meet some particular requirements (for official or personal expenses). Example, house rent allowance, tiffin/lunch/dinner allowance, uniform allowance , conveyance allowance etc.

Generally, there are three types of allowances under the Income Tax Act, 1961 and allowances are taxable on due or receipt basis, whichever is earlier.

  • Taxable Allowances- E.g., Dearness Allowance, Entertainment Allowance, Overtime Allowance, Fixed Medical Allowance etc.
  • Exempt Allowances– E.g., Allowances to High Court Judges, Compensatory Allowance received by a judge.
  • Partial Exempt ( partial taxable)– E.g., House Rent Allowance, Special Allowances [u/s 10(14)].

What deductions are applicable to salaried person in computing salary income?

  1. Standard deduction [Section 16(ia)]- 50000/- OR the amount of salary, whichever is lower.
  2. Entertainment allowance [Section 16(ii)]- allowed to Government Employee. Least of the following:-
  • 20% of basic salary or
  • Rs.5000 or
  • Actual Entertainment allowance received

3. Professional tax [Section 16(iii)]- tax on employment levied by a State under article 276 (max. 2500/- per annum) of the Constitution of India . Deduction is allowed only if it is actually paid by the employee during the previous year.

What is the taxability of conveyance allowance?

As per Section 10(14)​​ read with Rule 2BB conveyance allowance is exempt to the extent of amount spent or amount received whichever is less.

Note: This is given by employer to employee in order to meet the expenditure incurred on conveyance for official purpose.

What is form 12BB?

It is a form in which employee furnishes evidence or particulars of the claims. Such as House Rent Allowance, Leave Travel concession, Deduction of Interest, and deductions under Chapter-VIA.

Can standard deduction be taken from family pension?

No, family pension is taxable under the head income from other sources.

What is Form-16?

It is a certificate of TDS, if no taxes have been deducted by employer from salary then employer can issue salary statement only.

Is Transport Allowance can be claimed as exemption?

Generally , it is fully taxable ,exemption upto Rs. 3200/- p.m. is allowed in case of blind/deaf and dumb/orthopedically handicapped employees.

TDS Under GST

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TDS Deduction at Source under Goods and Services Tax:-

Special Note:- TDS under GST is different from TDS under Income Tax.

Basic Intro.- Section 51 of CGST Act, 2017 deals with the provisions of TDS under GST. In 28th meeting of GST Council, introduction of TDS has been recommended from 01.10.2018

What is TDS under GST?

Mechanism to collect tax from suppliers/vendors through buyers where the total value of taxable supply under a single contract (excluding GST) exceeds Rs. 2.5 Lakh.

Here, the deductor is to deduct tax at source from payment made to the suppliers of taxable goods or services or both.

Example– Mr. Raj, a DDO of XYZ office of the Government buys stationeries for his office from supplier Mr. Vinod for Rs. 3.5 Lakh under a contract.

When Mr. Raj pays to Mr. Vinod , he is require to deduct tax.

Which Persons are liable to deduct tax under GST?

  • A department or establishment of the Central Government or State Government; or
  • Governmental agencies; or
  • local authority; or
  • An authority or a board or any other body (1) set up by an Act of Parliament, or a State Legislature; or (ii) established by any Government having 51% or more participation by way of equity or control.
  • Public Sector Undertakings;
  • Society established by the Central/ State Government or a Local Authority under the Societies Registration Act,1860;

Rate of TDS Under GST:–

There are 4 types of taxes–

Integrated Tax (IGST), Central Tax (CGST) and State Tax (SGST) / Union territory Tax (UTGST).

Rate of TDS is @ 2% [i.e. 1% each on CGST & SGST/UTGST] in case of Intra-State supply and @ 2% on IGST in case of Inter-State supply on the amount paid/credited.

No TDS:-When the location of the supplier and the place of supply is in a State/ Union territory which is different from the State/ UT of registration of the recipient.

SituationLocation of SupplierPlace of SupplyRegistration of Recipient Applicability of TDS under Sec.51Rate of TDS
1HaryanaHaryanaHaryanaYes1% +1% = 2%
2HaryanaHaryanaU.PNo–
3HaryanaU.PU.PYes2%
4LadakhLadakhLadakhYes1% +1% = 2%
5LadakhLadakhLakshadweepNo–
6LadakhLakshadweepLakshadweepYes1% +1% = 2%

Is Registration is required for TDS Deductor ?

Yes, TDS deductor has to get registration and get GSTIN [Goods & Services Tax Identification Number].

What is the Time limit for filing the TDS Returns under GST?

FORM GSTR-7 for a particular month has to be filed online and due date is the 10th of the month succeeding to the month in which such deductions is made.

When TDS under GST is applicable ?

Tax is required to be deducted from payment made/credited to supplier if the total value of taxable supply under a contract exceeds Rs. 2,50,000/- (Rupees two lakh and fifty thousand).

Note:-Value of supply exclude the taxes leviable under GST (i.e. Central tax, State tax, UT tax, Integrated tax and Cess).

Example– If Mr. Raj a DDO of XYZ office of the Government wants to buy stationeries for his office from supplier Mr. Vinod. So, here, Mr. Raj is required to deduct tax at the time of making payment or crediting payment to Mr. Vinod.

Note:-Here, Value of taxable supply under a contract exceeds Rs 2.5 lakh (threshold limit).

Special Note:- tax is required to be deducted when payment is made after the effective date i.e. 01.10.2018 and date of contract does not matter.

Situation 1. Mr. Raj and Mr. Vinod enter into a contract of Rs. 2.4 Lakh (taxable supply) and payment of Rs. 1.4 Lakh has been made by Mr. Raj on 18.11.2021. Now, on 25.11.2021, contract value is revised from Rs. 2.4 Lakh to 5.4 Lakh. On which amount, tax should be deducted?

TDS shall have to be deducted on 5.4 Lakh (full value) while making remaining payment of Rs. 4 Lakh. Here, Rs. 10800/- would be deducted at the time of remaining payment of Rs. 4 Lakh.

Late fees, Interest and penalty:-

  • if fails to furnish the GSTR-7 by due date, late fees of Rs. 100/- per day under CGST & SGST/UTGST Act, separately subject to maximum Rs. 5000/- each under under CGST Act & SGST/UTGST Act.

Advice for readers- for detailed study please refer any book of Indirect Tax Laws.

Human Resource Accounting |Definition |Objectives |Importance

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In every business organization, human plays a vital role because there is nothing beyond a human being. Every business concern requires land, building, Plant & Machinery etc. but the important thing is that without human these are useless.

According to Alfered Marshall the most important asset in any business is human. Just like other resources, human also is a resource. This is considered one of the valuable resources in business because success of business enterprise depends on capable person.

HRA is a accounting for human resources by which cost can be determined.

HRA is the process of identifying and measuring data about human resources and communication to interested parties.

Objectives of HRA:-

  • To determine cost of recruitment, training & development etc. of human resources.
  • To enable management to monitor and assess efficiency of human resources.
  • To assist in developing effective management practices.
  • To provide information about human resources to investors for decision purpose.
  • To evaluate the return on investment in human resources.
  • To provide qualitative information about human resources.
  • To find out whether human resources have been used properly or not.
  • To analyze human assets whether these assets are to conserved, depleted and appreciated.
  • To help in better control.

Importance:-

Human resources provide useful information to the management, financial analysts and employees etc.

  • To assist company in identifying investment on employees and expected return on inestment.
  • To provide useful information about cost and value of human resources.
  • To give base for planning for physical assets and human resources.
  • To help in making personnel policies. For example recruitment, selection, promotion and retrenchment etc.
  • To provide useful information to investors and other interested users.
  • To assist management in best utilization of human resources.
  • To motivate employees.
  • To resolve industrial disputes.
  • To identify the causes of high labor turnover ratio and suggest for preventive measures.

Forensic Accounting

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Forensic accounting is growing due to fraud and white collar criminal activities. First time, the term forensic accounting was used in 1946 by Maurice E. Peloubet a partner in a New York accounting firm.

After that, Max Laurie stressed the need for forensic accounting, literature and training. As far as cyber crime is concerned, this is also increasing. Therefore, there is need of forensic accounting.

In USA, Enron an energy company faced a major disaster in form of largest bankruptcy. Satyam scam in India creates a big question mark on the creditability and authenticity on certified auditors.

Generally, accountants acts like a watchdog but a forensic accountant must be a bloodhound.

According to George A. Manning, forensic accounting is the science of gathering and presenting financial information in a form that would be accepted by a jurisprudence perpetrators of economic crimes.

Accounting + Auditing+ Investigating Skills = Forensic accounting which focuses on detecting or preventing accounting fraud.

It is used for legal purpose. Everywhere, whether there is stock market fraud, bank fraud or cyber fraud. It is important tool to detect investigate and prevents the frauds.

AICPA– It is the application of accounting principles, theories and discipline to facts or hypothesis at issue in legal dispute and encompasses every branch of accounting knowledge.

SFIO-Serious Fraud Investigation Office.

References: –

  • R. Khanna & A. Mehra
  • Pal V & L. Wadhwa

True Blood Report

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True Blood Report:-

For the betterment of corporate financial reporting, The American Institute of Certified Public Accountants (AICPA) formed a study group under the chairmanship of Robert M. True Blood. The study group visited various places and studied more than 500 corporations, professional firms, national and international organisations.

The Study group conducted meeting and interviewed of various executives and submitted report in October, 1973.

On the basis of this study, the study group recommended twelve objectives of financial reporting.

Objectives:-

  • To provide useful information for financial decision
  • To provide information to investors and creditors for prediction, comparison and evolution.
  • To give priority to users who have limited resources, authority and capability and rely on financial statements as principle source of information.
  • To furnish information to users for predicting, comparing and evaluating the earning capacity of business concern.
  • To supply information to the management by which resources can be utilised in such a manner that goal of enterprise achieve.
  • To give factual and interpretative information about transactions and events.
  • To provide financial position statement with current value.
  • To provide income statement for predict, compare and evaluate earning capacity of business concern and if changes in value should be reported separately.
  • To provide information that makes the economic decision beneficial for investors.
  • To provide financial information which increase the reliability of users.
  • To provide Information for evaluating earning and effectiveness of resources in achieving predetermined goal of the enterprise.
  • To provide report on financial statements about business activities which have effect on society and social environment.

Procedure for setting Accounting Standards in India

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Procedure for setting Accounting Standards in India/Standard Setting Process:-

ICAI is the premiere accounting body in India who constituted Accounting Standards Board (ASB) in 1977. Accounting standards are developed by the ASB. The ASB considered the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) while framing Accounting Standards (AS) in India and tried to integrate them

The Procedure of ASB for setting accounting standards in India is defined as:-

  • first of all, broad areas are to be found out by ASB for formulation of accounting standards.
  • Study group is constituted by ASB for preparing preliminary drafts. The draft normally includes definitions, objective, scope, recognition and measurement principles.
  • Consideration and revision of draft, if any,.
  • Circulation of draft to members of the council and various bodies such as:-
  1. Members of ICAI.
  2. MCA
  3. SEBI
  4. C&AG
  5. CBDT etc. for comments.
  • Taking into consideration the comments of bodies and meeting with the representatives of the bodies.
  • Finalisation of exposure draft and issue for public comments.
  • After consideration of comments received on exposure draft, submit to the council of ICAI for consideration and approval.
  • The council of ICAI, if necessary, do modification in consultation with ASB.
  • Finally, Accounting standard is issued.