Intellectual Capital Accounting: Practices in a Developing Country

Abstract

This study examines and explains the intellectual capital reporting (ICR) practices, with a human capital (HumC) focus, of firms located in a developing nation, Sri Lanka. The study ascertained the following: first, to what extent the industry groups, based on the number of shareholders, differ in their ICR practices; and second, to what extent firms in Sri Lanka differ from counterparts in other nations in their ICR practices.

The literature reviewed highlighted the voluntary nature and unregulated environment of ICR. It also underlined the inability of traditional accounting to recognise IC within its financial statements. This has lead to a plethora of non-uniform definitions of intellectual capital (IC) and ICR, and a wide range of theoretical frameworks available for IC

This study examined the top 30 firms by market capitalisation listed on the Colombo stock exchange in both 1998/1999 and 1999/2000. It reviewed their annual reports using content analysis to analyse the type and amount of IC reported, and carried out 11 case study interviews with directors and senior executives to analyse the type and amount of IC managed within the firms. Using this data, this study tested the political economy of accounting (PEA) theory. The study collapsed the firms into four industry groups based on the number of shareholders; this was done on the basis that the number of shareholders of a firm influences their ICR practice.

The results indicate that, overall, there were distinct differences in ICR practice between industry groups. The industry groups were found to report similarly in relation to IC category. However, in relation to IC elements the industry groups were found to report differently, with some industry groups over reporting on certain elements which were not well managed and vice versa. The differences in ICR practices indicate that industry groups use ICR to mediate the agenda of debate between them and their economic, social and political constituents to maximise their capital reproduction. The study also indicates that differences exist in ICR practices between firms located in Sri Lanka and firms in other nations in relation to both IC categories and IC elements. These differences are attributed to the unique economic, social and political context of each country.

Keywords: developing country, human capital, intellectual capital, Sri Lanka