Management, Measurement and Disclosure of Intellectual Capital Information in Financial Statements: An Empirical Study of a Developing Economy

International Journal of Management Sciences and Business Research, Vol-5, Issue 11, 2016

18 Pages Posted: 7 Dec 2016

Date Written: December 1, 2016

Abstract

In the 21st century, economic growth will be driven by people leveraging their know‐how, innovation and reputation, surpassing the contributory role of capital, land and equipment. In today’s knowledge-based economies, Intellectual Capital (IC), in addition to financial and physical capital, plays a significant role in the value creation process of organizations. It is argued that the success of many 21st century organizations will lie in their ability to unlock and exploit their IC to obtain maximum organizational advantage. In an ever increasing competitive world, measurement, management and disclosure of IC are an important and useful means to keep investors well-informed. IC management is a wide process, which aims to utilize and develop the IC and maximize the outcome of IC of the firm. Currently, IC disclosure is not compulsory, and IC disclosure is done by select few companies, purely on voluntary basis. Unfortunately, IC measurement and disclosure in the developing economy are still at a very nascent stage, especially in India. This study attempts to provide an insight into the style of IC disclosure done by the Indian companies. It is said that “what is measured in companies is also what finally gets managed.” Traditional accounting practices will need to assimilate innovations that seek to meaningfully represent the true value of the intangible assets of the company. In the knowledge age, it is the availability of IC and its effective use that determines the failure or success of an enterprise. IC is almost impossible to measure accurately but its returns can be nearly infinite. This paper investigates voluntary ICD by select Indian companies. This is an exploratory study of ICD and measurement by the 8 Indian companies over 5-year period, using content analysis and market value added (MVA) as research methodologies. IC is valued at market value (MV) minus book value (BV). The annual reports of the selected companies were collected from their respective web sites. As part of present study, various statistical techniques have been used to analyze the data. The findings show that on an average, the sample companies reported a positive value of IC; significant correlation has been noticed between tangible assets (TA) and net operating profits (NOP). However, no significant difference was found between percentage of IC to MV, and per cent of TA to MV. The study finds wide-disparity, low-level, and purely voluntary nature of the ICD made by the selected companies. Unfortunately, the omission of IC information may adversely influence the quality of decisions made by shareholders, or lead to material misstatements. Such challenges may be addressed by devising somewhat innovative accounting standards — beyond the existing ones — as necessary tools for authorities seeking to manage the IC of an entity. We recommend to the international accounting bodies, to take the lead by establishing a harmonized ICD standard, and provide guidance to the big listed companies for proper measurement and disclosure of IC, both for internal and external users.

Keywords: Intellectual capital, disclosure, market and book value, developing economy.

Suggested Citation

Bhasin, Madan Lal, Management, Measurement and Disclosure of Intellectual Capital Information in Financial Statements: An Empirical Study of a Developing Economy (December 1, 2016). International Journal of Management Sciences and Business Research, Vol-5, Issue 11, 2016, Available at SSRN: https://ssrn.com/abstract=2880396

Madan Lal Bhasin (Contact Author)

Universiti Utara Malaysia ( email )

Sintok, Kedah Darul Aman 06010
Malaysia
01114567247 (Phone)

HOME PAGE: http://www.uum.edu.my

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