Level of Intellectual Capital Disclosure Across Indian and Pakistani Companies

• Author: WASIM UL REHMAN, HAFEEZ UR REHMAN AND HAFIZ GHULAM MUJADDAD

Abstract

The transition of economies from production to knowledge based has captivated the concentration of corporate practitioners. Theory of Resource Based View (RBV) argues that the future performance indicator for sustainable performance for any economy will no longer be physical and financial capital but that would be intangible assets, for instance, people and their knowledge. Corporate sector, now, is in an exploration of new accounting practices in terms of intangible assets reporting into their annual reports which may help them to follow the transition from financial capital to intellectual capital (IC) reporting. With this intent of the study, four leading companies from the sectors of automobiles, textiles and banking from two competing neighbouring countries, Pakistan and India, are being selected for the sample.

In this discourse, this study is undertaken to find out the relative level of IC recording and reporting. A list of 65 items of IC is identified and content analysis is used to demonstrate the level of IC disclosure in both countries. The results of the study postulate that IC reporting in two countries is very low for a selected period of 2012-2013. Out of 65 items of IC, only 3 to 4 common items are being reported by a few companies; thus, suggesting that corporate practitioners need to emphasize more rigorously towards level of reporting for achieving the competitive positioning and sustainable performance of firms.

Keywords: Intellectual capital reporting, Knowledge management, Intangible assets

1. INTRODUCTION

   Undoubtedly, in knowledge oriented economies, intellectual capital (IC) disclosure, whether derived from employees, customer databases, brands, and structural operations attribute substantially to a firm's success for value creation (Burgman and Roos, 2004). IC reporting has achieved significant importance in terms of listed firms. The increasing trend of IC reporting emphasizes the organizations to disclose their intangible assets at their annual reports in view of a key enabler for sustainable performance and value creation (Edvinsson and Malone, 1997).

   Initially, organizations are primarily evaluated based on their financial performance indicators because financial statements scarcely disclose the information about knowledge resources and intangible assets, which predominantly create a pertinent share for corporate value addition. Non- disclosure of IC or intangibles information asymmetry provide negative consequences to organization in terms of possible errors while evaluating risks and future actions of firms due to un-exploitation of resources. However, research indicates that information asymmetry can be reduced through proper IC reporting which can better forecast the risk exposure of a firm and market valuations (Dumay and Tull, 2007).

   Practitioners are continuously endeavoring to report IC into their annual reports voluntarily in order to reduce the information asymmetry and create the transparency among managers and external stakeholders (de Pablos, 2002; Petty and Guthrie, 2000). Due to lack of well accepted accounting frameworks and formal definition of IC in literature, the IC disclosure remains very rare, limited and variable around the world. Further, broad spectrum of IC creates the problem for managers to capture and measure explicitly into their annual reports.

   Besides that, research on IC has achieved a great importance in last few decades (Petty and Guthrie, 2000). Therefore, this phenomenon calls for concentration of business practitioners for recognizing this new resource known as intellectual capital such as business strategies, knowledge workers and corporate culture which has been rigorously debated in literature (Ghosh and Wu, 2007; Rashid et al., 2012; Li et al., 2008). However, given the lack of adequate accounting processes for measuring and reporting these resources, corporate managers have recently begun to voluntarily disclose information pertaining to them and how it contributes to the firms' value creation (Garcia-Meca and Martinez, 2005).

   Prior research acknowledges that IC disclosure helps to capture the hidden value of intangibles which constitute a sustainable competitive advantage for a firm (Barney, 1991; Edvinsson and Malone, 1997). There is evidence that companies investing on intellectual capital frameworks and its disclosure are doing well to achieve sustainable performance (Meritum Project, 2002; Systematic, 2004). Studies also provide useful insights with respect to IC development stages more specifically application of IC on business and management models at different contexts (Tan et al., 2008).

   Numerous studies conducted in the field of IC were based on country specific setting and cross sectional contexts [for example, Williams (2001) in UK; Bontis (2003) in Canada; Brennan (2001) in Ireland; Guthrie and Petty (2000) in Australia; Goh and Lim (2004) in Malaysia; Tan et al. (2008) in Singapore; Oliveras et al. (2008) in Spain; Abeysekera and Guthrie (2005) in Sri Lanka; Chen et al. (2005) in Taiwan; Kamath (2007, 2008) in India; Whiting and Miller (2008) and Wong and Gardner (2005) in New Zealand; Mavridis (2004) in Japan, etc.] These studies highlight the level of IC reporting in annual reports. However, there has been scarcity of efforts regarding IC reporting in selected two important south Asian countries. Therefore, this study views to emphasize level of IC reporting in selected sectors (i.e. automobiles, textiles and banking) of two countries to bridge this gap.

2. LITERATURE REVIEW

   INTELLECTUAL CAPITAL

   There is a convergence of opinions with respect to formal definition of IC. Practitioners and academicians have presented numerous definition of IC in last two decades. The term 'intellectual capital' refers to knowledge resources or intangible assets which can be put to create value and sustainable competitive advantage (Sveiby, 1997; Teece, 2002). It refers to integration of knowledge base capabilities which are crucial to pave the way in maintaining sustainable competitive positioning (Stewart and Ruckdeschel, 1998).

   Initially, the IC was conceptualized to capture the difference between market and book value of assets (Stewart, 1997). Later on, it has been introduced as knowledge assets used to generate value for firms (Edvinsson and Malone, 1997). IC is referred as intangible assets difficult to capture completely at balance sheet in terms of intellectual material, knowledge, information and experience which warrant the sustainable performance of firm (Stewart and Ruckdeschel, 1998). It strengthens the business process capabilities to find the competitive advantage (Youndt et al., 2004). Such convergence of opinion agreed the scholars and practitioners to recognize IC as non-physical and non-monetary resource. It contributes not only to value creation but also in value extraction by knowledge embedded in individual minds, captured in organizations' databases, systems and business processes through proper reporting (Sullivan, 1999; Zharinova, 2011; Youndt et al., 2004).

   Keeping that in view, research has considered different mechanisms and views to constitute what actually the intellectual capital is. However, the...