Intellectual Capital – A Way Forward from Traditional Accounting

INTRODUCTION

This is an era of knowledge-based economy, where organizations mainly focus on its two vital sources for generating value and profit making for the company. Those are tangible and or intangible areas. In case of intangible resources, it is believed that stake holders prefer the importance of disclosing intellectual capital than the tangible capital employed in determining the financial performance of the companies. Thus, intellectual capital disclosure is an emerging concern for both the stake holders in the corporate world and the academic research.

A WAY FORWARD FROM TRADITIONAL ACCOUNTING

The conventional accounting practices have no scope to keep pace with the current dynamic environment. This drawback in traditional accounting pushed many academic practitioners to find ways as how to value and disclose intellectual capital in financial statements. Due to lack of intellectual capital reporting standards, security factors and cost factors organizations are finding challenging to disclose in the annual reports. However, considering the future prospectus of the company, organizations have now come forward in measuring and reporting on their organizational Intellectual Capital. To include Intellectual Capital Disclosure (ICD) in the organizational financial reporting, was initiated in the last decade of the twentieth century by a few corporations. This has led to the development of numerous measuring techniques of IC both in financial and non-financial values.

HOW THE GAP CAN BE BRIDGED AND WHERE DO WE STAND?

Research on ICD in other developing countries found that IC reporting phenomenon is highly recognized and well-tailored in its annual reports.

To have long term sustainability and survival, off late the management of the company have started to disclose voluntarily the intellectual capital and its human capital related information in their annual reports due to the following reasons.

WHY IS ICD REQUIRED?

1.To bridge the gap between book value of the shares and market value of the shares.

2.To provide overall and real information about the full value of the company.

3. To reduce information asymmetry between the company and the market.

4.To increase the ability to raise capital by providing intangibles valuation.

5.To enhance the organization’s reputation.

In the context of Indian corporate firms, many companies have started communicating to its stake holders about its intellectual capital through its annual reports.  The very limited availability of literature on the reporting of ICD in Indian corporate sector presents a window of opportunity for more research in this area.