Disclosure of non‐financial information in the annual report. A management‐team perspective
| DOI | https://doi.org/10.1108/14691931111123421 |
| Published date | 19 April 2011 |
| Pages | 277-300 |
| Date | 19 April 2011 |
| Author | Susanne Arvidsson |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Disclosure of non-financial
information in the annual report
A management-team perspective
Susanne Arvidsson
Department of Business Administration,
School of Economics and Management, Lund University, Lund, Sweden
Abstract
Purpose – The purpose of this paper is to analyse the management teams’ views regarding different
aspects related to the disclosure of non-financial information in the annual report. The focus is on the
following aspects: incentive, quantity, focus, use of non-financial key performance indicators (KPIs)
and trends.
Design/methodology/approach – The data are based on a comprehensive questionnaire survey
addressed to investor-relation managers (IRMs) at the largest companies listed on the Stockholm Stock
Exchange.
Findings – The study confirms an increasing focus of non-financial information related to intangible
assets in corporate disclosure. This increase appears to be both regulatory and demand driven.
Encouraging indeed is that management teams seem to have acknowledged the importance not only to
describe the less tangible values per se, but also to explain the roles they play in the value-creation
process and in corporate strategy. Furthermore, the study reveals a trend shift from research and
development (R&D) and relational information towards corporate social responsibility (CSR) and
employee-related information, an increasing number of non-financial KPIs and a positive attitude to
mandatory requirements. Overall, the findings indicate that voluntary disclosure compensates for the
deficiencies of financial statements to properly disclose intangible assets. This may lessen the risk of
the argued impairment of the efficient allocation of resources on the stock market.
Practical implications – The findings reveal that quite a few challenges lie ahead in shaping
efficient corporate disclosures where also intangible assets are in focus. The most critically relate to
dealing with the concerns of reliability and comparability associated with disclosures of intangible
assets and their related non-financial KPIs. This needs to be taken on promptly by management teams,
policy makers and financial market regulators if the corporate-disclosure process shall function
efficiently and facilitate decreased information asymmetry and uphold an efficient allocation of
resources on the stock market.
Originality/value – Herein not only one aspect related to disclosure of non-financial information is
being analysed, but also several and from a management-team perspective, which is a perspective
often neglected for the sophisticated-user perspective.
Keywords Intangible assets,Intellectual Assets, Non-financialinformation, Disclosure, Annualreport
Paper type Research paper
1. Introduction
With the emergence of the knowledge-based and innovation-driven era, today’s
companies increasingly rely on intangible assets, also referred to as intangibles or
intellectual assets, in their value-creation process. This shift in the value-creation
process, from tangible assets to intangible assets, is argued to be manifested in an
increasing gap between companies’ market and book value (Lock Lee and Guthrie,
2010; Holland, 2001; Stewart, 1997; Sveiby, 1997). A lot of research attention has been
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Disclosure of
non-financial
information
277
Journal of Intellectual Capital
Vol. 12 No. 2, 2011
pp. 277-300
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691931111123421
focused on exploring the invisible value omitted from financial statements (Sriram,
2008; Lev and Radhakrishnan, 2003; Lev, 2001; Brown et al., 1999; Lev and Zarowin,
1999). Empirical studies indicate that up to 80 per cent of a company’s market value
may not be reflected in its financial statements (Lev, 2001; Blair and Kochan, 2000).
Today, there is a unison agreement among both scholars and practitioners that
corporate value is not adequately portrayed in traditional financial statements due to
its inability to capture the value stemming from intangible assets. This inability is
argued to increase information asymmetry and, thus, cause an impairment of the
efficient allocation of resources on the stock market (Kristandl and Bontis, 2007; FASB,
2001a; Diamond and Verrecchia, 1991). To reduce some of these problems, there is
argued to be a need to focus more on non-financial information in corporate disclosure
since it is considered to capture at least some of the value stemming from these
intangible assets (Alwert et al., 2009; Sriram, 2008; Goodman, 2006; Rau, 2005; Holland
and Johanson, 2003; Mavrinac and Siesfeld, 1997; Eccles and Mavrinac, 1995). Area s
within which non-financial information are considered to contribute to more
informative and complete disclosure on intangible assets include human (Royal and
O’Donnell, 2008), relational (April et al., 2003), organizational (Lev and Radhakrishnan,
2003), corporate social responsibility (CSR) (Arvidsson, 2010) and environme ntal (Gray
et al., 2001).
Voluntary disclosure is considered to be vital in solving the alleged problems with
traditional financial reporting (see, e.g. Burgman and Roos, 2007; Leadbeater, 2000). By
decreasing information asymmetry, voluntary disclosure is found to result in a lower
average cost of both equity (Botosan and Plumlee, 2002; Richardson and Welker, 2001)
and debt capital (Sengupta, 1998), decreased bid-ask spreads (Petersen and Plenborg,
2003; Welker, 1995), and increased stock liquidity (Healy et al., 1999; Diamond and
Verrecchia, 1991). All of these well-sought outcomes are crucial in upholding an
efficient allocation of resources on the stock market. Thus, in order to overcome the
insufficiency of financial statements and obtain the above benefits, companies are
urged to improve their disclosure on intangible assets (Sriram, 2008; Burgman and
Roos, 2007; Chen et al., 2005; Vandemaele et al., 2005) and also explain the roles these
assets play in their value-creation strategies (Bismuth and Tojo, 2008). As stated
above, this is primarily argued to be achieved by including more non-financial
information focused at intangible assets and also by developing relevant non-financial
key performance indicators (KPIs) (see, e.g. Alwert et al., 2009; EFFAS Commission on
Intellectual Capital, 2008).
The need for a shift in focus seems, however, not to have been fully acknowledged
by management teams (Lev and Radhakrishnan, 2003; Johanson et al., 2001). Beca use
of the findings that the annual report is a good proxy for the level of voluntary
disclosure a company provides across all different forms of disclosure, e.g. press
releases, initial public offerings (IPOs), web sites, company brochures, newsletters
(Gelb, 2002; Botosan, 1997; Lang and Lundholm, 1993), earlier studies have primarily
focused on examining the annual report. A review of earlier studies confirms that
non-financial disclosure related to intangible assets is not favoured by management
teams when they structure their disclosure (see, e.g. Lock Lee and Guthrie, 2010).
However, there are some exceptions. Nordic companies in general and Swedish
companies specifically are found to be precursors when voluntary disclosure on
intangible assets is concerned (Lin and Edvinsson, 2008; Vandemaele et al., 2005;
JIC
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