Intellectual capital reporting between a developing and developed nation
| DOI | https://doi.org/10.1108/14691930710742871 |
| Date | 24 April 2007 |
| Published date | 24 April 2007 |
| Pages | 329-345 |
| Author | Indra Abeysekera |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Intellectual capital reporting
between a developing and
developed nation
Indra Abeysekera
The University of Sydney, Sydney, Australia
Abstract
Purpose – This paper aims to examine the patterns of intellectual capital reporting (ICR) of large
listed firms in a developing nation, Sri Lanka. The aim of this study is to highlight the differences in
ICR practice between developing and developed nations.
Design/methodology/approach – The paper begins by examining each of the top 30 firms by
market capitalization listed on the Colombo stock exchange in 1998/1999 and 1999/2000. Using the
content analysis method, it reviews the annual reports of these firms to determine the types of
intellectual capital (IC) items reported in Sri Lanka. It then compares these findings with a similar
study undertaken in Australia during the same period.
Findings – The findings in this paper highlight the need for a uniform ICR definition and a reporting
framework that provides comparative and consistent reporting under the auspices of a regulatory
body. ICR differences were identified between Sri Lankan and Australian firms, and it is argued that
these differences can be attributed to economic, social and political factors.
Practical implications – This paper highlights important policy issues for Australia, Sri Lanka
and other nations. These issues are even more pertinent in the light of the gradual international
adoption of the International Financial Reporting Standards (IFRSs), formulated by the International
Accounting Standards Board (IASB).
Originality/value – Most papers on intellectual capitalreporting have focused on firms in developed
countries. This paper offers insights into comparative reporting practices between a developed and a
developing country.
Keywords Intellectualcapital, Sri Lanka, Australia
Paper type Research paper
Overview
Recent changes in the global economy have led to an increasing focus on intellectual
capital (IC). Factors such as globalisation, new technology, relatively free capital,
increased competition, changes in customer demands, the demand for innovation and
changes in economic and political structures, and the growing role of the state in
supporting knowledge economies, are constantly reshaping the way business is carried
out, and highlighting the importance of IC and IC reporting (ICR) for firms (Buckley
and Carter, 2000; Garcia-Ayuso, 2003; Thorne and Smith, 2000; Volberda et al., 2001).
Several authors have taken a long-term view in defining and nature of IC, though
their definitions have varied significantly (Edvinsson and Sullivan, 1996; Brooking,
1997; Edvinsson, 1997; Edvinsson and Malone, 1998; Stewart, 1997, p. x; Klein, 1998,
p. 1; Nasseri, 1998; Saint-Onge, 1998; Ulrich, 1998; CMA (The Society of Management
Accountants of Canada), 1998, p. 3; ASCPA (Australian Society of CPAs) and CMA
(The Society of Management Accountants of Canada), 1999, p. 4; Knight, 1999). For the
purposes of this study, IC is defined as knowledge that can be converted into value
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
Intellectual
capital reporting
329
Journal of Intellectual Capital
Vol. 8 No. 2, 2007
pp. 329-345
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930710742871
(Edvinsson and Sullivan, 1996, p. 358). The IC held by a firm can be thought of as a
form of “unaccounted capital”, to borrow a term used in the traditional accounting
system. This “unaccounted capital” can be described as the knowledge-based equity
that supports the knowledge-based assets of a firm. IC includes both intellectual assets
(IFAC (International Federation of Accountants), 1998, p. 12) and intellectual liabilities
(Caddy, 2000, pp. 141-142).
There is however little discussion in the literature in relation to a definition of the
reporting of IC. Therefore this paper refers to the definition proposed by Abeysekera
and Guthrie (2002) of ICR as “external reporting intended to meet the information
needs common to users who are unable to command the preparation of reports about IC
tailored so as to satisfy, specifically, all of their information needs”.
While several ICR studies have been carried out in developed nations, there is a
dearth of research on the ICR practices of firms located in developing nations and, in
particular, of comparative studies with firms in developing nations. This study seeks
to fill this gap – a gap that has become increasingly significant as developing countries
find themselves competing with firms in developed countries due to globalisation,
lower transaction costs, and more freely available capital. As Daley (2001, p. 5) points
out, in today’s knowledge economy the competitive advantage of firms lies in IC
attached to products and services, rather than in the actual products or services
themselves. In addition, globalisation and the resulting relatively free flow of capi tal
between countries have increased investor interest in investing in developing
economies such as Sri Lanka, in order to maximise their accumulation of capital. As a
result, the Colombo Stock Exchange (CSE) is heavily dependent on foreign investme nt,
making firms listed on the CSE increasingly vulnerable to flows of international capital
migration (CSE (Colombo Stock Exchange), 1998, p. 33; CSE (Colombo Stock
Exchange), 1999, p. 50; CSE (Colombo Stock Exchange), 2000, pp. 34, 67).
Sri Lanka has been chosenas the location for the study of ICR in a developing nation
for five reasons. First, Sri Lanka is a lower middle-income country that typifies a
developing nation (UNDP Sri Lanka, 1998, pp. 5, 42). Second, as a way of directing the
country’s economy toward a knowledge-based economy, the Sri Lankan government
offers reduced corporate taxation ratesand exemptions from direct and indirect taxation
to both foreign and local investors (BOI, 2000, 2003). Third, the Sri Lankan government
heavily invests in maintaining a skilled labour force and a high literacy level, which
makes it easier forinvestors to maximise their returnon capital (The World Bank, 2004).
Fourth, recent amendments to the Intellectual Property Act 1979, which were
implemented to further push Sri Lanka towards a knowledge-based economy, have
strengthened themechanisms for the creation and enforcement of propertyrights, which
is a crucial factorin attracting foreign investors (Codeof Intellectual Property Act No. 40,
2000;USAID (US Agency for International Development, Sri Lanka), 1998, pp. 7-8;
Wickremaratne, 2000). Fifth, the decided reluctance of accounting regulators and
company lawmakers to implement regulations has given firms no choice but to make
voluntary disclosure (The Sunday Times, 1999a, b).
This study attempts to report findings in relation to ICR practices in a developing
nation, Sri Lanka, and then compare them with a previous study of a developed nation,
Australia. The study has used an established framework on ICR to determine the
variables of IC that cause such differences. It then argues for a policy framework for
consistent and comparable ICR that would allow for more meaningful decision-m aking
JIC
8,2
330
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