Why Companies Disclose Intellectual Capital in Corporate Reports

This report provides a comprehensive analysis of intellectual capital (IC) disclosure in corporate annual reports. It explores the components of IC, including human, structural, and relational capital, and examines why companies choose to disclose this information. The report highlights the shift from tangible to intangible assets, the role of IC in a knowledge economy, and the importance of managing "artistic" properties to increase shareholder equity. It discusses the challenges in measuring and reporting IC, including information asymmetry and the lack of standardized accounting practices. The report also examines the impact of IC disclosure on market value, company ratings, and investor confidence. It concludes that enhanced IC disclosure is associated with a lower cost of capital and better market participation, emphasizing the importance of IC for policymakers and regulators. The report draws on various journal articles and research to support its findings.

Intellectual
capital

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Why would companies choose to disclose Intellectual Capital information in the narrative
sections of corporate annual reports?..............................................................................................3
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

journal articles
Why would companies choose to disclose Intellectual Capital information in
the narrative sections of corporate annual reports? Buenechea-Elberdin,
2017

Intellectual capital
Intellectual capital - Intellectual capital is considered as the most important capital element
which is present in a business to facilitate its operations. The intangible and tangible
intellectual capital which is present in a business is helpful in achievement of various
objectives and goals of an organisation. The human, structure and relational capital are one
of the most important source of capital which is required to run as well as to develop a
business in a precise manner.
Keywords: word; intellectual property, economics, business
Subject classification codes: Economics Hickman, L.E., 2020. Information
asymmetry in CSR reporting: publicly-traded versus privately-held firms.
Sustainability Accounting, Management and Policy Journal.
Jamil, A., Ghazali, N.A.M. and Nelson, S.P., 2020. The influence of corporate
governance structure on sustainability reporting in Malaysia. Social Responsibility
Journal.
Manes‐Rossi, F., Nicolò, G. and Argento, D., 2020. Non-financial reporting formats in
public sector organizations: a structured literature review. Journal of Public Budgeting,
Accounting & Financial Management.
Introduction
As stated by (Buenechea-Elberdin, 2017), human, structural and relational capitals are
considered to be one of the major parts of intangible capital. With the rapid increase in
information markets, the planet is rapidly transitioning from a "economic" to a "knowledge"
economy, and the country's economy has drawn the interest of the entire world. The role of
information management, intellectual capital, and creativity in economic growth is bolstered by
the emergence of the digital economy. Learning and command of IC have become "primary"

success drivers in international competitiveness in today's innovation-driven environment.
Intellectual Capital (IC) components are rapidly determining and driving business conditions in
the twenty-first century. According to (Cerbone, and Maroun, 2020)“ In the era of information
and intelligence, successful use of IC is the most important element that decides the performance
of a business,” Survilaite3 recently said. Companies have moved their emphasis from
investments in real assets to acquisitions in intangible assets, as the conventional viewpoint has
changed. Human capital, institutional capital, and consumer capital are all called components of
IC.” Intangible properties (or IC) must be measured and recorded in a systematic and reliable
manner. Human capital plays an important role in a business by maximising production quality
and satisfying customers.
According to the views of (Ginesti, 2018), structural and relational capital are very relevant
because they have a direct and substantial impact on the stock valuation of the company.6 As a
result, accounting standards should be concerned with this immediately. The use of IC data in
corporate financial statements will “result in an accounting records that more objectively
represents the industry's worth, and shows all related assets from which the company plans to
derive profits in the coming few years,” according to the authors. According to various figures,
“abstract” properties actually account for 60-75 percent of value proposition on aggregate. For
this reason, For example, Lev8 analyzed the investment patterns of 1929 and 1995 and found
that "in 1929, nearly 70% of U.S. firms' investment went into tangible assets (TA) and 30percent
of the total went into intangible resources." In 1995, however, the pattern was corrected. As per
the views of (Gangi, Daniele, and Varrone, 2020), it was discovered that a large portion of
investment goes into intangibles like design and technology, IT tech, schooling and key
competencies, and the internet.” Intangible assets (or IC) are “company accomplices and

suppliers of value, as they convert capital into value.” output of added value.” As a result,
corporations are devoting a lot of time and money to managing their "artistic" properties in order
to increase shareholder equity. Despite the awareness and competition for IC data, prior literature
shows that there is a pervasive and substantial inconsistency in the ‘quantity' and ‘quality' of
statistics provided by businesses on this critical resource. Present economic and market indices
are tracking a decreasing proportion of the global economy, resulting in a deficit and
inefficiency. The growing knowledge "asymmetry" between "educated" and "uninformed"
investors is due to inconsistency in the reporting of IC-related data. This creates an ideal
environment for knowledgeable buyers to extract higher abnormal returns. 11 As a result, IC is
gradually being recognised as playing a larger role in achieving and retaining "competitive"
advantage and shareholder "benefit." This obviously necessitates a re-evaluation of corporate
standards, data reporting, and decision-making processes.
Logical analysis
According to (Hickman, 2020), Monitoring and monitoring are also in its infancy. Human capital
such as accountants, company executives, and policymakers are all grappling with the
problem. Concepts and implementation in depth are the one would imagine, there are several
different definitions of IC. “It has become common to conclude that a company's IC is the
amount of its human capital (talent), institutional capital (intellectual property, methodologies,
applications, records, and other information artifacts), and consumer capital. In reality, Sveiby14
was the first to classify IC into three categories of intangibles: human resources, structural
capital, and strategic capital. Capital and Customer capital—a classification that was later
updated and expanded to include relational capital in place of customer capital. In Box-1, you'll
find some IC cases. The diagram is just a general representation of the components of IC, since
the elements mix and communicate with one another, as well as conventional capital elements
(physical objects and monetary elements), in forms that are particular to each company to
generate value. Investors and emerging global economies are putting a lot of emphasis on the
quality of knowledge and data. As stated by, (Jamil, Ghazali, and Nelson, 2020), Any

organizations have voluntarily reported facts detailing their IC expenditures as a result of market
success review. Hopefully, this information would round out the financial statements,
demonstrate companies' potential to build leverage in the future, and lend confidence to the
information summarized in annual financial statements.
Figure 1Explanation of elements in intellectual capital
Annual reviews
As stated by (Cabrilo, 2018), annual reviews related to human and structural capital
provide a wealth of knowledge for company as well as for customers, who would be able to get a
good understanding of the company's general success over the previous year. It's important to
remember that many annual reports aren't conventional reports with a lot of text; instead, many
businesses use a lot of illustrations and photographs to create a visually pleasing paper.
Intangible assets which are referred to human and structural capital commodities that is not
material. An intangible asset purchased by a third party is originally valued at its fair market
value. When an intangible value is created in-house, it is recorded as a cost as it is incurred.
Since patents, licences, and trademarks are the only ones accepted as properties, this would

restrict the acknowledgment of most IC to what is bought from outside the company. Human
capital and most of the structural capital, such as internally developed software, trademarks, and
brazenness, are not valued according to generally agreed accounting standards. The valuation of
intellectual resources, as well as much of the systemic importance, is not recognized by generally
agreed accounting standards. Internally produced software, trademarks, and labels are examples
of money. The FASB used the four identification requirements contained in FASB Concept
Statement No. 5.22 to create the Statement. These conditions are: (1) the item satisfies the
description of an asset, (2) the item can be measured with adequate accuracy, (3) the information
can influence actions, and (4) the information represents what it appears to represent, is
verifiable, and impartial.
According to (Allameh, 2018), the International Accounting Standards Committee and its
national counterparts face a difficult task in establishing accounting standards. Reporting
requirements for IC 42. So far, the measuring references have become so firm-specific, and no
series of metrics might expect to be broad enough to cover the needs of a wide range of
international and business contexts. At this stage, auditing any of the various systems will be
futile. According to (Paternostro, 2020), when ranking firms, the use of IC should be given due
consideration for optimum utilisation of resources. Since IC reporting has an impact on share
pricing, it can result in a rise in company ratings as a result of increased market capitalization. In
the short term, voluntary monitoring is the only option. In the short term, voluntary monitoring is
the only option. It would be up to the demands of the financial markets in the long run. As told
by (Polizzi, and Scannella, 2020), whether investors and experts agree, Companies would have
no choice but to please their audience until they believe that IC reporting is useful in describing
market success. Meanwhile, a company should encourage the role of human and structural
capital in formation of several organisational objectives.
CONCLUSION
As per the above discussion, it is analysed that enhanced evidence capita information
disclosure is related to cost of capital. It suggests that investors have to find information which is
useful for providing value for firms. That is why improved intellectual capital disclosure is
beneficial for market participation. It enables in context of having relevant information present
for the firm. It provides help for minimising the cost available for private information. This type
of information is very important for policy makers. The reason behind this is it provides the

development of base for regulators. This provides evaluation of cost and benefit of potential
regulation associated with intellectual capital information. There are firms which uses cost of
capital in their capital investment decisions. The finance director perceived disclosure for
influencing cost of capital. As per the findings from above report, it is analysed that managers
can have insight for enhancing disclosure of intellectual capital information about their firms.

REFERENCES
Books and Journals
Cerbone, D. and Maroun, W., 2020. Materiality in an integrated reporting setting: Insights using
an institutional logics framework. The British Accounting Review, 52(3), p.100876.
Gangi, F., Daniele, L.M. and Varrone, N., 2020. How do corporate environmental policy and
corporate reputation affect risk‐adjusted financial performance?. Business Strategy and
the Environment, 29(5), pp.1975-1991.
Hickman, L.E., 2020. Information asymmetry in CSR reporting: publicly-traded versus
privately-held firms. Sustainability Accounting, Management and Policy Journal.
Jamil, A., Ghazali, N.A.M. and Nelson, S.P., 2020. The influence of corporate governance
structure on sustainability reporting in Malaysia. Social Responsibility Journal.
Manes‐Rossi, F., Nicolò, G. and Argento, D., 2020. Non-financial reporting formats in public
sector organizations: a structured literature review. Journal of Public Budgeting,
Accounting & Financial Management.
Paternostro, S., 2020. Integrated Reporting and Social Disclosure: True Love or Forced
Marriage? A Multidimensional Analysis of a Contested Concept. In Non-Financial
Disclosure and Integrated Reporting: Practices and Critical Issues. Emerald Publishing
Limited.
Polizzi, S. and Scannella, E., 2020. An empirical investigation into market risk disclosure: is
there room to improve for Italian banks?. Journal of Financial Regulation and
Compliance.
Allameh, S.M., 2018. Antecedents and consequences of intellectual capital. Journal of
Intellectual Capital.
Ginesti, G., Caldarelli, A. and Zampella, A., 2018. Exploring the impact of intellectual capital on
company reputation and performance. Journal of Intellectual Capital.
Cabrilo, S. and Dahms, S., 2018. How strategic knowledge management drives intellectual
capital to superior innovation and market performance. Journal of knowledge
management.
Buenechea-Elberdin, M., 2017. Structured literature review about intellectual capital and
innovation. Journal of Intellectual capital.