Impact of Intellectual Capital Disclosure Practices on the Credibility of the Financial Statements

Abstract

Intellectual capital is the knowledge that can be exploited for money-making or other useful purposes. The term combines the idea of intellect or brain-power with the economic concept of capital. Even though there is an impact of intellectual capital disclosure practices on business performances; only the financial capital is recorded in the financial statements. It means that the credibility of the financial statements is understated. Therefore, this study aims to investigate the impact of intellectual capital disclosure practices on the credibility of the financial statements. Further, the relationship between the managerial perception of intellectual capital disclosure practices and the credibility of financial statements has been investigated. As the method, the primary data was collected through a questionnaire. The targeted sample was the financial managers who are directly involved in the preparation of financial statements in public limited companies. 150 questionnaires were distributed covering financial managers of all the sectors using the stratified random sampling method. There were three hypotheses developed covering the major components of intellectual capital as human, customer and social. Correlation analysis was done to test the hypothesis using the SPSS software. It was found that there is a relationship between the managerial perception of intellectual capital disclosure practices and the credibility of the financial statements. Through a regression analysis, it showed that there is an impact of intellectual capital disclosure practices on the credibility of financial statements. The managers believe that the existing reporting practices do not represent the reality of the organizational performance until the intellectual capital is incorporated to the financial statements. Further, they have suggested that there should be a proper mechanism to report the intellectual capital in the financial statements or in the annual reports to avoid such kind of misrepresentation.