Intellectual capital disclosure by traditional US companies

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Intellectual capital disclosure by traditional
US companies: a longitudinal assessment
The Authors
Blaise M. Sonnier, School of Accounting, Florida International University, Miami, Florida,
USA
Kerry D. Carson, Moody College of Business, University of Louisiana at Lafayette, Lafayette,
Louisiana, USA
Paula Phillips Carson, Moody College of Business, University of Louisiana at Lafayette,
Lafayette, Louisiana, USA
Abstract
Purpose – The paper aims to evaluate 141 publicly traded US firms in the traditional sectors of
the economy to assess intellectual capital disclosure levels.
Design/methodology/approach – Content analysis was conducted using 10-K annual reports.
Findings – It was found that traditional sector companies had a mean disclosure of intellectual
capital of 24.227 in fiscal year 2000 and 27.709 in fiscal year 2004 (t=3.68, df = 140, p=0.01).
This supported the authors hypothesis that traditional sector companies would show an increase
in the level of intellectual capital disclosure in 2004 as compared to 2000. Within the total
sample, 78 companies increased their intellectual capital disclosure in fiscal year 2004 as
compared to fiscal year 2000 (z=−3.4756, p=0.01).
Research limitations/implications – While the authors generated 121 phrases to tap the
intellectual capital construct, there may be other word combinations given the differences in
vocabulary between academia and the corporate world.
Practical implications – These findings are particularly noteworthy because traditional sector
companies are capital intensive and are reliant upon fixed assets which are reported on the
balance sheet. This study suggests that even managers in the traditional sectors of the US
economy are coming to recognize the growing importance of intellectual capital.
Originality/value – This is the only longitudinal study to focus on intellectual capital disclosure
of traditional firms in the USA, and this research was conducted over the time that the Financial
Accounting Standards Board called for increased disclosure of intangible assets.
Article Type:
Research paper
Keyword(s):
Intellectual capital; Disclosure; Intangible assets; Annual reports; United States of America.
Journal:
Journal of Accounting & Organizational Change
Volume:
4
Number:
1
Year:
2008
pp:
67-80
Copyright ©
Emerald Group Publishing Limited
ISSN:
1832-5912
1 Introduction
In 2001, the US Financial Accounting Standards Board (FASB) issued a report that encouraged
firms in all sectors of the economy to increase the level of disclosure of their intangible assets
and intellectual capital in the interest of providing increased transparency and understanding by
investors, creditors and other stakeholders. The FASB is the body charged with establishing
generally accepted accounting principles that apply in the USA. It establishes these principles by
issuing Statements of Financial Accounting Standards (SFAS) that govern the particular subject,
topic or matter at issue.
The current accounting principles and rules in the USA were developed at a time when firms
relied upon the traditional manufacturing model in the production of their goods and products.
The primary resources required for the success of a firm operating under the traditional
manufacturing model are land, plant and equipment, machinery, and raw materials. Because our
current accounting model was developed at a time when knowledge-based assets were not
considered to be valuable resources of the firm, it is argued by many that the knowledge-based
assets central to many businesses today are inadequately accounted for in many firm's financial
statements. If the argument is accepted, one may question whether the traditional accounting
model is adequate to meet the information needs of the users of financial statements in a
knowledge-based economy (Dontoh et al., 2004; Garcia-Ayuso, 2003; Kannan and Aulbur,
2004; Lev and Zarowin, 1999).
2 Overview of the US accounting model
SFAS No. 141, entitled “Business Combinations” provides rules that govern the initial
measurement and recognition of intangible assets and goodwill acquired in a business
combination, including guidance on whether an intangible asset so acquired should be
recognized as an asset independent of goodwill. SFAS No. 142 entitled “Goodwill and Other
Intangible Assets” governs the initial and subsequent accounting for all internally developed
intangible assets in the USA with the exception of research and development costs and computer
software costs which are covered in SFAS No. 2 and SFAS No. 86, respectively, (Carmichael
and Rosenfield, 2003; Delaney et al., 2004; Williams and Carcello, 2004).
The accounting rules applicable to intangible assets acquired from third parties vary from those
for internally-developed intangible assets. An intangible asset acquired from a third party either
individually or as part of a group of other assets (other than in a business combination) is
recognized and measured based on its fair market value. In this situation, the purchase price is
allocated among the assets acquired (tangibles and intangibles) based on their respective fair
market value and goodwill is not recognized as a result of the transaction (Carmichael and
Rosenfield, 2003; Williams and Carcello, 2004).
An intangible asset acquired in connection with a business combination will be recognized or
capitalized for accounting purposes if it meets one of the criteria outlined in SFAS 142.
Examples of intangible assets that may meet these criteria include: government granted
franchises for cable, utility or other similar services; trademarks, service marks, and trade names;
customer lists; covenants not to compete; computer programs; technical drawings; customer
routes; internet domain names; patents and copyrights; and secret formulas and processes
(Carmichael and Rosenfield, 2003; Delaney et al., 2004; Williams and Carcello, 2004).
SFAS No. 142 provides that the costs of internally developing, maintaining and restoring
intangible assets that are not specifically identifiable, have indeterminate lives or that are
inherent in a continuing business and related to the business as a whole are expensed as incurred
(Carmichael and Rosenfield, 2003; Williams and Carcello, 2004). Stated another way, in order
for costs incurred by a firm related to an internally-generated intangible asset to be capitalized
under SFAS No. 142, each of the following three criteria must be met. The costs must be
identifiable with the intangible asset. The intangible asset must have a determinate life. Finally,
the costs incurred must not be an inherent part of the business. Given these requirements, the
general rule is that the costs associated with internally-generated intangibles are expensed as
incurred as opposed to being capitalized as assets (Carmichael and Rosenfield, 2003; Williams
and Carcello, 2004).
With regard to research and development costs, SFAS No. 2, “Accounting for Research and
Development Costs,” requires that they be charged as an expense when incurred. SFAS No. 2
also requires the disclosure of total research and development costs charged as an expense each
period. Likewise, the costs associated with developing computer software that is to be sold,
leased or otherwise marketed are to be expensed when incurred until it is established that it is
technically feasible to produce the software (Carmichael and Rosenfield, 2003).
Generally stated, the traditional accounting model fails to account for the value of internallygenerated intangible assets on the balance sheet of the firm. For this reason, information
provided to investors by the traditional accounting model has lost its value relevance over time
due to the increased importance of intangibles and intellectual capital in our economy (GarciaAyuso, 2003; Lev and Zarowin, 1999; Dontoh et al., 2004). At the same time, firms have an
incentive to provide potential investors and stakeholders with relevant information about their
intellectual capital due to its value and performance-creating characteristics of intangibles and
intellectual capital. Increased voluntary disclosure may increase the number of analysts
following a company and may ultimately lower the firm's cost of capital (Bontis, 2003).
Increasing the level of a firm's voluntary disclosure may also reduce the volatility of a firm's
stock price (Botosan, 1997; Healy and Palepu, 2001; Lev, 2001).
Several studies have been undertaken to determine the extent to which firms with significant
intangible assets, particularly in high-technology, knowledge-intensive sectors of the economy,
have used voluntary disclosures to overcome the failure of the traditional accounting model to
provide value relevant information. It has been argued that firms that perceive traditional
accounting reports and disclosures to be inadequate will voluntarily provide supplementary
information on intangible assets and intellectual capital to convey relevant information to
investors, lenders and other stakeholders (Amir and Lev, 1996; Gelb, 2002; Tasker, 1998). These
voluntary disclosures may be in the firm's annual reports, quarterly reports, voluntary
publications, press releases, or investor relations programs (Gelb, 2002).
In a study of US companies, Tasker (1998) reported that publicly-traded firms with significant
levels of intangible assets are more likely to host quarterly conference calls as a means to provide
supplemental, voluntary disclosures to overcome the inadequacies of traditional accounting
reports. Firms with extensive research and development and advertising expenditures, and higher
levels of intangible assets, also rely on voluntary disclosures to convey relevant information to
investors. In fact, Gelb (2002) found that firms with higher levels of research and development
and advertising expenditures relied more heavily on their investor relation programs or voluntary
publications than on their annual reports in making these disclosures.
Dontoh et al. (2004) argue that the decline in the value relevance of traditional accounting data
may be caused in part by the availability of other information to investors. Regressing stock
prices on earnings and book values, Dontoh et al. (2004) confirmed prior studies that the value
relevance of traditional accounting data has declined over time. By investigating the effect of
trading activity caused by changes in investor beliefs that could not be attributable to accounting
data, which was referred to in the study as non-information based trading, these researchers
suggested that the decline in the value relevance of accounting data were related to noninformation-based trading. Although Dontoh et al. (2004) did not identify the sources of this
other information that may be the basis of non-information based trading, possible sources could
be disclosures by firms in their investor relation programs, investor conference calls, press
releases, and annual reports.
In recognition of the failure of the traditional accounting model to provide value relevant
information about the intangible assets and intellectual capital of a firm, the FASB issued a
report in 2001 that encouraged firms to increase the level of disclosure of these resources. The
years selected for this study, namely fiscal year 2000 and fiscal year 2004, allows an evaluation
of the progress that has been made toward the FASB's objective that firms increase the level of
disclosure of their intangible resources and intellectual capital.
The growing importance of intellectual capital to firms in all sectors of the economy, the failure
of the traditional accounting model to provide relevant information regarding the same, and the
incentive of firms to provide investors with value relevant information all provide firms with a
reason to disclose information regarding their intellectual capital. Based on the foregoing, the
following hypothesis is offered:
H1. Traditional sector companies in the USA have increased the level of their intellectual capital
disclosure in their annual report for the 2004 fiscal year as compared to the 2000 fiscal year.
3 Intellectual capital construct
The terms “intangible assets” and “intellectual capital” have been used interchangeably and
include knowledge-based assets, such as patents, copyrights, trade secrets, processes, procedures,
and employee know-how, and other intangible assets which have not traditionally been
considered to be knowledge-based, such as corporate culture, charisma of leaders, and customer
loyalty (Andriessen, 2004; Lev, 2001). Intangible assets also include reputation, brand image,
technical know-how, in-house knowledge, efficient procedures, corporate culture, ability of
managers to work together, patents, trademarks, trade secrets, and other knowledge-based assets
(Barney, 1991; Bharadwaj, 2000; Fahy, 2000; Grant, 1991; Hall, 1992; Teece, 1998; Wernerfelt,
1984). These resources are important to a firm because of their contributions to future earning
potential, leading Hall (1992) to refer to intangible resources as the feedstock of sustainable
competitive advantage.
Knowledge-based assets in particular have generated much interest as advantage-creating
resources. Bontis (2001) argues that the following list of recently invented terms evidence the
increased importance of knowledge assets in recent years: intellectual capital, knowledge capital,
knowledge organizations, learning organizations, organizational learning, information age,
knowledge era, information assets, intangible assets, intangible management, hidden value, and
human capital. He points out that “these are descriptors belonging to a new paradigm where
sustainable competitive advantage is tied to individual workers' and organizational knowledge”
(Bontis, 2001, p. 41). When compared to physical assets, knowledge-based assets provide many
advantages. They can be deployed simultaneously to multiple locations for multiple projects.
Instead of experiencing diminishing returns like physical assets, knowledge assets often
experience increasing returns. Also, they are renewable in that knowledge often creates more
knowledge, and the marginal cost of supplying an additional unit of knowledge to an end-user is
essentially zero (Seetharaman et al., 2004; Shaikh, 2004).
No matter what names are used for intangible assets, whether they be absorptive capacity, core
competencies, or organizational memory, these types of invisible assets are the ones that are
advantage creating resources (Sanchez et al., 2000; Hall, 1992). In fact, Conner (2002) suggests
that intangible resources are the only real strategic asset. King and Zeithaml (2001) concluded
that knowledge-based intangible resources create competitive advantage and higher
organizational performance. Ordonez de Pablos (2004) also recognized that it was knowledgebased resources that provide the firm with a competitive advantage in the changing economy.
Given the rising importance of the intellectual capital construct, a focus of the literature has been
on delineating its components. One multi-dimensional model posits that intellectual capital
consists of:



employee competence;
internal structure; and
external structure (Sveiby, 1997).
The “employee competence” component deals with human capital which involves the capacity of
employees to create a wide variety of assets. The “internal structure” component includes
organizational capital and intellectual property such as patents, concepts, models, organizational
structure, and computer and administrative systems. The “external structure” involves both
customer capital and supplier capital (Sveiby, 1997). Intellectual capital was operationalized in
this study to tap this multi-dimensional construct.
4 Prior studies
Content analysis studies have been undertaken to evaluate the voluntary disclosure of intellectual
capital in the annual reports of firms in a number of countries including the UK (Williams,
2001), Ireland (Brennan, 2001), Canada (Bontis, 2003), Italy (Bozzolan et al., 2003), Malaysia
(Goh and Lim, 2004), Hong Kong, Australia (Guthrie et al., 2004a), The Netherlands, France,
Germany (Vergauwen and Alem, 2005), and the USA (Abdolmohammadi, 2005).
Abdolmohammadi (2005) examined the overall level of intellectual capital disclosure of USA
firms listed on the Fortune 500 between 1993 and 1997. While the increase in disclosure relating
to brand and proprietary processes was statistically significant for these companies in 1997 as
compared to 1993, there was not a statistically significant increase in the overall level of
intellectual capital disclosure during that time period. This is one of the few published studies in
recent years in which the author was unable to accept the hypothesis that the level of intellectual
capital disclosure had increased during the time period being examined.
The purpose of this study is to examine intellectual capital disclosures of US firms over a more
recent time period. Specifically, we undertake a longitudinal examination of the intellectual
capital disclosure practices of USA publicly traded companies in the traditional sectors of the
economy in an effort to address whether there has been an increase in the level of their
intellectual capital disclosure between 2000 and 2004 in their annual report. This compares the
level of the intellectual capital disclosure of US firms in the traditional sectors of the economy
one year prior to the issuance of the FASB's recommendation that firm's increase the level of
such disclosure with the level of such disclosure three years after the FASB's recommendation.
A firm's annual report is one of the most frequently used sources of information to the
investment community (Bontis, 2003). In the USA, all publicly-traded firms are required to file a
Form 10-K with the Securities and Exchange Commission (SEC). The Form 10-K must be in the
compliance with regulations issued by the SEC and must be on the form required by the SEC. A
firm's 10-Ks are available to members of the general public either by request from the SEC or the
firm. Additionally, a firm's 10-K can be obtained from the SEC's web site (www.sec.gov) and in
most cases on the firm's web site. The Form 10-K of a firm will often contain more detailed
information about a firm than its annual report. In fact, many firms in the USA have substituted
the Form 10-K for the traditional annual report and have discontinued issuing a separate annual
report. For purposes of this study, the term “annual report” refers to the Form 10-K filed with the
SEC on an annual basis.
5 Methodology
The North American Industry Classification System (NAICS) was utilized to compile the list of
traditional sector companies from which the sample of the study was randomly selected. The
following NAICS codes with descriptions were used in the study: 23, construction (n=64); 313,
textile mills (n=9); 314, textile product mills (n=9); 315, apparel manufacturing (n=36); 321,
wood product manufacturing (n=13); 322, paper manufacturing (n=34); 333, machinery
manufacturing (n=185); 336, transportation equipment manufacturing (n=86); and 337, furniture
manufacturing (n=21). The total number of traditional sector companies in the sample was 455
(two firms were included in two categories).
The traditional sector companies were placed in alphabetical order by group and assigned
numbers based on their order of appearance in the alphabetized list. A random sample was then
generated using a computer-driven random number generator. About 150 traditional sector
companies were selected for inclusion in this study. After the firms included in the sample was
determined, the SEC Form 10-K for each sample firm for the 2000 fiscal year and 2004 fiscal
year was obtained. A box and whiskers plot generated for the 2000 fiscal year and 2004 fiscal
year of the initial 150 traditional sector companies revealed that nine companies had a level of
intellectual capital that caused them to be outliers. A sample of 141 traditional sector companies
remained in the study after elimination of the outliers. In fiscal years 2000 and 2004, the mean
number of employees of the firms in the study was 9,068 and 9,342, respectively, and the mean
firm age was 37 and 41 years, respectively.
Content analysis is a standard methodology that allows researchers to examine key words from
large amounts of text. This technique captured the frequency of words or phrases used by firms
when describing their intellectual capital activities. In the USA, each publicly traded firm is
required by the Securities Exchange Act of 1934 to file annual and quarterly reports with the
SEC. The annual report that must be filed is referred to as a “Form 10-K” and it must contain the
information prescribed by Regulation S-K issued by the SEC. Many publicly traded firms in the
USA have adopted the Form 10-K as their annual report in lieu of the traditional annual report
issued by firms.
To measure the level of intellectual capital disclosure of each sample firm for 2000 and 2004, a
content analysis was performed on Part I of the Form 10-K of each firm for those years (Guthrie
et al., 2004b). Part I of the Form 10-K is a narrative description of the firm's business. The
following is an example of some of the items that Regulation S-K specifies should be included in
Part I of Form 10-K: a description of the business done and intended to be done by the firm, the
principal products produced and services rendered by the firm, the dependence of the business on
one or a few customers, and the competitive conditions in the business.
Because Part I of the Form 10-K is a description of the firm that is intended by the Securities Act
of 1934 and Regulations S-K to provide meaningful and relevant information regarding the firm
to investors, creditors and potential investors, it was selected as the subject of the content
analysis. Civil penalties may be imposed on a firm under the Securities Exchange Act of 1934
and Regulations S-K if misrepresentations are contained in its Form 10-K. The threat of civil
penalties for misrepresentations regarding the assets or resources of the firm in the Form 10-K
increases the reliability of the document as a source of information.
The first step in conducting a content analysis is to compile a list of terms that represent the
subject being measured (Vergauwen and Alem, 2005; Bontis, 2003; and Brennan, 2001). In this
study, a list of terms was developed for the intellectual capital construct which included the
major components:



the external structure (customer capital and supplier capital);
employee competency (human capital); and
the internal structure (intellectual property and organizational capital).
For the external structure component of the intellectual capital construct, sample terms include
brands, company reputation, customer loyalty, customer relations, customer satisfaction,
distribution channels, franchising agreements, licensing agreements, market share, repeat
business, alliances, business collaborations, favorable contracts, partnerships, and supplier
relations. Sample terms for the employee competency component include employee loyalty, staff
competencies, staff turnover, teamwork, training, work force, work-related knowledge, career
development, employee attitude, employee development, employee expertise, employee
knowledge, employee productivity, expert teams, human assets, human capital, and employee
innovations. Finally, for the internal structure component sample terms include intellectual
property, patents, copyrights, trade secrets, management philosophy, management style,
organization learning, organizational culture, organizational structure, structural capital, work
processes, competitive intelligence, corporate mission, information systems, and knowledge
management.
A list of 121 words and phrases were used in this study. The number of terms included on the list
of intellectual capital terms was expanded from that used in prior studies to address the concern
that the low level of intellectual capital disclosure as reported in academic studies may be
attributable to a difference in vocabulary used in academia from that used in the business world
(Vergauwen and Alem, 2005). The word combinations were based on terms used by such
researchers as Bontis (2001), Bozzolan et al. (2003), Brooking (1996), Edvinsson and Malone
(1997), Guthrie et al. (2004a, 2005), Ordonez de Pablos (2002), Starovic and Marr (2003) and
Vergauwen and Alem (2005).
Content analysis was performed using WordStat, Version 5.0, developed by Provalis Research,
Montreal, Canada. The SEC 10-Ks were downloaded in Microsoft Word format and then directly
imported into WordStat for analysis. The ability to import the SEC 10-Ks as Microsoft Word
documents directly into WordStat eliminated any risk of error associated with converting a
document from an image (i.e. pdf) format to a text format. For each SEC 10-K evaluated in this
study, WordStat generated a report of the number of times that a term or phrase was used in the
document by intellectual capital category based on the list of terms. The frequency that a term
was used in Part I of the the SEC 10-K was used as the measure of the intellectual capital
disclosure of that firm by category for that year.
A one (1) tailed, paired-samples t test was used to test the hypothesis. The independent variable
for the hypothesis was the fiscal year of the respective firm with the levels used in this study
being the 2000 fiscal year and 2004 fiscal year of each sample firm. The dependent variable was
the level of intellectual capital disclosure for the respective fiscal year. The level of intellectual
capital disclosure for the 2000 and 2004 fiscal years was compared for each component of the
intellectual capital construct (external structure, employee competence and internal structure) as
well as in the aggregate for all categories of the intellectual capital construct.
The Wilcoxon matched-pairs signed-ranks test was also used to evaluate the hypothesis. The
pragmatic reason for performing the Wilcoxon matched pairs signed-ranks test was that it
revealed the number of firms that increased, decreased or did not change the level of their
intellectual capital disclosure in 2004 as compared to 2000. A one (1) tailed test was used with a
level of significance of p < 0.05. As with the one (1) tailed, paired-samples t test, the Wilcoxon
matched-pairs signed-ranks test was applied to each component of the intellectual capital
construct as well as in the aggregate for all categories of the intellectual capital construct.
6 Results
The hypothesis predicts that traditional sector companies have increased the level of their
intellectual capital disclosure in their annual reports for the 2004 fiscal year as compared to the
2000 fiscal year. A one (1) tailed, paired-samples t test was used to test the hypothesis at an α of
p<0.05. An examination of a frequency distribution for 2000 and 2004 indicated that the
respective dependent variable for each sector and for each year was normally distributed
although positively skewed. The sample size of 141 companies, respectively, was sufficiently
large to be robust to violations of assumptions of normality.
Traditional sector companies had a mean disclosure of intellectual capital of 24.227 (n=141,
SD = 16.279) in fiscal year 2000 and 27.709 (n=141, SD = 17.613) in fiscal year 2004. The
increase of 3.4823 (SD = 11.2463) in the mean of intellectual capital disclosure of traditional
sector companies was statistically significant (t=3.68, DF = 140, p=0.000). The effect size of
r=0.2967 is considered medium or typical. The increase in the mean number of disclosures of
3.4823 between fiscal year 2004 and fiscal year 2000 was a 14.37 percent increase over four
years, or an average annual increase of 3.59 percent.
An analysis of the components of the intellectual capital model used for this study yielded
similar results. Table I sets forth a summary of the statistics comparing the level of intellectual
capital disclosure for fiscal year 2000 and fiscal year 2004 for the three components of the
intellectual capital model used in this study. As Table I indicates, the increase in the level of
intellectual capital disclosure between the 2000 fiscal year and the 2004 fiscal year was
statistically significant for each component of the intellectual capital construct. Further
examination of Table I, indicates that firms made more disclosures about the external structure
component and the least amount of disclosures about the employee competence component of
the intellectual capital construct.
The results of the Wilcoxon matched-pairs sign-ranks test confirmed that the level of intellectual
capital disclosure of traditional sector companies was significantly greater in fiscal year 2004
then in fiscal year 2000. The data indicated that 78 companies increased (with a mean rank of
69.59), and 48 companies decreased (with a mean rank of 53.60), the level of their intellectual
capital disclosure in fiscal year 2004 as compared to fiscal year 2000. The remaining 15
companies had the same level of disclosure in 2004 and 2000. Based on this data, there was a
statistically significant increase in the number of traditional sector companies that increased the
level of their intellectual capital disclosure in fiscal year 2004 as compared to fiscal year 2000
(z=−3.4756, p=0.0003). When the Wilcoxon matched-pairs sign-ranks test was applied to the
three components of the intellectual capital model, the level of intellectual capital disclosure was
significantly greater in fiscal year 2000 as compared to fiscal year 2004 for the employee
competence and external structure components. However, the Wilcoxon matched-pairs signranks test did not support a significant increase in the level of intellectual capital disclosure for
the internal structure component in fiscal year 2000 as compared to fiscal year 2004. This data
are provided in Table I.
Based on the results of the t test and the Wilcoxon matched-pairs signed-ranks test used to
evaluate the level of intellectual capital disclosure by traditional sector companies for fiscal year
2004 as compared to fiscal year 2000, the hypothesis is supported. Traditional sector companies
significantly increased the level of disclosure of their intellectual capital in 2004 as compared to
2000.
Table II sets forth a list of the 20 most frequently used terms or phrases used in the content
analysis as representing or referring to the intellectual capital of a firm. The terms are presented
in descending order of the most frequently used terms in 2000. Although the same 20 terms were
the most frequently used in both fiscal year 2000 and fiscal year 2004, there was a slight change
in the order of frequency of use in fiscal year 2004 as compared to fiscal year 2000. In addition
to the frequency of appearance of each of the 20 most frequently used terms or phrases, Table II
also sets forth the number of firms in 2000 and 2004 that used the terms in their Form 10-K.
7 Conclusion
As discussed above, in 2001 the FASB issued a report that encouraged firms in all sectors of the
economy to increase the level of disclosure of their intangible assets and intellectual capital in
the interest of providing increased transparency and understanding by investors, creditors and
other stakeholders about the company (FASB, 1974, 1985, 2001a, b, c). In recognition of the
failure of the traditional accounting model to provide value relevant information about the
intangible assets and intellectual capital of a firm, the FASB encouraged firms to increase the
level of disclosure of these resources. The years selected for this study, namely fiscal year 2000
and fiscal year 2004, allows an evaluation of the progress that has been made toward the FASB's
objective that firms increase the level of disclosure of their intangible resources and intellectual
capital.
As with all research projects there are certain limitations to this study. First, when conducting a
trend analysis, more than two data points are required in the time series. While this study is
longitudinal in nature, it only compares two different time periods. Also, there are certain
shortcomings when conducting computer supported content analysis (Conway, 2006). While
content analysis is an accepted method in intellectual capital research (Abdolmohammadi, 2005;
Bontis, 2003; Vergauwen and Alem, 2005), one limitation of this approach is its inability to
capture the context within which a word or phrase has been used. For example, a firm could only
be unfolding a training plan in the annual report. The software would pick this up as an
intellectual capital phrase when it is only a future plan not yet to be achieved. In contrast,
intellectual capital issues may be addressed in the annual report without using one the 121 words
or phrases identified by the authors. In this case, a firm could describe its management
philosophy or corporate culture without using the specific words. Finally, computer supported
textual analysis is picking up the words per se, not their underlying meaning.
Despite these limitations, this study suggests that traditional sector companies increased the level
of disclosure of their intellectual capital in fiscal year 2004 as compared to fiscal year 2000. The
increase in the overall level of disclosure found in this study indicates that managers of firms in
traditional sectors of the economy have come to recognize the growing importance of intellectual
capital in the operation of their business. It also indicates an increased awareness by management
of traditional sector companies of the desire and expectation by investors, creditors and other
stakeholders to be provided with value relevant information regarding their intangible assets and
intellectual capital. The increase of the level of intellectual capital disclosure may also indicate
awareness by managers that the traditional accounting model fails to provide value relevant
information to investors, creditors and other stakeholders of the firm regarding the knowledgebased assets of a firm.
Table IComparison of intellectual disclosure: 2000 vs 2004
Table II15 Most frequently used IC terms: 2000 vs 2004
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Corresponding author
Kerry D. Carson can be contacted at: kcarson@louisiana.edu
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