research corporate disclosure of intangibles: a ... comparative study of practices among indian, us,...

VIKALPA • VOLUME 37 • NO 3 • JULY - SEPTEMBER 2012 51

R E S E A R C H

includes research articles thatfocus on the analysis and

resolution of managerial andacademic issues based on

analytical and empirical orcase research

ExecutiveSummary

Corporate Disclosure of Intangibles:A Comparative Study of Practicesamong Indian, US, and JapaneseCompanies

Ragini

KEY WORDS

Accounting

Financial Reporting

Intangible Assets

Disclosure Practices

Return on Assets (ROA)

Intellectual Property Rights(IPR)

Today, the methods which create value for companies have undergone a sea change.In the new globalized economy, when companies have edge to edge competition,the intangibles like strategies, brands, market leadership, management policies, etc.,play a major role in creating value for a company. Very few intangibles are coveredunder the mandatory rules and regulations of accounting all over the world. De-spite these regulatory limitations, an increasing number of companies are voluntar-ily opting to include information in their list of intangibles in the notes to their annualaccounts or as an appendix in a narrative form. The narrative reporting on intangi-bles has not yet been regularized by various accounting authorities, but to havecompetitive edge in the market, a number of companies are voluntarily disclosinginformation on intangibles in their business review section along with the manda-tory information on intangibles in the financial accounts.

This study examined and compared the various disclosure practices of intangiblesof the top one hundred Indian, US, and Japanese companies for a period of fiveyears, i.e., 2001-2005. The study examined the type and extent of information onintangibles being disclosed by the companies with the help of a disclosure Index.The index of disclosure of intangibles used in this paper consisted of an extensivelist of 180 items, including both mandatory as well as voluntary disclosure items.

This study reveals that the countries under study, i.e., India, US, and Japan, haveshown a significant improvement in their overall disclosure scores over the five yearperiod. The Japanese companies have shown the maximum improvement of 59 percent in the overall disclosure scores over five year period, followed by US (42 %) andIndian companies (31%). Secondly, ‘IPRS and goodwill and other intangibles’ groupshowed maximum increase in five years by the sample companies of all the threecountries under study.

On the basis of the results, it can be suggested that Indian companies need to im-prove their disclosure practices in the areas of ‘strategy and competition’ and ‘mar-ket and customer’. Secondly, the accounting authorities should endeavour toregularize the narrative reporting on intangibles. A number of organizations areworking to improve disclosure of non-financial items. Some of them are Interna-tional Accounting Standard Board (IASB), Financial Accounting Standard Board(FASB), Organisation for Economic Cooperation and Development (OECD), andEuropean Commission (EC).

52

Accounting is considered to be the language ofbusiness. It has evolved and emerged in res-ponse to the social and economic needs of the

society. As trade, commerce, and industry progressed,many new dimensions have been added to the account-ing discipline. During the pre-industrial age (i.e., before1850), business firms being mostly proprietary, laidgreater emphasis on balance-sheet as the owner wasmore interested in knowing his capital, i.e., assets mi-nus liabilities. The financial statements were preparedprimarily to reveal the wealth earned by the proprietorof the firm; as a result the quantum of disclosure wasvery small. Growth of corporations, and emergence ofthe separate entity concept, company form of organiza-tion, large-scale production, and cut-throat competitionduring industrial age (1850-1975), led to the develop-ment of various new financial control systems such asReturn on Capital Employed (ROCE) and Return on In-vestment (ROI), in order to monitor efficient allocationof financial and physical capital (Kaplan and Norton,2000). As a result, the focus of accounting shifted fromjust recording, classifying, summarizing, and interpret-ing the results1 to identifying, measuring, and commu-nicating economic information to permit informedjudgments and decisions by users of the information2.According to SFAC-I (1978), “financial reporting shouldprovide information that is useful to present and poten-tial investors and creditors and other users in makingrational investment, credit and similar decisions.” Dur-ing this age, the ways in which companies created valuewere based upon the efficient use of physical resourcessuch as raw material and machinery; the only intangi-ble assets recognized in financial statements were intel-lectual property rights such as patents and trademarkswhere a market value was established by a transaction,and acquired items such as goodwill (OECD, 2006).

The emergence of the information age in the last decadeof twentieth century led business to compete in a chal-lenging market place that is rapidly changing, and be-coming complex, global, hyper-competitive, andintensely customer-focused. The organizations re-sponded to these pressures of information age in aunique manner. The major responses included strategic

approach, customer focus and service orientation, con-tinuous improvement, empowering employees and fos-tering collaborative work, team-based structure andbusiness alliances, which are more of an intangible na-ture (Turban, Rainer & Potter, 2000). Further, the growthof service sector and information technology along withthe dramatic increase in the number and size of merg-ers and acquisitions made accounting for goodwill andother intangible assets such as brands, research and de-velopment significant (Saudagaran, 2001). Thus, nolonger can companies gain sustainable competitive ad-vantage by merely monitoring efficient allocation of tan-gible resources like physical assets and excellentmanagement of financial assets and liabilities. AsGoldfinger (1997) suggests, the source of economic valueand wealth is no longer the production of material goodsbut the creation and manipulation of intangible assets.

In the present scenario, the information moves so rap-idly around the world that industrial secrets, technicaladvantages, and managerial innovations can evaporatewith the speed of an electronic mail. This speed of changeand dispersion of information gave birth to knowledge-based economy which is driven by increased workforcemobility, growing complexity in business environments,the need to reduce loss of intellectual assets from em-ployee turnover, the need to operate at global level, in-creasing shift from tactical to strategic approach, andsteady absorption of internet and wireless technology(Rao, 2003). As a result, the new source of wealth is notmaterial; it is information, knowledge applied to workto create value. It is the human intelligence and intellec-tual resources which are now any company’s most valu-able assets.

The increased role of intangibles can be well assessedfrom the changing market-to-book value differences. Astudy of S&P 500 companies reveals that since the mid-1980s, there has been a large increase in the ratio of mar-ket value to book value, albeit with very high volatility.At its peak in March 2000, the ratio was 7.5; at the end of2005, it was 4.1, and it may still go down. However, evenif the ratio fell to 4 or even 3, it would be high enough toconfirm that an amount of value equal to between one-half and two-thirds of corporate market values reflectsthe value of intangible assets (Lev, 2003). Further, Lev(2004; p.109) adds, “intangible assets which include askilled workforce, patents and know-how, software,strong customer relationships, brands, unique organi-

1 Accounting Terminology Bulletin No.1, Review and Resume, AICPA,1953, paragraph 9.

2 American Accounting Association, A Statement of Basic AccountingTheory, AAA,1966, p.1.

CORPORATE DISCLOSURE PRACTICES ON INTANGIBLES – A COMPARATIVE STUDY ...


zational designs and processes, and the like generatemost of corporate growth and shareholder value. Theyaccount for well over half of the market capitalizationof public companies. They absorb a trillion dollars ofcorporate investment funds every year. In fact, these‘soft’ assets are what give today’s companies their hardcompetitive edge.”

In the light of increasing importance of intangible assetsin today’s economy, the traditional model of account-ing, which so beautifully described the operations ofcompanies for a half millennium, is now failing to keepup with the revolution taking place in business. Like theorganization chart, printed corporate brochure, andemployee handbook, corporate financial documents areincreasingly proving themselves too static and hide-bound to keep up with the modern organization withits fluid structure, strategic partnering, empoweredemployees, groupware, multimedia network marketing,and vital reservoirs of human intellectual resources(Edvinsson & Malone, 1997). Also, in the words of Egol,“Double entry book keeping derived accounting modelis transaction based, information captured is, for mostpart, limited by whether an ‘exchange’ has occurred.Hence, the values created by successful strategic posi-tioning, human capital development and organizationalinnovation are not reflected in this model” (Sisodia, 2001,p.1). As a consequence, the traditional financial account-ing model needs to be expanded to incorporate the valu-ation of a company’s intangible assets along withtangible assets, so as to enhance the usefulness of ac-counting information. Indeed, amongst users of finan-cial accounting information, there is a growing demandfor extensive corporate disclosures on intellectual capi-tal matters. Taylor and Associates (1998), for example,reported disclosure of intellectual capital informationranked in the top ten information needs of users. Butfinancial reporting and accounting systems are not ableto deal with intangibles. According to Adrienne Baker,Editor-in-chief of Investor Relations magazine, over halfof the information that investors want is not reportedon the balance-sheet. Left out are important items suchas growth opportunities, infrastructure, intellectual capi-tal, network effects, workforce, and in-process researchand development. Also, Commissioner of SEC, CynthiaA Glassman mentions that “accounting standards(known as GAAP-Generally Accepted Accounting Prin-ciples) are less effective in providing relevant informa-

tion on intangible assets, such as technology rights, hu-man capital and innovation.” (Jarboe, 2005, p.2). Despitethese regulatory limitations, an increasing number ofcompanies are voluntarily opting to include informa-tion on their intangibles in the notes to their annual ac-counts or as an appendix thereto. Lang and Lundholm(1993) and Tasker (1998) reveal in their studies that com-panies with high level of intangibles emphasize volun-tary disclosure. In yet another study undertaken by Kang(2006), it has been found that emerging market compa-nies engage in voluntary disclosure practices in order todisseminate different varieties of mainly quantitativeintangible asset information to their global stakeholders.But this disclosure on intangibles is on an unsystematicbasis and with great discrepancies between companies,sectors, and countries as evidenced by PriceWaterhouseCoopers (PWC) in its 2005 annual trends report. Thereason for this heterogeneity is the absence of concep-tual framework within the accounting academics. Thisis being evidenced from different terms used for intan-gibles in different studies. There is a widespread ten-dency to use the terms “intangibles”, “intellectualcapital” or “intellectual assets” interchangeably. Somewill find differences between these terms, but they referto the same reality: a non-physical asset with a potentialstream of future benefits (OECD, 2006). Similarly,Oliveras and Kasperskaya (2002) mention that an organi-zation’s business knowledge can be called by a varietyof names, of which ‘intellectual capital’ and ‘intellectualassets’ are the most common. Further, Lev (2001) usesthe terms intangible assets, knowledge assets, and in-tellectual capital interchangeably, arguing that they dif-fer only in their discipline of origin – the accountants’intangible assets are knowledge assets for economistsand intellectual capital for managers and lawyers. How-ever, in the present paper, the term ‘intangibles’ has beenused.

This paper documents an investigation into the report-ing practices for intangibles by the top Indian, US, andJapanese companies with the objective of understand-ing and comparing their disclosure practices over a pe-riod of time. Secondly, the paper studies the influenceof industry type on the disclosure of intangibles, i.e.,whether an intangible-intensive company discloses moreon intangibles than a non-intangible- intensive company.Service companies and companies with R&D expendi-ture are referred to as intangible-intensive companies.

54

Thirdly, the paper studies the influence of firm attributes– organizational size, profitability, market-to-book valueratio, leverage, and industry type on the disclosure lev-els of the top Indian, US, and Japanese companies.

RESEARCH METHODOLOGY

Universe and Sample of the Study

The top Indian 500 companies ranked on the basis ofrevenue in the ‘Compendium of Top 500 Companies in In-dia’ constitute the universe of the Indian companies,whereas the top 500 companies ranked on the basis ofrevenue in the Fortune Global 500 World’s Largest Corpo-rations constitute the universe of the US and Japanesecompanies.

First 100 most valuable companies of India in the Com-pendium of Top 500 Companies in India, 100 US, and 60Japanese companies listed in the Fortune Global 500World’s Largest Corporations constitute the sample.Banking, insurance, and financial companies have beenexcluded from the purview of this paper because of dif-ferent disclosure requirements.

Sources of Data Collection

Published annual reports of the companies happen tobe the primary source of data. Annual reports of the USand Japanese companies were ordered through thewebsites of the companies. Annual reports of the Indianas well as some of the US and Japanese companies wereobtained after sending e-mail requests and registeredletters at their respective addresses. In all, 60 Indian, 65US, and 42 Japanese companies were requested to sendtheir annual reports. However, in response to these re-quests, 35 companies from India, 50 from US, and 30from Japan made their annual reports available. The re-maining annual reports were downloaded from the re-spective websites of the companies. In all, 192 annualreports were collected for the year 2005 (70 for Indiancompanies , 66 for US companies, and 56 for Japanesecompanies), 177 for the year 2004 (63 for Indian compa-nies , 61 for US companies, and 53 for Japanese compa-nies), 162 for the year 2003 (52 for Indian companies, 57for US companies, and 53 for Japanese companies), 148for the year 2002 (45 for Indian companies, 53 for UScompanies, and 50 for Japanese companies) and 137 forthe year 2001 (40 for Indian companies, 49 for US com-panies, and 48 for Japanese companies).

Period of the Study

The corporate annual reports of the Indian, US, and Japa-nese companies have been collected for the period 2001-2005. The span of five year period provides a justifiablechance to study and compare the changes in corporatedisclosure practices of the Indian as well as the US andJapanese companies. Many new developments tookplace regarding intangibles during this period in all thethree countries under study. Regarding Indian scenario,Accounting Standard - 26 (2002) on intangible assets wasissued in 2003. In the US, Statement of Financial Account-ing Standard-142 (SFAS-142) on Goodwill and OtherIntangibles came into effect from 2001. Moreover, theFinancial Accounting Standards Board (FASB, 2001) andthe Securities Exchange Commission (SEC) had alsosuggested certain changes in reporting system in the year2004. Similarly, the Japanese Ministry of Trade and In-dustry had also issued “a reference guideline for intel-lectual property information disclosure” in January 2004which might have affected the disclosure practices ofthe Japanese companies. Many new developments re-garding narrative reporting can also be noticed duringthis period.

SCOPE OF THE STUDY

The scope of the study is limited to the disclosure in thecorporate annual reports. Knutson (1993) mentioned thatannual reports are typically the most important sourceof information for most analysts. In addition, Lang andLundholm (1993) found a high, positive correlation be-tween annual report disclosure and disclosure in othersources (such as press releases or regulatory filings).

Disclosure Index

A disclosure index is used to examine whether corpora-tions engage in disclosure practices of a particular in-formation in annual reports (Marston and Shrives, 1991).Many researchers have utilized a disclosure index forexamining the disclosure practices for intangibles of se-lected companies (Williams, 2001; Citron et al., 2005;Bergamini and Zambon, 2005; Kang, 2006). The index ofdisclosure on intangibles used in this paper consists ofan extensive list of 180 information items, applicable toa wide range of users, which appear in an annual report(See Appendix). The index includes both mandatory aswell as voluntary disclosure items. These 180 items havebeen grouped into seven broad categories called param-



eters or groups of the Index (Table 1).

Table 1: Classification of Disclosure Index Items

Broad Parameter/ Group No. of Items

A. Research and Development 20

B. Strategy and Competition 30

C. Market and Customer 36

D. Human Resource 26

E. Intellectual Property Rights(IPRs), and 25Goodwill & other Intangibles

F. Corporate and Shareholder 18

G. Environment and Others 25

Total 180

Disclosure Index can be assigned either weighted orunweighted scores. A lot of controversy exists on thisissue. A number of researchers have made use of theweighted disclosure index where items have been as-signed weights according to either the importance orthe type of disclosure (Bergamini and Zambon, 2005;Kang, 2006). On the other hand, Williams (2001) andCitron, et al (2005) used unweighted index giving equalimportance to all the disclosure items. The argumentgiven by them is that annual reports are read by a widevariety of users and each class of user will attach differ-ent weights to an item. As a result, weighted index in-volves the issue of subjectivity. Further, Robbins andAustin (1986) found that using a weighted disclosureindex does not materially affect the results of possibledeterminants of disclosure. This view is also supportedby Cooke (1989) and Firth (1980).

This paper uses the unweighted index as the use ofunweighted dichotomous index reduces subjectivityinvolved in determining the weights of each item(Williams, 2001; Ahmed and Courtis, 1999; Courtis,1986). The disclosure item is scored as one (1) if it is dis-closed in the annual report or zero (0) if it is not dis-closed in the annual report. Thus, the total disclosurescore in terms of number of items being disclosed is de-termined. This total disclosure score has been convertedin percentage terms by applying the following formula:

Total number of items appearingin the annual report

x 100Maximum number of items which should

appear in annual reports (180)

Dependent and Independent Variables

The paper attempts to establish a cause and effect rela-tionship between dependent variable, viz., disclosurescore and independent variables, viz., organizationalsize, profitability, leverage, market-to-book value, andindustry type.

(a) Organizational size: It has been measured in termsof total sales and total assets.

(b) Profitability: It has been measured in terms of re-turn on assets (ROA) and return on equity (ROE).ROA is calculated as the ratio of net profit to totalassets and ROE is calculated as the ratio of net profitto net worth or shareholders equity.

(c) Leverage: It has been measured as the ratio of long-term debt to shareholders equity.

(d) Market value to Book value: It has been measuredas the ratio of market value to book value of the com-pany.

(e) Industry type: It has been measured in terms of theamount of R&D expenditure disclosed in the annualreport. Taking it as controlled dichotomous variable,coded as one (1) if the company discloses R&D ex-penditure in annual report or zero (0), if otherwise.

Techniques of Data Analysis

The following statistical techniques have been used toanalyse the data relating to disclosure of intangibles col-lected from the Indian, US, and Japanese companies.

Descriptive Statistics

Descriptive statistics include the various measures ofcentral tendency, i.e., mean, range, and standard devia-tion. Mean is a single value which is considered as themost representative value for a given set of data. Butthe average alone cannot adequately describe a set ofobservations, unless all the observations are alike. As aresult, it is necessary to describe the variability of obser-vations. Measures of variation help us in studying theimportant characteristics of a distribution, i.e., the ex-tent to which the observations vary from one anotherand from some average value. Measures of variationused in the study include range and standard deviation.Range is defined as the difference between value of thesmallest observation and value of the largest observa-tions included in the distribution. The most importantand widely used measure of studying variation is stand-

56

ard deviation. A small standard deviation means a highdegree of uniformity of the observations as well as ho-mogeneity of a series; and a large standard deviationmeans just the opposite.

Univariate Statistics

Statistical techniques, which are appropriate for analys-ing data when there is a single measurement of eachelement in the sample or if there are several measure-ments on each element or each variable is analysed inisolation, have been used. Both types of univariate tech-niques – parametric and non-parametric tests – havebeen used to analyse the data. For analysing the differ-ences in the yearly disclosure scores, a paired t-test (aparametric test) and Wilcoxon sign-rank test (a non-para-metric test) have been used. Further, for analysing thedifferences in the mean disclosure scores of the threecountries, Kruskal-Wallis test (a non-parametric) hasbeen used. Lastly, an independent sample t-test (a para-metric test) has been used to analyse the mean differ-ences of the data on the basis of Industry type.

Multivariate Statistics

Multivariate statistics is suitable for analysing the datawhen there are two or more measurements on each ele-ment and the variables are analysed simultaneously.These techniques are concerned with the simultaneousrelationships among two or more independent variablesand a dependent variable.

In this paper, following regression model was formu-lated to check the dependence of total (T) disclosure onthe company attributes (independent variables) dis-cussed above.

T = a1+ b1x1 + b2x2 + b3x3 - - - - - - - + bnxn

where,

a1 = Constantsb1-bn = Regression coefficientsx1 = Total salesx2 = Total assetsx3 = ROAx4 = ROEx5 = Leveragex6 = Market value to Book valuex7 = Industry type.

Multicollinearity is a serious problem which must beconsidered before employing multiple regression analy-sis. It arises when high level of correlation exists betweensome of the independent variables. A formal method ofdetecting multicollinearity is to check the collinearitytolerance and variance inflation factor (VIF). VIF showshow the variance of an estimator is inflated by the pres-ence of multicollinearity and tolerance is the inverse ofVIF. Larger the value of VIF, the more troublesome orcollinear the variable, whereas smaller the value of thetolerance, the more collinear the variable (Gujarati, 2004).

To check the problem of multicollinearity, every regres-sion model was tested for the VIF values and tolerancevalues of the variables and the results show that the co-efficients of independent variables are quite below therule of thumb3. As a result, multicollinearity was not aserious problem for any of the regression models.

ANALYSIS AND RESULTS

Descriptive Analysis

Overall Disclosure Practices on Intangibles

The results of descriptive statistics indicate that themaximum disclosure has been made by the US compa-nies during all the years of study except 2001 when theIndian companies took the lead. The second position hasbeen earned by Indian companies during the entire pe-riod of study followed by Japanese companies except2005 when the Japanese companies remained ahead ofthe Indian companies in the disclosure practices (seeTable 2). Further, the results indicate a continuous up-ward trend in the mean disclosure scores by all the sam-ple companies of respective three countries included inthe study. The mean disclosure scores of the Indian sam-ple companies showed an increase of 31 per cent in fiveyears. Each consecutive year showed a constant increaseas the disclosure score was 16.38 in 2001, 17.22 in 2002,19.10 in 2003, 20.55 in 2004, and 21.47 in 2005. Similarly,the mean disclosure scores of the US sample companiesincreased from 16.01 in 2001 to 23.74 in 2005 showing anincrease of 42 per cent in five years. Each consecutiveyear showed an increase in the disclosure scores but thisincrease was not constant. A detailed analysis of the dis-

3 As a rule of thumb, if the VIF of a variable exceeds 10, then it is saidto be highly collinear (Gujarati, 2004).



closure scores reveal that maximum increase has takenplace in the year 2002, i.e., 18.55 per cent while the re-maining years, i.e., 2003, 2004, and 2005 show a minorincrease of 4.12 per cent and 5.77 per cent respectively.On the same lines, Japanese sample companies tooshowed a continuous upward trend in its disclosurescores. The mean disclosure scores increased from 14.05in 2001 to 22.38 in 2005 showing an increase of 59.30 percent in five years. Each consecutive year showed a con-stant increase.

Though the maximum disclosure on intangibles was bythe US companies, the maximum increase over the studyperiod was shown by the Japanese companies. The pic-ture becomes clearer from the graph in Figure 1.

Group-wise Disclosure on Intangibles

It is clear from the above discussion, that the overallmean disclosure scores of all the three countries indi-cate a continuous upward trend over the study period.Group-wise analysis helps in answering as to which typeof information on intangibles is increasing in a particu-lar country over time. The study of the descriptive re-sults reveals that the Indian companies disclosed moreinformation on ‘research & development’, and ‘humanresource’ than the companies from US and Japan as themean disclosure scores of Indian companies have beengreater during the period of study. However, the UScompanies disclosed more information on ‘strategy andcompetition’, ‘market and customer’, and ‘IPRs and

goodwill and other intangibles’ than the Indian and Japa-nese companies. Japanese companies disclosed more on‘corporate and shareholder’, and ‘environment and oth-ers’ (Table 2). Further, on analysing the descriptive re-sults of the Indian sample companies, it was found thatthe mean disclosure scores of all the groups showed acontinuous upward trend. ‘Research & development’group mean disclosure score showed an increase of 18.60per cent in five years. Similarly, ‘strategy and competi-tion’ mean disclosure score increased from 4.05 in 2001to 5.47 in 2005 showing an increase of 35 per cent. ‘Mar-ket and customer’ group showed an increase of 18.15per cent whereas ‘corporate and shareholder’ groupshowed an increase of 28.67 per cent. Maximum increaseof 183.46 per cent was shown by the ‘IPRs and goodwilland other intangibes’ group, whereas the minimum in-crease of 15.84 per cent was shown by the ‘human re-source’ group. Yearly analysis of the mean disclosurescores on ‘IPRs and goodwill and other intangibles’group by the Indian sample companies reveal that themajor shift has taken place in the year 2004. The meandisclosure score of the same has been doubled in a sin-gle year as it increased to 3.30 in 2004 from just 1.65 in2003. This increase can be attributed to the introductionof Accounting Standard – 26 on intangibles in 2003 whichwas applicable from the year 2004. In case of the US sam-ple companies, a five-year change showed a continuousincrease in the mean disclosure scores of all the groups.‘Research and development’ mean disclosure scoreshowed an increase of 73 per cent. ‘Strategy and compe-

Figure 1: Mean Disclosure Scores of the Indian, US, and Japanese Companies

58

tition’ mean disclosure score increased from 4.84 in 2001to 7.27 in 2005 showing an increase of 50 per cent. ‘Mar-ket and customer’ mean disclosure score increased by27.56 per cent. Mean disclosure of ‘human resource’ in-creased by 11.57 per cent. Maximum increase of 74.27per cent was shown by the mean disclosure scores on‘IPRs and goodwill and other intangibles’, whereas theminimum increase of 10.36 per cent was shown by ‘cor-porate and shareholders’ mean disclosure scores. Maxi-mum increase in the disclosure scores on ‘IPRs andgoodwill and other intangibles’ was noticed in 2002when the score moved from 4.78 in 2001 to 7.19 indicat-ing that companies responded well to the SFAS-142 on‘goodwill and other intangibles’. In case of the Japanesesample companies, a five-year change showed a con-tinuous increase in the mean disclosure scores of all thegroups – 58.24 per cent for ‘research and development’,88 per cent for ‘strategy and competition’ (from 4.13 in2001 to 7.76 in 2005), 30.53 per cent for ‘market and cus-tomer’, and 37.79 per cent for ‘corporate and sharehold-ers’ group. The maximum increase of 221.79 per centwas found in ‘IPRs and goodwill and other intangibles’,whereas the minimum increase of 22.18 per cent wasfound in ‘human resource’ mean disclosure scores. Themean disclosure scores increased steeply in the year 2003which could also be the result of SFAS-142.

On the whole, items on ‘IPRs and goodwill and otherintangibles’ group showed the maximum increase in fiveyears by the sample companies of all the three countriesunder study. Though the Japanese sample companiesshowed the maximum increase of 221.79 per cent dur-ing this period, the maximum disclosure was by the USsample companies in all the study years.

Major Items Disclosed by End of 2005

The major items disclosed by the sample companies ofthe respective countries are presented in Tables 3 and 4.The study of the Tables reveals that six items from ‘re-search and development’ group were disclosed by morethan 50 per cent of the Indian companies. The positionis different in the case of US and Japanese companies.No item from ‘research and development’ group wasdisclosed by more than 50 per cent of the US samplecompanies whereas only one item namely R&D expendi-ture was disclosed by 71.40 per cent of the Japanese com-panies; 71.3 cent of the Indian companies disclosedinformation on R&D strategy whereas 67.90 per cent ofthe Japanese companies disclosed information ongrowth strategy; 53 per cent of the US and 78.60 per centof the Japanese companies disclosed information on busi-ness strategy. The other major difference noticed wasthat only US companies disclosed information on itemsof competition — 34.8 per cent and 40.9 per cent of theUS companies disclosed information on key competi-tors and type of competition respectively. No such in-formation was disclosed even by 25 per cent of the Indianand Japanese sample companies. No information on cus-tomers was disclosed by the three countries under studyexcept for the 27.3 per cent of the US companies whichdisclosed information on major customers. Indian com-panies overlap the US and Japanese companies in caseof the disclosure on ‘human resource’. The commonitems disclosed by the three countries included retire-ment benefits, number of employees, and leadershipteam. In addition to this, Indian companies disclosedinformation on HRD activities, particulars of remunera-tion, and benefits paid to key managerial personnel, in-dustrial relations, information about executive officers,


Table 2: Comparison of the Mean Disclosure Scores of the Indian, US, and Japanese Companies

Item-wise/Year 2001 2002 2003 2004 2005

Country India US Japan India US Japan India US Japan India US Japan India US Japan

Overall Disclosure 16.37 16.01 14.05 17.22 18.98 14.30 19.10 20.65 17.92 20.55 21.50 20.32 21.47 22.74 22.38

Research & Development 5.70 1.73 2.85 5.58 2.13 3.18 6.08 2.56 3.77 6.67 2.49 4.11 6.76 3.00 4.51

Strategy & Competition 4.05 4.84 4.13 4.76 5.02 3.84 5.37 5.74 4.94 5.73 6.90 6.40 5.47 7.27 7.76

Market & Customer 3.25 5.37 3.44 2.62 5.72 3.04 3.50 6.00 3.62 3.86 6.31 4.80 3.84 6.85 4.49

Human Resource 5.62 3.63 2.75 5.91 4.11 2.70 6.44 3.91 2.85 6.11 4.13 3.23 6.51 4.05 3.36

IPRs & Goodwill and 1.33 4.78 1.56 1.36 7.19 1.62 1.65 7.88 3.85 3.30 7.41 4.08 3.77 8.33 5.02Other Intangibles

Corporate & Shareholder 4.43 2.80 4.79 5.33 3.38 5.16 5.58 3.65 5.81 5.65 3.62 6.60 5.70 3.09 6.60

Environment & Others 5.10 5.67 5.77 5.44 6.62 6.20 5.77 7.44 7.42 5.97 7.84 8.09 6.59 8.35 8.51


and training programmes. No information on intellec-tual property rights was disclosed by 25 per cent of thesample companies of the respective countries except 36.4per cent of the US companies which disclosed informa-tion on value of trademarks/tradenames. Sample com-panies of all the three countries disclosed informationon ‘goodwill and other intangibles’. In case of disclo-sure on ‘goodwill and other intangibles’, US companiesoverlap the companies of other two countries. For ex-ample, 84.80 per cent of the US companies disclosedvalue of goodwill in their annual reports whereas only44 per cent and 30 per cent of the Japanese and Indiancompanies respectively disclosed the same. Japanesecompanies took the lead in disclosing corporate infor-mation. While 87 per cent of the Japanese companiesdisclosed information on corporate data, 62.50 per centdisclosed information on corporate profile. Annual re-ports of the Indian companies stressed more on infor-mation related to shareholders – 91 per cent of the Indiancompanies disclosed information on share price data and87 per cent disclosed shareholding distribution. A sin-gle item, namely share price data, is disclosed by morethan 50 per cent of the US companies. More than 50 percent of the sample companies of these countries did notdisclose any information on environment.

Univariate Results

To Test the Change in Disclosure Scores over Years

Wilcoxon matched pair-sign rank test and paired t-test:The Wilcoxon matched pair-sign rank test and the pairedt-test results of all sample companies from respectivecountries indicated that the change in the overall meandisclosure scores on intangibles between each consecu-tive year is statistically significant (see Tables 5 and 6).The change in the overall mean disclosure scores on in-tangibles in the five-year period was also found to besignificant. This change in the overall disclosure scoresof all sample companies from respective countries can-not be attributed to a particular group or a particularyear. It could be different in different groups and in dif-ferent countries. For example, Indian sample companiesshowed significant change in the disclosure on ‘researchand development’ and ‘IPRs and goodwill and otherintangibles’ and ‘environment and others’ in all the yearsunder study. Similarly, Japanese sample companiesshowed significant change in the disclosure on ‘strat-egy and competition’ and ‘market and customer’ in all

the consecutive years. The US sample companies did notshow significant change in any consecutive year understudy. Time of change in the disclosure also differed fromgroup to group and also country to country. For exam-ple, disclosure scores of two groups namely ‘researchand development’ and ‘strategy and competition’ of allsample companies from respective countries showed sig-nificant change in the year 2003 whereas disclosurescores of the group namely, ‘IPRs and goodwill and otherintangibles’ showed significant change in the year 2005.

To conclude, it can be observed that over the years therehas been significant change in the overall disclosurescores on intangibles of the sample companies from therespective countries; but the areas of improvement alsodiffer among the three countries.

To Test the Difference in the Disclosure Scores of theThree Countries

Kruskal-Wallis Test: Kruskal-Wallis test was appliedto find whether there was any significant difference inthe overall disclosures scores of the three countries. Re-sults indicate statistically significant differences in thefirst three study years, i.e., 2001-2003, but no significantdifference in the years 2004 and 2005 (see Table 7).

The results for group-wise disclosure on intangibles in-dicate significant differences among the Indian, US, andJapanese companies on ‘research and development’,‘market and customer’, ‘human resource’, ‘IPRs andgoodwill and other intangibles’, and ‘corporate andshareholder’ disclosure scores for all the years. For ‘strat-egy and competition’, no significant difference existedduring the first three years but for the next two years,i.e., 2004 and 2005, significant differences were seenamong the companies from all the three countries. For‘environment and others’, significant differences werenoticed during the last three years, i.e., 2003-05.

To Test the Difference in Disclosure Scores of DifferentIndustries

Univariate analysis was also done to test the relation-ship between the industry type and the level of disclo-sure on intangibles to check whether intangibility of anindustry effects disclosure on intangibles. The follow-ing two types of industry classification were tested withthe help of independent sample t-statistic:

60

Service and Manufacturing Companies: According toZeithami, et al (2008), “Intangibility is a key determi-nant of whether an offering is a service. Although this istrue, it is also true that very few products are purelyintangible or totally tangible. Instead, services tend tobe more intangible than manufactured products, andmanufactured products tend to be more tangible thanservices.” Services are intangibles and as a result it isoften expected that the service companies will disclosemore information on intangibles than the manufacturedcompanies. Citron, et al (2005) examine whether intan-gible-intensive firms make more intellectual capital dis-closures than less intangible-intensive firms. Intangible-intensive firms are measured by the presence of R&Dspending, membership of the service sector, and a greatermarket-to-book ratio. The results indicate that greaterdisclosures are made by the UK-based R&D active firms,service sector firms, and those with higher market-to-book ratio.

The results of the Indian and Japanese companies indi-cate higher mean disclosure scores for service compa-nies than that of the manufacturing companies. Thedifference between the disclosure scores of the serviceand manufacturing companies of the respective coun-tries was not significant. The scenario is opposite in caseof the US companies where mean disclosure scores ofthe manufacturing companies were more than the serv-ice companies and also the difference was significant.This implies that though a greater disclosure on intan-gibles is made by the Indian and Japanese service com-panies, the difference is not statistically significantwhereas in the case of US, greater disclosure on intangi-bles is made by the manufacturing companies and thedifference is statistically significant.

Companies With and Without R&D Expenditure

As per Hirschey (1993), spending on advertising andR&D can be viewed as a form of investment in intangi-ble assets with predictably positive effects on future cashflows. Further, as per Citron, et al (2005), “The inherentuncertainties associated with R&D expenditure make itmore likely that firms engaging in such activities willseek to make additional disclosures to explain the na-ture of these accounts.” So, it is expected that the com-panies with material R&D expenditure disclose more onintangibles than the companies without R&D expendi-ture.

The results indicate that the sample companies withR&D expenditure of the respective countries disclosemore on intangibles. The Indian and US companies withR&D expenditure have significantly more mean disclo-sure on intangibles for all the study years. The Japanesecompanies with R&D expenditure have more mean dis-closure score for all the study years but the difference issignificant only for the first three years of study, i.e.,2001-03.

Multivariate Analysis

Multivariate analysis discusses the association betweenthe selected company attributes and overall disclosurescores over a period with the help of step-wise multipleregressions. The results of step-wise regressions for fiveyears of the Indian companies reveal that industry typeis significantly associated with the disclosure scores ofthe Indian companies during all the study years except2001 (see Table 9). Organizational size is significantlyassociated with the disclosure scores only in the year2005, where assets are significantly associated with dis-closure score on intangibles. Profitability of a companyin terms of ROA is highly associated with the disclosurescores on intangibles in all the study years except in theyear 2005. Leverage and market-to-book value prices arenot significantly associated with the disclosure scoreson intangibles of the Indian companies. The explana-tory power of the five regression models varies from ashigh as 52.3 per cent in 2003 to as low as 25.6 per cent in2005. F-value is highly significant for all the five regres-sion models. Overall, the Table reveals that industry typeand ROA are the two company attributes which are sig-nificantly associated with the disclosure scores on in-tangibles of the Indian companies.

The results of step-wise regression for the US compa-nies reveal that industry type is significantly associatedwith the overall disclosure scores of the US companies(see Table 10). No other company attribute is found tobe significantly associated with overall disclosure scoresduring any of the study years. The explanatory powerof the four models ranges from as high as 11.7 per centin 2004 to as low as 8.7 per cent in 2003. The F-ratio issignificant for all the five models at 95 per cent level ofsignificance.

The results of step-wise multiple regression for the Japa-nese companies reveals that overall disclosure scores of



the Japanese companies are significantly associated withthe organizational size during all the years (either interms of assets or sales) (see Table 11) whereas industrytype is significantly associated with the overall disclo-sure scores only during the first two years of study, i.e.,2001 and 2002. The explanatory power of the five re-gression models ranges from as high as 27.7 per cent in2002 to as low as 11.7 per cent in 2001. The F-ratio issignificant at 95 per cent level of significance during allthe study years.

Thus, step-wise multiple regression results reveal thatdifferent company attributes are associated with the dis-closure scores of the three countries, i.e., India, US, andJapan. The disclosure scores of Indian companies aremore associated with organizational size and profitabil-ity, whereas those of the US companies are more associ-ated with industry type. However, in the case of Japanesecompanies, disclosure scores are associated with organi-zational size.

CONCLUSION

The paper brings out that the countries under study, i.e.,India, US, and Japan, have had a significant improve-ment in their overall disclosure scores over the five-yearperiod. The Japanese companies have shown the maxi-mum improvement of 59 per cent in the overall disclo-sure scores followed by the US (42%) and Indiancompanies (31%). The study of the descriptive results ofseven groups reveals that the Indian companies dis-closed more information on ‘research and development’and ‘human resource’ than the companies from the USand Japan. However, the US companies disclosed moreinformation on ‘strategy and competition’, ‘market andcustomer’, and ‘IPRs and goodwill and other intangi-bles’ than the Indian and Japanese companies. Japanesecompanies disclosed more on ‘corporate and share-holder’ and ‘environment and others’. The item, ‘IPRsand goodwill and other intangibles’ group showed maxi-mum increase in five years by the sample companies ofall the three countries under study. The areas where theIndian companies lack in disclosure on intangibles are‘strategy and competition’, and ‘market and customer’.Answer to the question on whether an intangible-inten-sive company affects the level of disclosure on intangi-bles could not be found because of the mixed nature ofresults for the two proxies of intangible-intensive com-panies. As per the univariate analysis, the companies

with R&D expenditure disclose significantly more thanthe companies without R&D expenditure in all the threecountries under study but for the service companies forwhich the results are different. Greater disclosure on in-tangibles is made by the Indian and Japanese servicecompanies but the difference is not statistically signifi-cant. Lastly, the multivariate analysis reveals that dif-ferent company attributes are associated with thedisclosure scores of the three countries under study. Thedisclosure scores of the Indian companies are more as-sociated with organizational size and profitability,whereas those of the US companies are associated morewith industry type. However, in case of the Japanesecompanies, disclosure scores are associated with organi-zational size.

Accounting is a social science and the legal regulatoryframeworks are the pearls from the society. As a result,accounting frameworks are bound to be different acrosscountries. In the present study, the differences in thedisclosure practices also reveal the differences in theregulatory frameworks across countries as the indexincludes the mandatory disclosure along with the vol-untary disclosure on intangibles. The steps to harmo-nize the regulatory frameworks across countries havebeen taken by international financial reporting stand-ards (IFRS). Efforts are also taken to improve the quali-tative characteristics of financial reporting as IFRS issuedan exposure draft namely ‘management commentary’in 2009.

SCOPE FOR FURTHER RESEARCH

Some of the possible areas that can be explored by fu-ture researchers on intangibles includes a study of thedisclosure of intangibles among the banking and insur-ance companies as they are governed by different stat-utes. Further, case studies regarding measurement andreporting on intangibles can be taken up with respect toleading Indian companies. For example, companies likeInfosys and BHEL disclose information on intangibles;it would therefore be useful to examine the model ap-plied by them and see why other companies do not fol-low the same. Last but not the least, a study establishingthe relationship between the performance of companiesand R&D expenditure or market to book value ratio(proxies for intangibles) would also provide scope forfurther research.

62

Table 3: Major Items Disclosed by More than 50% of the Sample Companies

India Per cent of US Per cent of Japan Per cent ofCompanies Companies Companies

Research & R&DResults/ 80.00 R&D 71.40Development Achievements Expenditure

R&D Focus Areas 78.57

Technology and Innovation 78.57

R&D Expenditure 75.71

Information on Accounting 68.57Treatment of R&DExpenditure

R&D Expenditure as 67.14% of sales

Strategy & Industry Trends/Environment 74.29 Liquidity Management 78.80 Business Strategy 78.60Competition R&D Strategy 71.43 Restructuring Activities 66.70 Growth Strategy 67.90

Risk Factors 64.29 Business Strategy 53.00 Restructuring Activities 51.80

Industry Trends/ 50.00Environment

Market & Market Risk 77.30 Geographic Division 82.10Customer Major Products 68.20 Major Products 73.20

Geographic Division 54.50 Primary Markets 57.10

Human Particulars of Remuneration 88.57 Retirement Benefits 87.90 Retirement Benefits 100.00Resource and Benefits Paid to Key

Managerial Personnel

Retirement Benefits 82.86 No. of Employees 60.60 Leadership Team 91.10

Leadership Team 81.43 Leadership Team 60.60 No. of Employees 85.70

No. of Employees 65.71 Incentive Plans for 50.00Employees

Industrial Relations 54.29

Human Resource 50.00Development Activities

IPRs & Value of Other 61.43 Value of Goodwill 84.80 Value of Other 58.90Goodwill Intangible Assets Intangible Assetsand Other Items included in 58.57 Accounting Treatment 78.80 Accounting Treatment 58.90Intangible Other Intangible Assets for Goodwill and Other for Goodwill and OtherAssets Intangible Assets Intangible Assets

Accounting Treatment 51.43 Value of Other 75.80 Amortization Method 55.40for Goodwill and Other Intangible Assets for Goodwill andIntangible Assets Other Intangible Assets

Details regarding 69.70 Amortization Method 51.80Impairment Test Criteria for Goodwill andfor Goodwill and Other Other Intangible AssetsIntangible Assets

Amortization Method 63.60for Goodwill andOther Intangible Assets

Items included in 62.10Other Intangible Assets

Amortization Period 62.10for Goodwill andOther Intangible Assets

Amortization Method 59.10for Goodwill andOther Intangible Assets



India Per cent of US Per cent of Japan Per cent ofCompanies Companies Companies

Corporate & Share Price Data 91.43 Share Price Data 72.70 Corporate Data 87.50Shareholder Shareholding Distribution 87.14 No. of Shareholders 71.40

(Type of Shareholder)

Shareholding Distribution 85.71 Major Shareholders 71.40(No. of Shares Held)

Corporate Profile 62.50

Share Price Data 58.90

Environment Corporate Governance 94.29 New Accounting 83.30 Lease 92.90& Others Standards

Related Party Transactions 84.29 Contingencies & 80.30 Contingencies & 91.10Commitments Commitments

Contingencies & 74.29 Contractual Obligations 77.30 Corporate Governance 87.50Commitments

Outlook/Future 71.43 Fair Value of Financial 68.20 Corporate Social 80.40Instruments Responsibility

Opportunities and 61.43 Off-balance-sheet 66.70 Subsequent Events 67.90Challenges Arrangements

Corporate Social 58.57 Hedging Activities 53.00 Hedging Activities 66.10Responsibility

Information on Awards 50.00 Lease 51.50 Outlook/Future 55.40

Table 4: Major Items Disclosed by More than 25% but Less than 50% of Sample Companies

Groups India Per cent of US Per cent of Japan Per cent ofCompanies Companies Companies

Research & Information related to 47.14 Technology and 45.5 Information on 48.2Development Software Cost Innovation Accounting Treatment

of R&D Expenditure

Information 37.14 R&D Expenditure 40.9 Information related to 42.9Technology Initiatives Software Cost

Technical Know-how 28.57 Information on 28.8 Technology and 39.3Accounting Treatment Innovationof R&D Expenditure

R&D Activities 35.7

Growth Rate of R&D 26.8Expenditure

R&D Focus Areas 25.0

R&D Results/Achievements 25.0

R&D Expenditure as 25.0% of Sales

New Technologies 25.0

Strategy & Restructuring Activities 42.86 Risk Factors 45.5 Liquidity Management 48.2Competition Business Strategy 37.14 Type/Degree of Competition 40.9 Strategic Targets 44.6

Human Resource Strategy 30.00 Competitive Factors 40.9 Product Strategy 42.9

Strengths 28.57 Industry Trends/ 36.4 Regional Strategy 39.3Environment

Strategic Initiatives 27.14 Key Competitors 34.8 Risk Management 39.3

Strengths 33.3 Risk Factors 39.3

Growth Strategy 31.8 Global Strategy 37.5

Risk Management 25.8 Strengths 35.7

Marketing Strategy 26.8

64

Groups India Per cent of US Per cent of Japan Per cent ofCompanies Companies Companies

Market & Marketing/Advertising Costs 48.57 Marketing/Advertising Costs 48.5 New Products 39.3Customer Major Products 44.29 New Products 34.8 Market Units/Stores 32.1

New Products 38.57 Market Units/Stores 31.8 Marketing/Advertising Costs 28.6

Geographic Division 38.57 Primary Markets 28.8

Information related to 31.43 Brand Names 28.8Product Quality

Major/Significant customers 27.3

Human Information about 48.57Resource Executive Officers

Training Programmes 35.71

IPRs & Amortization Method 34.29Goodwill for Goodwill andand Other Other Intangible AssetsIntangible Amortization Period for 34.29 Carrying Value for 43.9 Value of Goodwill 44.6Assets Goodwill and Other Goodwill and Other

Intangible Assets Intangible Assets

Value of Goodwill 30.00 Value of Goodwill 37.9 Items included in Other 44.6(segment-wise) Intangible Assets

Amortized Value for Goodwill 28.57 Value of Trademarks/ 36.4 Amortized Value for Goodwill 30.4and Other Intangible Assets Tradenames and Other Intangible Assets

Value of Acquired Goodwill 34.8 Value of Acquired Goodwill 28.6

Carrying Value for Goodwill 28.6and Other Intangible Assets

Details regarding Impairment 28.6Test Criteria for Goodwill andOther Intangible Assets

Corporate & Shareholder Complaints 47.14 Corporate 34.8 Shareholding Distribution 48.2Shareholder Accomplishments (Type of Shareholder)

No. of Shareholders 41.43 Corporate Structure 39.3

Corporate Data 38.57 Corporate Goals/Objectives 32.1

Corporate Accomplishments 30.00 Corporate Vision 30.4

Corporate Vision 25.71 Corporate Philosophy 30.4

Corporate History 28.6

Corporate Accomplishments 25.0

Corporate Ethics/ 25.0Code of Conduct

Environment Lease 42.86 Outlook/Future 45.5 Environmental Activities 46.4& Others Environmental Initiatives 27.14 Environmental Matters 33.3 Fair Value of Financial 44.6

Instruments

Corporate Social 30.3 New Accounting 35.7Responsibility Standards

Subsequent Events 30.3

Source: Based on Annual Reports of the Indian, US, and Japanese companies



Table 5: Results of Paired t-test

Overall Disclosure Research & Development Strategy & Competition Market & Customer

Pairs India US Japan India US Japan India US Japan India US Japan

2001-02 -2.65** -5.67* 0.130 -0.202 -1.18 -0.458 -2.42** -0.993 0.899 0.848 -0.772 1.711

2002-03 -4.29* -4.15* -7.466* -2.37** -2.15** -2.27** -2.80** -2.36** -3.674* -2.39** -1.11 -2.90**

2003-04 -4.81* -2.61** -7.493* -2.31** -0.467 -1.671 -0.499 -3.291** -5.224* -1.621 -1.016 -2.74**

2004-05 -3.59* -2.48** -7.205* -1.32 -1.09 -1.843 -0.903 -1.053 -3.20** -0.760 -2.011** -2.07**

2001-05 -7.72* -8.13* -9.673* -4.77* -3.03** -4.112* -3.67** -5.218* -.673* -2.71** -2.948** -3.19**

Human Resource IPRs & Goodwill & Corporate & Shareholder Environment & OthersOther Intangibles


2001-02 -1.36 -1.401 0.269 -0.493 -4.57* 0.089 -3.47* -1.974 -0.919 -1.91 -2.144** -0.808

2002-03 -3.39* 0.825 -1.231 -2.50** -1.92 -4.675* -2.01 -1.322 -3.14** -2.23** -3.707* -4.54*

2003-04 0.509 -1.320 -3.19** -5.66* 0.400 -0.855 -0.99 0.000 -3.81* -2.13** -1.211 -3.06**

2004-05 -2.15** -0.080 -1.459 -3.102** -2.12** -4.364* -0.59 1.430 -0.132 -3.49* -1.538 -1.734

2001-05 -2.86** -1.604 -3.48* -6.73* -6.02* -6.132* -4.32* -0.861 -4.51* -5.32* -5.171* -7.83*

*t-value significant at 99% level of significance **t-value significant at 95% level of significance

Table 6: Results of Wilcoxon Matched Pair-sign Rank Test

Overall Disclosure Research & Development Strategy & Competition Market & Customer


2001-02 -3.320** -4.49* -0.253 -0.649 -1.13 -0.26 -2.324** -0.946 -1.06 -1.04 -0.878 -1.54

2002-03 -3.85* -3.72* -.5.51* -2.399** -2.08** -2.06** -2.56** -2.36** -3.45* -2.75** -1.54 -2.68**

2003-04 -4.723* -2.22** -.5.53* -2.665** -0.062 -1.70 -0.79 -2.90** -4.50* -1.54 -0.67 -2.51**

2004-05 -3.95* -2.64** -5.51* -2.834** -0.947 -1.77 -0.62 -1.336 -2.98** -0.574 -2.05** -1.96**

2001-05 -5.05* -5.45* -5.72* -4.029* -3.19* -3.49* -3.39* -4.31* -5.06* -2.57** -2.96* -2.87**

Human Resource IPRs & Goodwill & Corporate & Shareholder Environment & OthersOther Intangibles


2001-02 -1.69 -1.40 -0.204 -0.956 -3.96* -0.141 -3.03** -1.68 -0.924 -1.991** -1.95 -0.644

2002-03 -3.07** -0.96 -1.24 -2.414** -1.69 -4.01* -2.17** -1.13 -2.98** -2.156** -3.35* -3.88*

2003-04 -0.720 -1.43 -3.08** -4.526* -0.383 -1.23 -0.773 -0.485 -3.46* -2.212** -1.34 -2.99**

2004-05 -1.94 -0.033 -1.44 -2.996** -1.94 -4.07* -0.706 -1.207 -0.120 -3.463* -1.84 -1.85

2001-05 -2.96** -1.42 -3.03** -4.748* -4.61* -4.95* -3.82* -0.73 -3.77* -4.463* -4.25* -5.31*

* z-value significant at 99% level of significance ** z-value significant at 95% level of significance

66

Table 7: Results of Kruskal-Wallis Test

2001 2002 2003 2004 2005

Mean Chi-sq. P-value Mean Chi-sq. P-value Mean Chi-sq. P-value Mean Chi-sq. P-value Mean Chi-sq. P-value

Overall Disclosure

India 73.56 76.36 78.90 85.83 88.08

US 76.14 5.876 0.053 94.27 23.876 0.000* 93.18 6.123 0.047** 95.21 1.379 0.047** 102.16 2.564 0.277

Japan 57.91 52.97 71.48 85.92 100.36

Research & Development

India 102.75 105.09 111.31 123.83 127.35

US 45.90 46.97 0.000* 51.91 38.57 0.000* 58.39 35.28 0.000* 56.40 54.704 0.000* 66.90 40.962 0.000*

Japan 64.46 70.92 79.08 85.11 92.82

Strategy & Competition

India 61.49 76.54 79.29 75.15 74.66

US 77.82 4.169 0.124 82.15 4.562 0.102 89.81 2.118 0.347 99.46 7.629 0.022** 105.61 17.724 0.000*

Japan 66.26 64.55 77.92 93.42 113.06

Market & Customer

India 54.74 53.87 64.02 70.90 74.66

US 89.02 20.156 0.000* 102.99 38.062 0.000* 110.32 31.049 0.000* 117.41 29.553 0.000* 131.35 42.532 0.000*

Japan 60.45 62.87 71.41 77.82 87.04

Human Resource

India 104.30 111.95 122.82 128.71 138.31

US 66.86 56.623 0.000* 78.95 77.454 0.000* 77.37 71.765 0.000* 82.06 72.708 0.000* 83.58 70.280 0.000*

Japan 41.77 36.28 46.93 49.79 59.46

IPRS &Goodwill & Intangibles

India 52.84 53.09 52.19 67.88 72.20

US 96.67 40.467 0.000* 112.15 67.95 0.000* 118.22 57.66 0.000* 120.64 37.110 0.000* 129.26 37.903 0.000*

Japan 54.22 53.86 74.97 77.69 88.27

Corporate & Shareholder

India 79.30 91.26 93.67 99.31 111.19

US 46.60 25.045 0.000* 49.26 29.55 0.000* 55.96 28.170 0.000* 53.88 47.98 0.000* 53.91 62.976 0.000*

Japan 83.28 86.17 99.66 117.17 128.33

Environment & Others

India 60.64 63.36 60.02 64.20 71.34

US 71.60 2.607 0.272 83.93 5.72 0.057 92.79 18.407 0.000* 100.13 23.631 0.000* 110.20 22.951 0.000*

Japan 73.31 74.53 94.34 105.67 111.81



Tabl

e 8:

Res

ults

of I

ndep

ende

nt S

ampl

e t-t

est f

or In

dust

ry C

lass

ifica

tion

Coun

try

Year

/ In

dust

ry20

0120

0220

0320

0420

05

Mea

nt-

valu

ep-

valu

eM

ean

t-va

lue

p-va

lue

Mea

nt-

valu

ep-

valu

eM

ean

t-va

lue

p-va

lue

Mea

nt-

valu

ep-

valu

e

Indi

aM

anuf

actu

ring

15.8

7-1

.44

0.15

716

.64

-2.17

0.03

5**

18.5

9-1

.48

0.14

420

.31

-0.6

940.

490

21.7

70.

776

.441

Serv

ice19

.89

23.19

23.0

622

.1519

.67

R&D

inte

nsive

17.2

21.

603

0.11

718

.491

2.87

30.

006*

*20

.90

4.86

20.

000*

21.8

53.

496

0.00

1*22

.79

2.94

20.

004*

*N

on-R

&D in

tens

ive13

.83

12.7

7710

.49

14.3

916

.19

US

Man

ufac

turin

g16

.91

1.69

40.

097

19.9

82.

313

0.02

5**

22.3

13.

380

0.00

1*23

.172.

850.

006*

*24

.55

3.13

50.

003*

*Se

rvice

14.8

917

.68

18.5

319

.40

20.4

4

R&D

inte

nsive

17.0

81.

920.

239

20.2

82.

669

0.01

0**

22.2

22.

500.

015*

*23

.67

2.96

70.

004*

*24

.76

3.02

80.

004*

*N

on-R

&D in

tens

ive15

.54

17.7

419

.29

19.7

520

.76

Japa

nM

anuf

actu

ring

13.7

3-.8

730.

387

13.9

2-1

.163

0.25

117

.33

-1.4

10.

163

19.7

8-1

.170.

244

21.9

4-0

.908

0.36

8Se

rvice

14.9

115

.51

19.7

422

.01

23.6

9

R&D

inte

nsive

15.8

62.

450.

018*

*16

.25

2.91

60.

005*

*19

.67

2.05

00.

046*

*21

.49

1.41

90.

162

23.0

71.

540

0.13

0N

on-R

&D in

tens

ive12

.96

13.0

016

.68

19.19

20.0

8

*p-v

alue

d”0.

001

**p-

valu

ed”0

.05

68

Table 9: Multiple Regression Results of Indian Companies (2001-2005)

Year →→→→→ 2001 2002 2003 2004 2005

Variable ↓↓↓↓↓ βββββ- t- p- βββββ- t- p- βββββ- t- p- βββββ- t- p- βββββ- t- p-value value value value value value value value value value value value value value value

Sales 0.156 1.213 0.233 0.159 0.991 0.328 0.048 0.473 0.639 0.206 1.956 0.055 -0.009 -0.050 0.960

Assets 0.253 1.999 0.053 0.266 1.698 0.098 0.006 0.057 0.955 0.152 1.428 0.159 0.221 2.087 0.041**

ROA 0.631 4.882 0.000* 0.501 3.853 0.000* 0.791 4.75 0.000* 0.686 4.198 0.000* 0.026 0.198 0.844

ROE -0.098 -0.382 0.705 -0.242 -1.539 0.132 -0.507 -3.05 0.004** -0.365 -2.17 0.034** 0.060 0.548 0.586

Leverage -0.106 -0.705 0.485 0.144 0.135 0.895 -0.014 -0.11 0.913 -0.092 -.734 0.466 0.088 0.761 0.449

Market to 0.190 0.941 0.353 0.033 0.033 0.205 -0.099 -0.80 0.425 0.228 1.263 0.212 0.400 3.731 0.000*Book Prices

Industry Type 0.154 1.195 0.240 0.366 2.814 0.008** 0.513 5.19 0.000* 0.366 3.309 0.002** 0.225 2.089 0.041**

Constant 13.432 0.000* 5.697 0.000* 4.32 0.000* 5.786 0.000* 6.928 0.000*

Model Summary

R2 0.398 0.347 0.552 0.357 0.289

Adjusted R2 0.382 0.314 0.523 0.323 0.256

F- value 23.83 10.373 19.302 10.538 8.931

Significance 0.000* 0.000* 0.000* 0.000* 0.000*

*p-value≤0.001 **p-value≤0.05

Table 10: Multiple Regression Results of US Companies (2001 to 2005)

Year →→→→→ 2002 2003 2004 2005

Variable ↓↓↓↓↓ βββββ-value t- value p-value βββββ-value t- value p-value βββββ-value t- value p-value βββββ-value t- value p-value

Sales 0.099 0.736 0.465 -0.059 -0.449 0.655 -0.181 -1.490 0.142 -0.174 -1.486 0.142

Assets -0.086 -0.636 0.528 -0.019 -0.146 0.884 0.021 0.169 0.866 0.037 0.300 0.765

ROA -0.136 -1.012 0.317 0.044 0.342 0.734 0.154 1.265 0.211 0.140 1.187 0.240

ROE -0.155 -1.154 0.254 0.200 1.572 0.122 -0.151 -1.225 0.226 0.207 1.780 0.080

Leverage 0.060 0.440 0.662 -0.224 -1.739 0.088 -0.126 -1.026 0.309 0.001 0.008 0.994

Market to Book Value -0.122 -0.887 0.380 -0.186 -1.443 0.155 -0.139 -1.134 0.262 0.046 0.387 0.700

Industry Type 0.356 2.669 0.010** 0.322 2.503 0.015** 0.363 2.967 0.004** 0.356 3.028 0.004**

Constant 28.41 0.000* 23.734 0.000* 21.922 0.000* 22.769 0.000*

Model Summary

R2 12.7% 10.4% 13.2% 12.7%

Adjusted R2 10.9% 8.7% 11.7% 11.3%

F-value 7.125 6.267 8.803 9.171

Significance 0.010** 0.015** 0.004** 0.004**

*P≤0.001 **P≤0.05Note: In the year 2001, no company attribute was significant.



Table 11: Multiple Regression Results of Japanese Companies (2001-2005)

Year→→→→→ 2001 2002 2003 2004 2005Variable↓↓↓↓↓ βββββ- t- p- βββββ- t- p- βββββ- t- p- βββββ- t- p- βββββ- t- p-

value value value value value value value value value value value value value value value

Sales 0.243 1.699 0.097 0.224 1.755 0.086 0.447 3.462 0.001* 0.183 0.749 0.457 0.469 1.055 0.297

Assets 0.157 1.077 0.288 0.413 3.271 0.002** 0.114 0.637 0.528 0.389 3.017 0.004** 0.252 3.870 0.000*

ROA 0.148 0.959 0.343 0.155 1.238 0.222 0.136 1.025 0.310 0.113 0.870 0.388 0.031 0.251 0.803

ROE 0.069 0.461 0.647 0.103 0.815 0.420 0.181 1.404 0.167 0.027 0.208 0.836 -0.028 -0.231 0.818

Leverage -0.052 -0.312 0.757 0.007 0.050 0.961 -0.009 -0.067 0.947 -0.015 -0.116 0.908 0.036 0.294 0.770

Market to 0.106 0.729 0.471 0.156 1.249 0.218 0.047 0.363 0.719 0.006 0.048 0.962 0.154 1.272 0.209Book Value

Industry Type 0.372 2.565 0.014** 0.427 3.378 0.002** 0.160 1.219 0.229 0.128 0.992 0.326 0.105 0.845 0.402

Constant 16.203 0.000* 15.683 0.000* 14.118 0.000* 13.390 0.000* 18.834 0.000*

Model Summary

R2 13.8% 30.9% 20.0% 15.1% 22%

Adj. R2 11.7% 27.7% 18.3% 13.5% 20.6%

F- value 6.58 9.82 11.99 9.104 14.98

Significance 0.014** 0.000* 0.001* 0.004** 0.000*

*p-value≤0.001**p-value≤0.05

Annexure: Disclosure Index of Intangibles

Items/Year

A. Research and Development

a1 R & D Facilities

a2 R & D Activities

a3 R & D Personnel

a4 R & D Focus Areas

a5 R & D Centres/ Bases

a6 R & D Structure

a7 R & D Efforts/Initiatives

a8 R & D Results/Achievements

a9 R & D Expenditure

a10 R & D Expenditure as % of Sales

a11 Growth Rate of R&D Expenditure

a12 Reason for the Increase or Decrease in Expenditure

a13 Information on Accounting Treatment of R&D Expenditure

a14 In-process Research and Development

a15 Technology and Innovation

a16 Technical know-How

a17 New Technologies

a18 Details Regarding Funding of R&D

a19 Information Technology Initiatives

a20 Information Related to Software Cost

Grand Total(A)

B. Strategy & Competition

Strategy:-

b1 R & D Strategy

b2 Human Resource Strategy

Items/Year

b3 Intellectual Property Strategy

b4 Product Strategy

b5 Marketing Strategy

b6 Growth Strategy

b7 Growth Areas/Drivers

b8 Business Strategy

b9 Suppliers Strategy

b10 Investment Strategy

b11 Global Strategy

b12 Regional Strategy

b13 Leadership Strategy

b14 Strengths

b15 Risk Management

b16 Liquidity Management

b17 Strategic Issues

b18 Strategic Targets

b19 Strategic Initiatives

b20 Restructuring Activities

b21 Strategic Alliances

b22 Cost Control Measures / Initiatives

b23 Financial Strategies

b24 Information Related to Supply Chain Management

Competition:

b25 Type/Degree of Competition

b26 Competitive Factors

b27 Key Competitors

70

Items/Year

b28 Industry Trends/Environment

b29 Risk Factors

b30 Efforts to Overcome Global Competition

Grand Total(B)

C. Market & Customer

Market:

c1 Primary Markets

c2 Major Products

c3 New Products

c4 Ratio of New Products to all Products

c5 Market Units/Stores

c6 No. of New Units/Stores

c7 New Markets/Target Markets

c8 Market Risk

c9 Market Share

c10 Marketing/Advertising Costs

c11 Market Growth

c12 Brand Names

c13 Top Brands

c14 Information Related to Distribution

c15 No. of Dealers

c16 Major Suppliers

c17 Supplier Relationships

c18 Sales of Company as % of Industry Sales

c19 Market leadership

c20 No. of Brands

c21 Brand Value

c22 Brand Building

c23 Sales Promotion/Marketing Activities

c24 Per Capita Consumption of Product

c25 Information Related to Product Quality

c26 Information Related to Product Design

Customer:

c27 Customer Base

c28 Major/Significant Customers

c29 New Customers

c30 Customer Loyalty

c31 Customer Relationships

c32 Customer List

c33 Geographic Division

c34 Sales Incentives with Customers

c35 Information on Customer Satisfaction

c36 Customer Services

Grand Total(C)

D. Human Resource

d1 No. of Employees

d2 No. of Employees(segment-wise)

d3 No. of Employees(area-wise)

Items/Year

d4 New employees

d5 Age Profile of Employees

d6 Average age of Employees

d7 Gender Classification of Employees

d8 Educational Index of Employees

d9 Value of Human Resource

d10 Value of Human Resource per Employee

d11 Return on Human Resource Value

d12 Training Programmes

d13 Human Resource Development Activities

d14 Leadership Team

d15 Recruiting and Staffing Programmes

d16 Employee Relationships

d17 Industrial Relations

d18 Remuneration Policy

d19 Particulars of Remuneration and Benefits Paid to key ManagerialPersonnel

d20 Incentive Plans for Employees

d21 Retirement Benefits

d22 Employment Productivity Over Years

d23 No. of Employees Exposed to Training programmes

d24 Information on Employee Satisfaction

d25 Information about Executive Officers

d26 Sales per Employee

Grand Total(D)

E. Intellectual Property Rights & Goodwill and Other IntangibleAssets

Intellectual Property Rights:

e1 Value of Intellectual Property Rights

e2 No. of Patents

e3 No. of Patents (area-wise)

e4 Value of Patents

e5 Value of Acquired Patents

e6 Patent Ranking

e7 Value of Trademarks/ Tradenames

e8 Names of Trademarks Registered for the Company

e9 Intellectual Property Cycle

e10 Intellectual Property Activities

e11 Intellectual Property Management

e12 Information on Trade Secrets, Copyrights etc.

e13 Value of Customer Relationships

Goodwill And Other Intangible Assets:

e14 Value of Goodwill

e15 Value of Acquired Goodwill

e16 Value of Goodwill (Segment-wise)

e17 Value of Goodwill (Area-wise)

e18 Value of Other Intangible Assets

e19 Items Included in Other Intangible Assets



Items/Year

e20 Accounting Treatment for Goodwill and Other Intangible Assets

e21 Amortization Method for Goodwill and other Intangible Assets

e22 Amortization Period for Goodwill and Other Intangible Assets

e23 Amortized Value for Goodwill and Other Intangible Assets

e24 Carrying Value for Goodwill and Other Intangible Assets

e25 Details Regarding Impairment Test Criteria for Goodwill and OtherIntangible Assets

Grand Total(E)

F. Corporate & Shareholder Information

Corporate Information:

f1 Corporate Values

f2 Corporate Goals/Objectives

f3 Corporate Vision

f4 Corporate Mission

f5 Corporate Culture

f6 Corporate Profile

f7 Corporate Philosophy

f8 Corporate History

f9 Corporate Accomplishments

f10 Corporate Structure

f11 Corporate Data

f12 Corporate Ethics/Code of Conduct

Shareholder Information:

f13 Shareholder Complaints

f14 No. of Shareholders

f15 Shareholding Distribution (type of shareholder)

f16 Shareholding Distribution (number of shares held)

f17 Share Price Data

f18 Major Shareholders

Grand Total(F)

Items/Year

G. Environment & Others

Environment:

g1 Environmental Activities

g2 Environmental Philosophy

g3 Environmental Programmes/Policies

g4 Environmental Initiatives

g5 Environmental Commitments

g6 Environmental Management Framework

g7 Environmental Matters

g8 Environmental Expenditure

g9 Products/Technologies Contributing to Environment

Other:

g10 Corporate Social Responsibility

g11 Corporate Governance

g12 Contingencies & Commitments

g13 Off Balance Sheet Arrangements

g14 Lease

g15 Related Party Transactions

g16 Hedging Activities

g17 Fair Value of Financial Instruments

g18 Contractual Obligations

g19 New Accounting Standards

g20 Accounting Changes

g21 Outlook/ Future

g22 Subsequent Events

g23 Opportunities and Challenges

g24 Information on Awards

g25 Information on Credit Ratings

Grand Total(G)

REFERENCES

Accounting Standard 26 (2002). Intangible assets. The CharteredAccountant, February.

Accounting Terminology Bulletin No. 1 (1953). Review andresume, AICPA, Paragraph 9.

Ahmed, K., and Courtis, J. K. (1999). Association between cor-porate characteristics and disclosure level in annual re-ports: A meta-analysis. British Accounting Review, 31,35-61.

Bergamini, I.; and Zambon, S. (2005). A scoring methodologyfor ranking company disclosure on intangibles. EU PrismResearch Project. WP4 Accounting, Auditing and Finan-cial Analysis in the New Economy, available atwww.euintangibles.net/library/localfiles/WP4/4.2_Bergamini&Zambon2002.pdf

Citron, D.; Holden J.; Selim, G.; and Oehleke, F. (2005). Dovoluntary intellectual capital disclosures provide infor-mation about firm’s intangible assets? EBK, Working Pa-per 2005/11 available at website www.ebkresearch.org/

downloads/workingpapers/wpo511_citron_etal.pdf.

Cooke, T. E. (1989). Voluntary corporate disclosure by Swed-ish companies. Journal of International Financial Manage-ment and Accounting, 1(2), 171-195.

Courtis, J. K. (1986). “An investigation into annual report read-ability and corporate risk-return relationships. Account-ing and Business Research, 16(64), 19-27.

Edvinson, L., and Malone, M.S. (1997). Intellectual capital – Re-alizing your company’s true value by finding its hiddenbrainpower. New York: Harper Business Publisher.

FASB (2001). Summary of statement no.142 – Goodwill andother intangible assets. available at www. Fasb.org

Firth, M. A. (1980). Raising finance and finns’ corporate re-porting policies. Abacus, 16(2), 100-115.

Goldfinger, C. (1997). Understanding and measuring the in-tangible economy: Current status and suggestions forfuture research. CIRET Seminar, Helsinki.

72

Gujarati, N. D. (2004). Basic econometrics. Fourth Edition, NewDelhi: Tata McGraw-Hill Publishing Company Limited,

Hirschey, M. (1993). Advertising R&D expenditure and themarket value of the firm. Financial Management, 22nd De-cember, available at www.allbusiness,com/marketing-advertising/advertising/416365-1.html

Jarboe, K. P. (2005). Reporting intangibles – A hardlook at im-proving business information in the US. Working PaperNo. 1, Athena Alliance, available at www.athenaalliance.org

Kang, H. (2006). Reporting intangible assets: Voluntary disclosurepractices of the top emerging market companies. Ph.D. Dis-sertation, The University of New South Wales, Australia.

Kaplan, R.S., and Norton, D.P. (2000). The balanced scorecard.Boston: Harvard Business School Press.

Knutson, P. (1993). Financial reporting in the 1990s and be-yond: Position paper on the association for investmentmanagement & research. Charlotteville, VA: Associationfor Investment Management & Research, available atwww.emeraldinsight.com/published/emeraldfulltextarticle/pdf/0510210502_ref.html.

Lang, M., and Lundholm, R. (1993). Cross-sectional determi-nants of analyst ratings of corporate disclosure. Journal ofAccounting Research, 31(2), 246-271.

Lev, B. (2001) Intangibles: Management, measurement and report-ing. Washington: Brooklyn Institution Press.

Lev, B. (2003). Remarks on the measurement, valuation andreporting of intangible assets. FRBNY Economic PolicyReview, September, 17-22.

Lev, B. (2004). Sharpening the intangibles edge. Harvard Busi-ness Review, June, 109-118.

Marston, C. L., and Shrives, P. J. (1991). The use of disclosureindices in accounting research: A review article. British

Accounting Review, 23, 195-210.

OECD (2006). Intellectual assets and value creation: Implica-tions for corporate reporting. Available at www.oecd.org/daf/corporate-affairs/.

Oliveras, E., and Kasperskaya, Y. (2002). Reporting in intellec-tual capital in Spain. Journal of Economic Literature Classi-fication, available at www.papers.ssrn.com/so13/papers.cfm?abstract_id=848664.

Rao, M.M. (2003). Leading with knowledge. New Delhi: TataMcGraw-Hill Publishing Co. Ltd.

Robbins, W. A., and Austin, K. R. (1986). Disclosure quality ingovernmental financial reports: An assesment of the ap-propriateness of a compound measure. Journal of Account-ing Research, 24(2), 412-421.

Saudagaran, S.M. (2001). International accounting, Singapore:Thomson Asia Pte. Ltd.

Sisodia, A.S. (2001). Valuing the intangibles. Chartered Finan-cial Analyst, November.

Tasker, S. (1998). Bridging the information gap: Quarterly con-ference calls as a medium for voluntary disclosure. Re-view of Accounting Studies, 3, 137-167.

Taylor, S., and Associates (1998). Full disclosure 1998. London,United Kingdom: Shelley Taylor.

Turban, E., Rainer, R.K., and Potter, R.E. (2000). Introduction toinformation technology. Singapore: John Wiley and SonsInc.

Williams, S. (2001). Is intellectual capital performance and re-porting practice related? Journal of Intellectual Capital, 2(3),192-203.

Zeithaml, A., Gremler, D., Bitner, J., and Pandit,A. (2008). Ser-vices marketing-integrating customer focus across the firm.New Delhi: Tata McGraw- Hill Publishing Co. Ltd.

Acknowledgement: The author wishes to acknowledge hersupervisor, Prof. Dinesh K Gupta (University Business School,Panjab University, Chandigarh), for his consistent support,encouragement, and help in completing this study. She is alsothankful to Dr. Suresh Kumar (Department of Statistics, PanjabUniversity, Chandigarh) and Dr. Monica Bedi (University

Business School, Panjab University, Chandigarh) for theirthoughtful advice which contributed a lot to the statisticalapplications of this research work. She expresses her gratitudeto her husband, Dr. Gaurav Kalotra for his support and en-couragement.

Ragini is working as an Assistant Professor of Commerce atGovernment Post Graduate College, Naraingarh (Ambala). AMasters in Commerce from University Business School, PanjabUniversity, Chandigarh she completed her Ph.D. from the sameUniversity in 2010 under the guidance of Prof. Dinesh KumarGupta. She worked as a Guest Faculty at University Business

School, Panjab University, Chandigarh after submitting herPh.D. thesis and thereafter as an Assistant Professor of Com-merce at Government Post Graduate College, Chandigarh forone and a half years.

e-mail: [email protected]


research corporate disclosure of intangibles: a ... comparative study of practices among indian, us,...

Documents