Extent and trend of intellectual capital reporting in Malaysia: empirical evidence. Abdulrahman Anam Ousama*

Transcription

1 Int. J. Managerial and Financial Accounting, Vol. 4, No. 2, Extent and trend of intellectual capital reporting in Malaysia: empirical evidence Abdulrahman Anam Ousama* Department of Accounting, Faculty of Commerce and Management Sciences, Ibb University, University Street, Ibb City, Yemen *Corresponding author Abdul Hamid Fatima Department of Accounting, Faculty of Economics and Management Sciences, International Islamic University Malaysia, Jalan Gombak, 53100, Kuala Lumpur, Malaysia Abstract: This paper aims to examine the extent of intellectual capital (IC) disclosure in the annual reports of Malaysian listed companies. The paper also aims to investigate the trend of IC disclosure (ICD) in the annual reports in the years 2002 and A comprehensive disclosure index which includes 101 items was developed to measure the extent of ICD. The paper found that listed companies disclosed, on average, 22% and 24% of IC information in the annual reports for the years 2002 and 2006, respectively. In addition, the paper found that the extent of ICD had significantly increased between the period 2002 and The paper provides practical implications for the listed companies to understand their ICD practises, hence try to improve it towards greater transparency. In addition, the paper provides empirical evidence to the standard setter, authorities and professional bodies on the current ICD practises of listed companies. Thus, it could help in developing framework and guidelines on ICD to enhance its disclosure. Furthermore, the paper is considered to be the first paper to examine the trend of ICD in the annual reports of listed companies. Moreover, it contributes to the IC literature with the development of a comprehensive ICD index. Keywords: intellectual capital; IC; disclosure; extent; trend; Malaysia. Reference to this paper should be made as follows: Ousama, A.A. and Fatima, A.H. (2012) Extent and trend of intellectual capital reporting in Malaysia: empirical evidence, Int. J. Managerial and Financial Accounting, Vol. 4, No. 2, pp Biographical notes: Ousama Abdulrahman Anam is an Assistant Professor of Accounting at the Department of Accounting, Ibb University, Yemen. He holds a Bachelor of Accounting (honours) from Sana a University, Yemen and Master and PhD in Accounting from the International Islamic University Malaysia. He has published many articles in the area of intellectual capital, financial accounting and reporting and Islamic accounting. Copyright 2012 Inderscience Enterprises Ltd.

2 160 A.A. Ousama and A.H. Fatima Fatima Abdul Hamid is an Assistant Professor of Accounting at the Department of Accounting and the Deputy Dean of Faculty of Economics and Management Sciences, International Islamic University Malaysia. She holds a Bachelor of Accounting (honours) from the International Islamic University Malaysia and Master and PhD in Accounting and Finance from Lancaster University, UK. Her research interests are in auditing, accounting education and financial accounting and reporting. 1 Introduction Generally, the disclosure and reporting of information in the annual report of a company aims to provide useful and relevant financial and non-financial information to its users for decision making purposes. The shift from the traditional economy to the new economy (i.e., knowledge economy) tend to make companies to create their wealth and value based on intangible capital and resources rather than tangible (Abeysekera, 2006; Whiting and Miller, 2008). This intangible capital refers to intellectual capital (IC) that plays an important and significant role in the success and achievement of the companies objectives and strategies (Abeysekera, 2006; Striukova et al., 2008; Whiting and Miller, 2008). All potentially useful information, including IC information, has to be disclosed in the annual reports and other forms of reports. As a result of the important role of IC in the process of value creation, many companies have started to disclose information about their IC. IC is defined, from the perspective of the company s ability to function, as the combined intangible assets which enable the company to function [Brooking, (1996), p.12]. This definition focuses on the intangible assets and their intangible competitive advantages that can be brought to the company. On the other hand, IC can also be defined from the perspective of creation of value and wealth as intellectual material knowledge, information, intellectual property, experience that can be put to use to create wealth [Stewart, (2000), p.11]. IC comprises of three main components or categories, i.e., internal capital (INC), external capital (EXC) and human capital (HUC). The INC refers to the IC inside the company which consists of innovations, technological infrastructure, internally generated intangible assets, research and development activities, quality, processes, and management philosophy (Sanchez et al., 2000; Guthrie and Petty, 2000; Bontis, 2003; Seetharaman et al., 2004; Guthrie et al., 2006). On the other hand, the EXC refers to the IC outside the company which includes business partnering and alliances, business combination, information about customers (e.g., information about the customers number, market share), customers satisfaction, suppliers (e.g., number, major of suppliers), distribution channels, marketing, market value and share price, and shareholders (Sanchez et al., 2000; Brennan, 2001; Bontis, 2003; Seetharaman et al., 2004; Olsson, 2004; Johanson et al., 2006). Finally, the HUC refers to the human resources of the company which include the employees education, skills, training, values, and experience (Sanchez et al., 2000; Bontis, 2003; Seetharaman et al., 2004; Abeysekera and Guthrie, 2005). The first objective of this paper is to examine the extent of ICD in the annual reports of Malaysian listed on Bursa Malaysia (BM). Second, it aims to investigate the trend of ICD in the annual reports in the period 2002 and The contributions of the paper can

3 Extent and trend of intellectual capital reporting in Malaysia 161 be seen from different perspectives. Firstly, the study contributes towards extending and filling the gap in the limited Malaysian ICD literature, as there are only a few studies. Moreover, these few studies used a limited measure of ICD, whereas the current paper has developed a more comprehensive disclosure index to measure the ICD. Thus, it could help in reflecting and enhancing the understanding of the current practise of ICD. Additionally, it contributes to the IC literature as it is considered the first study to examine the trend of ICD. Secondly, the findings of the paper have an impact on practise as it looked at actual practise of ICD by the Malaysian listed companies by reflecting the existing actual practises of ICD in terms of the extent and trend. Thus, by realising the reality about their ICD practises, the companies may better appreciate and know what to improve and how much need to be improved towards greater disclosure and transparency. Thirdly, the paper also contributes to the policy implications as it provides some empirical evidence about the real practise of ICD in the annual reports of Malaysian listed companies, and found it to be quite low and indicates for more ICD. Therefore, the findings of the paper could be useful for the Malaysian Accounting Standards Board (MASB), BM and other professional bodies to develop framework and guidelines on ICD to enhance its disclosure practises. The remainder of this paper is organised as follows. Section 2 reviews ICD literature. Section 3 discusses the research method. Section 4 provides the empirical results and discussions. The final section concludes the paper. 2 Literature review There are many studies which have been conducted on the issue of ICD in different countries such as Australia (e.g., Guthrie and Petty, 2000; White et al., 2007), Bahrain (e.g., Omar, 2008), Canada (e.g., Bontis, 2003), Denmark (e.g., Bukh et al., 2005), European Countries 1 (e.g., Vergauwen and Alem, 2005; Vandemaele et al., 2005; Li et al., 2006), Hong Kong (e.g., Guthrie et al., 2006), India (e.g., Ordoñez de Pablos, 2005), Ireland (e.g., Brennan, 2001), Italy (e.g., Bozzolan et al., 2003), Malaysia (e.g., Goh and Lim, 2004; Zuliana, 2007; Yau et al., 2009), New Zealand (e.g., Wong and Gardner, 2005; Whiting and Miller, 2008), South Africa (e.g., April et al., 2003), Sri Lanka (e.g., Abeysekera and Guthrie, 2005), Sweden (e.g., Beaulieu et al., 2002; Olsson, 2004), the UK (e.g., Williams, 2001; Citron et al., 2005; Striukova et al., 2008) and the USA (e.g., Abdolmohammadi, 2005). Generally, one of the main objectives of many of these studies was to examine the ICD in the annual reports, except for Ordoñez de Pablos (2005) who examined the Indian IC Reports (IICR) and further compared them with some European IC Reports (EICR), Bukh et al. (2005) who focused on the initial public offering (IPO) prospectuses of the Danish listed companies and Striukova et al. (2008) who examined the ICD within a wide range of corporate reporting [i.e., analyst presentation 2, annual report, annual review, corporate social responsibility (CSR) report, interim report, preliminary report, web page and others]. In addition, investigating the trend of ICD in the annual reports was another objective of some studies (e.g., Williams, 2001; Olsson, 2004; Vergauwen and Alem, 2005; Abeysekera and Guthrie, 2005; Bukh et al., 2005; Yau et al., 2009). The comparison of ICD practises between countries was also one of the objectives of the ICD literature (e.g., Vergauwen and Alem, 2005; Vandemaele et al., 2005; Li et al., 2006; Guthrie et al., 2006).

4 162 A.A. Ousama and A.H. Fatima In accordance with the issue of the extent of ICD, the findings of some studies showed that the extent could be considered low compared to other studies (e.g., Guthrie and Petty, 2000; Bontis, 2003; Bukh et al., 2005). On the other hand, findings of other studies revealed that the extent of ICD was higher compared with the above studies (e.g., Beaulieu et al., 2002; Bozzolan et al., 2003; Zuliana, 2007; Omar, 2008). There might be several possible reasons for such differences. First, the use of different disclosure indexes by these studies. Second, it could be due to the different coding system used 3. Third, it might be due to the difference in sample size and the year of analysis. Fourth, in some countries it might be related to the government initiatives. For example, in Italy, the government encourages companies to invest in R&D projects (as it is a form of IC), which lead to more awareness of IC and result in more ICD (Bozzolan et al., 2003). Furthermore, the ICD was found to be in the form of qualitative rather than quantitative information (e.g., Guthrie and Petty, 2000; Goh and Lim, 2004; Guthrie et al., 2006). According to Guthrie and Petty (2000), this finding indicates that companies were interested in understanding and reporting where the real values of the company are placed rather than expressing these values in a monetary form. In other words, companies were showing that their real values (e.g., market values) came from IC but they failed to disclose or translate them into numerical terms. This finding was expected due to the difficulties attached to measuring IC components (Guthrie et al., 2006). Generally, the analysis of the results of the extent of ICD indicates that there was no standardised and agreed framework by companies; hence it was inconsistent and varied (Guthrie et al., 2006). Nevertheless, the results seem to indicate that there was an awareness of disclosing IC information by the companies in various countries. Another finding which is related to ICD was the disclosure of IC categories. Most of the studies found that the EXC was the category that had the highest extent of disclosure compared to the HUC and INC categories (e.g., Guthrie and Petty, 2000; April et al., 2003; Goh and Lim, 2004; Wong and Gardner, 2005; Guthrie et al., 2006; Striukova et al., 2008). In contrast, some other studies (e.g., Beaulieu et al., 2002) found the HUC to be the category with the highest disclosure and intellectual property (i.e., INC) to be the lowest. These different results of Beaulieu et al. (2002) might be due to the different framework used to measure ICD, where the first group used Sveiby s (1997) framework, whereas the latter used Brooking s (1996) framework 4. On the issue of the trend of ICD in the annual reports, most of the studies found that, in general, there was an increase in the extent of ICD over the years (e.g., Williams, 2001; Olsson, 2004; Abeysekera and Guthrie, 2005; Bukh et al., 2005). Specifically, Olsson (2004) found that the percentage of ICD in the annual reports for the year 2002 was higher than the year Furthermore, the support for such findings was found in Vergauwen and Alem (2005). They found that there was an increase in ICD over time in the three countries: Netherlands, France and Germany. In addition, Bukh et al. (2005) supported the increasing trend of ICD over the years when they found similar results in IPO prospectuses. This result indicates that there was an increase in importance of the expected benefit of disclosing IC information to the external users (Vergauwen and Alem, 2005). Based on the reviewing of the existing ICD literature, the current paper attempts to extend and fill its gap, especially in the Malaysian content as discussed below. Firstly, the prior studies have used limited disclosure indexes to examine the disclosure of IC information 5. On the other hand, the current paper has used a more comprehensive ICD

5 Extent and trend of intellectual capital reporting in Malaysia 163 index (i.e., 101 items) which includes quantitative/qualitative and financial/ non-financial IC information. Thus, it enables to capture a wider range of ICD, hence extending the understanding of its disclosure practises. Secondly, the paper is considered to be the first study to examine trend of ICD in the annual reports by using multiple years approach. Therefore, it can help in examining the longitudinal variations of ICD over time. Thirdly, the paper uses a bigger sample size compared to most of the prior Malaysian studies. Hence, it can provide more accurate results and will provide a better understanding of the actual ICD. 3 Research method 3.1 Sample selection The paper selects the annual reports of listed companies in BM for two years, i.e., 2002 and 2006 due to the fact that comparison between two periods is important to see the changes in ICD practises. In addition, the National Annual Corporate Report Awards (NACRA) and the Malaysian Code on Corporate Governance (MCCG) were introduced in the year The introduction of NACRA had the general aim of encouraging listed companies to be competitive in preparing and presenting their corporate annual reports and improving the level of disclosure (NACRA Organising Committee, 2008). On the other hand, the MCCG consists of a set of principles and best practises for the optimal governance that companies should follow to enhance the accountability and transparency in the corporate annual reports (Finance Committee on Corporate Governance, 2000). The MCCG then was enforced by BM as one of the listing requirements. Therefore, it is expected that companies will participate in NACRA and comply with the MCCG. Thus, it should result in disclosing more financial and non-financial information which may include IC information. Therefore, the year 2002 was selected by given a gap of two years since the introduction of NACRA and the MCCG to allow giving the effects to take place. On the other hand, a gap of three years was maintained after the year 2002 to ensure that there are reasonable changes in the existing practises of ICD to enable a comparison, as yearly changes are likely to be insignificant thus gathering such data would add little value to the research, hence resulting in the choice of the year The paper has used a stratified sampling method with systematic random selection to have a representative sample. As at 31 December 2002, there were 561 listed companies on the main board of BM, which are classified into fourteen sectors (Investors Digest, 2003). However, four sectors have been excluded from the population. First, finance, closed-end funds and trusts companies were eliminated due to the regulations and specific disclosure requirements imposed by the Ministry of Finance and the Central Bank of Malaysia. Second, PN4 companies 6 were excluded due to their financial problems which may affect their disclosure practises. Therefore, the remaining population consists of 456 companies. The determination of the desired sample size was based on the fact that measuring disclosure practises in the annual reports is unfeasible and time-consuming, thus impractical. Therefore, it is important to have a reasonable and manageable sample size; hence it consists of 20% of the population which results in 91 companies (i.e., %) as shown in Table 1.

6 164 A.A. Ousama and A.H. Fatima Table 1 Sample size and its distribution based on sectors for one year Sectors No. of population No. of sample % of sample Trading/services Industrial products Properties Consumer products Plantation Construction Technology Others a Total Note: a Others include infrastructure project, mining and hotels companies. 3.2 Data and data collection techniques The data were obtained from the 182 annual reports of the sample companies for the years 2002 and The annual report is considered to be a primary channel of communication of information. Also as the annual reports comply with the requirements of the Companies Acts and accounting standards (Firth, 1979) and they are audited, thus the information in the annual reports is deemed to be reliable. All of the annual reports of the selected companies were available through the BM website. 3.3 Content analysis Content analysis is a research technique for making replicable and valid inferences from texts (or other meaningful matter) to the contexts of their use [Krippendorff, (2004), p.18]. In addition, it is defined as a technique for gathering data, it involves codifying qualitative and quantitative information into per-defined categories in order to derive patterns in the presentation and reporting of information [Guthrie et al., (2004), p.287]. This technique has been employed in previous studies of social and environmental reporting to examine the extent of such disclosure, therefore it is considered to be valid (Guthrie et al., 2004). In addition, content analysis is a useful technique for investigating the trends in corporate disclosure where it can be systematically classified and compared (Hall, 2002). Content analysis technique was used by prior studies on ICD (e.g., Guthrie and Petty, 2000; Bontis, 2003; April et al., 2003; Olsson, 2004; Abeysekera and Guthrie, 2005). One of the important issues in the content analysis is to select the recording unit. According to Holsti (1969, p.116) as cited by Krippendorff (2004, p.100) the recording unit is the specific segment of content that is characterized by placing it in a given category. The paper has adopted the sentence unit as it is preferred in written communication, if the task is to infer meaning (Gray et al., 1995). Thus, a sentence is likely to provide complete, reliable and meaningful data for analysis (Milne and Adler, 1999). Additionally, ICD can be considered as qualitative in nature and to some extent it is difficult to explain in quantitative terms. Thus, sentences would be more appropriate as a unit of coding. Moreover, some of the ICD studies used this basis as well for coding

7 Extent and trend of intellectual capital reporting in Malaysia 165 decisions (e.g., Beaulieu et al., 2002; Bozzolan et al., 2003; Vandemaele et al., 2005; Whiting and Miller, 2008). Another issue in the content analysis is to develop a scoring scheme. The paper used an unweighted dichotomous procedure where 1 is assigned when an item (i.e., a sentence) is disclosed in the annual report and 0 otherwise. The dichotomous approach was used by most previous disclosure studies (e.g., Cooke, 1991; Hossain et al., 1994; Brennan, 2001; April et al., 2003; Goh and Lim, 2004). The preference in using the unweighted approach for scoring is to avoid the high subjectivity involved in assigning the weights of importance of items by different user groups (Raffournier, 1995; Bukh et al., 2005). In addition, the assumption of treating disclosure items equally will result in a lower bias than an inaccurate weighting used by the weighted approach (Raffournier, 1995). 3.4 Disclosure index development The disclosure index is a disclosure checklist which contains a number of different disclosure items (i.e., sentences) which is used to measure the extent of disclosure (Arvidsson, 2003). The disclosure index is based on what companies should disclose rather than what is being disclosed. Generally, there is evidence that there is no agreed theoretical framework or guidelines on the number and the selection of items to be included in a disclosure index (Bukh et al., 2005). The disclosure index in this paper was developed based on the following steps: 1 Adoption of the MERITUM guidelines for the measurement and disclosure of IC which was developed by Sanchez et al. (2000) as the project was sponsored by the European Union (i.e., Finland, France, Denmark, Norway, Spain and Sweden). 2 Modifications were made to the disclosure index adopted in step No. 1 based on a thorough inspection of the other ICD indexes in the prior studies (e.g., Brooking, 1996; Edvinsson and Malone, 1997; Sveiby, 1997; Miller et al., 1999; Allee, 2000; Bontis et al., 2000; Brennan and Connell, 2000; Liebowitz and Suen, 2000; Rylander et al., 2000; Stewart, 2000; Meer-Kooistra and Zijlstra, 2001; Williams, 2001; Lim and Dallimore, 2002; Al-Ali, 2003; Engstrom et al., 2003; Ordoñez de Pablos, 2003; Bozbura, 2004; Chen et al., 2004; Goh and Lim, 2004; Seetharaman et al., 2004; Abdolmohammadi, 2005; Abeysekera and Guthrie, 2005; Bukh et al., 2005; Burgman et al., 2005; Garcia-Meca et al., 2005; Jacobsen et al., 2005; Flostrand, 2006; Li et al., 2006; Johanson et al., 2006; White et al., 2007). Thus, a primary list of 80 disclosure items was developed. 3 A review of MASB s financial reporting standards (FRSs) and Ng (2006) was made to include relevant items which have not been included and to combine items which are similar in the primary disclosure index. Thus, a draft list of 92 disclosure items was developed. 4 Reviewed and discussed the draft of the index with a few experts in the area of IC at the International Islamic University Malaysia (IIUM) and Malaysian Multimedia University (MMU) to determine the validity and clarity of the items. This resulted in restructuring the content and rewording several items to improve their clarity. Therefore, a list of 101 ICD items was finalised. The disclosure index is divided into three main categories, i.e., INC disclosure items, EXC disclosure items and HUC disclosure items 7.

8 166 A.A. Ousama and A.H. Fatima 3.5 Measurement of extent of IC disclosure The extent of disclosure is a ratio of the recorded information items found in the annual report divided by the maximum amount of information items contained in the disclosure index (i.e., 101 items). Consequently, the measurement of the extent of intellectual capital disclosure (EICD) takes the following steps. First, calculate the total actual disclosure score (TADS j ) for a company j which is calculated as follows: TADS j m = d i= 1 i where d i scores 1 if item i is disclosed and 0 otherwise; and m is the number of disclosure items (i.e., m n = 101 items). Second, measure the maximum items expected to be disclosed so the companies are not penalised for not disclosing items which are irrelevant to them. Thus, the irrelevant items are excluded from the index. Therefore, the maximum relevant disclosure items (MRDI j ) of the company j can be calculated as follows: MRDI j n = d i= 1 i where d i is an expected item of disclosure (a relevant disclosure item); and n is the number of items which the company is expected to disclose. In other words, the number of relevant disclosure items (i.e., n 101). Third, calculate the EICD in the annual report for the company (j) as follows: EICD j TADS = MRDI j j 4 Results and discussion 4.1 Reliability test The disclosure index was subjected to a reliability test. Table 2 presents the results of the internal consistncy of the reliability test of the index. The results show that the Cronbach s alpha were 0.896, 0.861, and for EICD (i.e., overall), INC, EXC and HUC, respectively. All alpha values are above the 0.80, hence, it indicates that all items in the disclosure index are reliable 8. Table 2 Reliability test results of the disclosure index Type No. of cases No. of items Cronbach s alpha EICD INC EXC HUC

9 Extent and trend of intellectual capital reporting in Malaysia Descriptive statistics Table 3 presents the descriptive statistics of the EICD (i.e., overall), INC, EXC and HUC disclosure for the years 2002 and The table shows that the means of the extent of the ICD in the annual reports of Malaysian listed companies were 0.22 and 0.24 for the years 2002 and 2006, respectively. In other words, the companies disclosed, on average, 22% and 24% of the items in the disclosure index for the years 2002 and 2006, respectively, out of 101 items. In addition, the findings show that the extent of ICD in annual reports for the year 2006 was slightly higher compared to the year Table 3 Descriptive statistics results of the extent of ICD EICD INC EXC HUC Mean Median Std. deviation A comparison between the findings of the current paper with the findings of the prior studies gives mixed results. Specifically, the average of the extent of ICD was found to be higher compared to some prior studies, for example Bontis (2003) and White et al. (2007). These studies have found the averages of the extent of ICD were 0.18, 0.15, and 0.15, respectively. On the other hand, the findings of the extent of ICD in the current paper were lower compared to some other previous studies, such as Beaulieu et al. (2002), Bozzolan et al. (2003), Li et al. (2006), Omar, (2008) and Yau et al. (2009). The averages of the extent of ICD of the above mentioned studies were 0.59, 0.51, 0.30, 0.36 and 0.47, respectively. There are some possible reasons for such differences in the findings. Firstly, the disclosure index in the current paper is more comprehensive as it includes more items (i.e., 101) compared to those in the prior studies that used a smaller number of items, ranging between 22 to 78 (e.g., Bozzolan et al., 2003; Omar, 2008) which reported a high extent of ICD. Secondly, the sample size of most of the studies with a high level of ICD was relatively small ranging between 9 to 39 companies (e.g., Li et al., 2006; Omar, 2008). A small sample size results in a higher extent of ICD when calculating the overall disclosure for all the companies in the sample. Thirdly, the diversity in the sample period could also influence the results. This can be seen where the practises of disclosure might differ from time to time. Finally, the country differences may also have an effect on the extent of ICD since the disclosure practises are more advanced in the developed countries compared to the developing countries, hence extent of ICD in the annual reports would be higher. Further discussion based on the IC categories is conducted as follows. Table 3 shows that means of the extent of the disclosure for the INC, EXC and HUC were 0.14, 0.30 and 0.24 for the year 2002 and 0.15, 0.32 and 0.24 for the year 2006, respectively. These results indicate that companies disclosed on average 5 and 5 items over 35 items for the INC, 9 and 10 items over 30 items for the EXC, and 9 and 9 items over 36 items for the HUC in the years 2002 and 2006, respectively. In addition, the results show that the highest extent of disclosure in the years 2002 and 2006 was for the EXC. The finding on the EXC is consistent with most previous ICD studies (e.g., Guthrie and Petty, 2000;

10 168 A.A. Ousama and A.H. Fatima April et al., 2003; Goh and Lim, 2004; Vandemaele et al., 2005; Striukova et al., 2008) which found that the EXC was the highest reported IC category. In contrast, this finding is inconsistent with some other prior ICD studies (e.g., Beaulieu et al., 2002; Zuliana, 2007) which found the HUC to be the highest category. On the other hand, the lowest extent of disclosure was for the INC, also in both years. The finding of the INC is also consistent with some of the prior ICD literature (e.g., Abeysekera and Guthrie, 2005; Wong and Gardner, 2005; Whiting and Miller, 2008). However, the result is inconsistent with other studies (e.g., Bozzolan et al., 2003; Citron et al., 2005; Li et al., 2006; Guthrie et al., 2006) which found the HUC to be the lowest. Therefore, it can be said that Malaysian listed companies disclosed, on average, more information on the EXC compared to the HUC and the INC, respectively. Several possible reasons can explain this finding. First, companies might not want to disclose information about their INC (e.g., technological infrastructure, technology investment) as disclosing this information may be considered as a competitive disadvantage (Debreceny et al., 2002). Second, companies, on the other hand, may consider disclosing information about their EXC (e.g., business partnering and alliances agreements, distribution channels, market value and share price, shareholders) as a competitive advantage. Disclosing such information may increase the confidence of the investors, shareholders and other parties in the performance and value of the company. Third, companies may want to disclose more information about the EXC to reflect how strong a relationship the company maintains with outsiders. Thus, this may result in keeping a good image of the company. In summary, it can be said that the findings indicate that Malaysian listed companies do have IC, hence they do disclose it. However, even when IC is disclosed, the extent of disclosure in the annual reports of these companies can be considered low overall as well as for each category of IC where about 70% to 80% remains undisclosed. This finding is consistent as various previous ICD studies reveal that the extent of ICD in the annual reports is relatively low (Li et al., 2007). The low extent of ICD in the Malaysia is expected due to several possible reasons. Firstly, IC is still a new issue for Malaysian companies, thus the reporting of its information has not been fully incorporated into their disclosure practises. Secondly, as mentioned earlier the introduction of NACRA and the MCCG was in 2000, however, the years 2002 and 2006 are still within six years of this introduction, hence companies may not have fully incorporated such practises. Further analysis of the extent of ICD was carried out based on the disclosure means of the IC sub-categories and ranks them accordingly as shown in Table 4. There are ten sub-categories under the INC, 11 sub-categories under the EXC, and 14 sub-categories under the HUC. As can be seen from the table, there were two sub-categories under the HUC (i.e., education level and employees capacities and abilities), which had a mean of 1.000, which indicates that all the companies in the sample disclosed the information in this category. In contrast, there were five sub-categories under the EXC and HUC (i.e., loyalty, suppliers, gender of employees, employees satisfaction and employee evaluation), in the year 2002 that had a mean of 0.000, which reveals that none of the companies disclosed any of the information in these sub-categories. Interestingly, the number of sub-categories that had completely no disclosure increased in the year 2006 to seven sub-categories. Four of them (i.e., loyalty, suppliers, gender of employees and employees satisfaction) remain the same from the year 2002 but three of them (i.e., customer satisfaction, flexibility and knowledge map) were disclosed in the year 2002 but

11 Extent and trend of intellectual capital reporting in Malaysia 169 not in the year On the other hand, employee evaluation became a disclosure in the year 2006 from 100% non-disclosure in the year Table 4 Means disclosure and rank of the sub-categories of IC categories IC categories/sub-categories 1 INC Mean Rank Mean Rank 1.1 Innovations Technological infrastructure Technology investments Research and development (R&D) Other internally generated intangible assets Quality Communication systems Processes Problem solving capacity Management philosophy EXC 2.1 Business partnering and alliances agreements Goodwill acquired in a business combination Separately acquired intangible assets Loyalty Customer satisfaction Customers Suppliers Marketing Turnover and distribution channels Market value and share price Shareholders HUC 3.1 Gender of employees Age of the employees Education level Flexibility Employees welfare Training and education Participation in the development of the company Knowledge map Employee satisfaction Employee evaluation Distribution of employees Employees capacities and abilities Employee development plans Safety and health of employees

12 170 A.A. Ousama and A.H. Fatima After providing a brief overview of the disclosure based on sub-category, a more detailed discussion follows 9. Firstly, under the INC, the three sub-categories that had the highest disclosure means for the years 2002 and 2006, as shown in Table 4, were management philosophy (0.341 and 0.396), innovations (0.271 and 0.341), and processes (0.264). Under the management philosophy, the information disclosed is about the company s mission and vision. Under the innovations sub-category, most of the information was about products and services and about new products or services offered by the company. For the processes sub-category, most of the information was about the management processes, which all the companies disclosed. The reason for such disclosure is that this information is required by the MCCG. In addition, information about the technological processes and information about identified critical processes under the processes sub-category were disclosed during the financial year. In contrast, the three lowest disclosed sub-categories were problem solving capacity (0.011), other internally generated intangibles assets (0.011), and technology investments (0.018 and 0.004). For example, under the technology investments sub-category, the information that was disclosed by the companies is about investments in information technologies (IT) and IT expenditure. Secondly, under the EXC, Table 4 shows that the three highest disclosed sub-categories for the years 2002 and 2006 were shareholders 10 (0.711 and 0.714) goodwill acquired in a business combination (0.670 and 0.593), and turnover and distribution channels (0.489 and 0.538). On the other hand, the three lowest sub-categories include the non-disclosure sub-categories, as mentioned before; suppliers (0.000), loyalty (0.000), and customer satisfaction (0.022 and 0.000). For the first highest sub-category (i.e., shareholders), all the companies disclose information about the number of shareholders and the list of top shareholders. This is expected as it is a requirement of the MCCG and the listing requirement of BM 11. In addition, under this sub-category, information about the type of shareholders (e.g., % of foreign, local and other shareholders) was disclosed as well. Under the sub-category of goodwill acquired in a business combination, the information that was disclosed is about the goodwill policies, carrying amount or reconciliation of the goodwill and information about acquisitions which is required under the FRS 3 (i.e., bussiness combinations). For the sub-category of the turnover and distribution channels, most of the information disclosed was about the percentage or ratios of total turnover in accordance to: e.g., line of business, product, customer, which is required under FRS 14 (i.e., segment reporting). Although some items in the sub-categories above are regulation requirements, there are still companies who did not disclose them, hence resulting in a high disclosure mean, but still less than a mean of On the other hand, for the lowest sub-categories, suppliers 12 and loyalty 13, none of the items under these sub-categories were disclosed by any of the companies in the sample. A possible reason is that Malaysian listed companies might consider disclosing information about suppliers and customers as competitive disadvantage or information that is not important or useful to users. For the sub-category of customer satisfaction, information about customer feedback and customers complaints was disclosed in the year 2002, but interestingly no information under this sub-category was disclosed in the year Thirdly, under the HUC, Table 4 shows that the three highest disclosed sub-categories were education level (1.000), employees capacities and abilities (1.000), and employees welfare (0.714 and 0.747) in both years 2002 and 2006, respectively. In contrast, the

13 Extent and trend of intellectual capital reporting in Malaysia 171 lowest sub-categories were gender of employees and employee satisfaction, employee evaluation and knowledge map with a mean of for both years 2002 and Under the highest sub-category of education level, the information disclosed by all of the companies in the sample was about the education and qualifications of the members of the Board of Directors, as this information is one of the requirements of the MCCG. Similarly, under the sub-category of employees capacities and abilities, all the companies disclose information about the skills and experience of the members of the Board of Directors. This was also due to the fact that this information is one of the requirements of the MCCG. Under the sub-category of the employees welfare, the information disclosed by the companies was about the policies of the share options scheme for the employees and information about shares held by the members of the Board of Directors. The high level of disclosure for this sub-category could be due to the requirement by the FRS 119 (i.e., Employee Benefits). On the other hand, under the sub-category of the gender of employees, none of the companies disclosed information about the number or percentage of men and women employees. A possible reason for this is perhaps because companies did not consider such information to be useful for users. In addition, information about employee satisfaction was not disclosed by any company in the sample, and could be due to the following possible reasons. First, the companies were not measuring the satisfaction of their employees. Second, in the case of dissatisfaction of the employees, the companies would not disclose such information. 4.3 Paired-samples t-test Table 5 represents the results of the paired-samples t-test for the trend EICD (i.e., overall), INC, EXC and HUC for the years 2002 and As shown in the table, the increase in the extent of ICD was statistically significant at the 0.05 level. Thus, the results indicate that the Malaysian listed companies for the year 2006 disclosed, on average, more IC information in their annual reports than they did in the year This finding supports the findings of the descriptive statistics which showed that the mean of the ICD in the annual reports has increased from 2002 to Furthermore, this finding is consistent with the finding of most prior ICD studies which conducted a trend analysis (e.g., Williams, 2001; Olsson, 2004; Abdolmohammadi, 2005; Vandemaele et al., 2005; Bukh et al., 2005). Table 5 Paired-samples t-test results of the trend of the extent of ICD DF Mean Mean diff. Std. error mean t-statistic Sig. t EICD ** INC ** EXC ** HUC Note: **Significant at the 0.05 level. The result was expected for several possible reasons. First, the introduction of the MCCG and NACRA was in the year 2000, thus for the year 2002, it was at the early stage of practising and implementing them, hence the disclosure which includes information about IC was limited. In the year 2006, however, it shows an improvement with time;

14 172 A.A. Ousama and A.H. Fatima therefore, it indicates that the companies were more involved in practising and implementing such requirements. Second, IC issues were still new for the Malaysian listed companies since the beginning of the new millennium, thus in the year 2002 their disclosure was limited. By the year 2006 they were more aware of the importance of IC, hence they improved their disclosure of IC. More specifically, Table 5 shows results of t-test of the trend of the IC categories (i.e., INC, EXC and HUC). The results for the INC and EXC indicate that the trend of disclosure between the year 2002 and 2006 was statistically significant at the 0.05 significance level. On the other hand, the result of the trend of the HUC disclosure was not statistically significant. This result is supported by the results of the descriptive statistics of the HUC disclosure as the mean of disclosure has increased slightly (0.004) but not to a significant level. 5 Conclusions This paper has focused to examine the extent and trend of ICD in the annual reports of Malaysian companies. The results of the descriptive analysis of the disclosure index indicate that Malaysian listed companies disclose, on average, 0.22 and 0.24 on EICD (i.e., overall) in their annual reports for the years 2002 and 2006, respectively. More specifically, the mean disclosure for the INC, EXC and HUC did not exceed 0.16, 0.33, and 0.25, respectively in the two years. Hence, it is considered that much more disclosure could be made by Malaysian listed companies on IC. In addition, the results show that the highest disclosure was for the EXC and the lowest was for the INC for both years. In addition, the empirical results of the paired-samples t-test support that the extent of ICD in the annual reports of Malaysian listed companies had increased between the period 2002 and More specifically, the results supported that there was an increase in the extent of the INC and EXC disclosure in the annual reports. However, the results did not support that there was an increase in the extent of HUC. Despite the use of two years data, the paper provides empirical evidence for the Malaysian listed companies, MASB, BM as well as other professional bodies to understand current ICD practises; hence they will try to improve and enhance it towards greater disclosure and transparency. References Abdolmohammadi, M.J. (2005) Intellectual capital disclosure and market capitalization, Journal of Intellectual Capital, Vol. 6, No. 3, pp Abeysekera, I. (2006) The project of intellectual capital disclosure: researching the research, Journal of Intellectual Capital, Vol. 7, No. 1, pp Abeysekera, I. and Guthrie, J. (2005) An empirical investigation of annual reporting trends of intellectual capital in Sri Lanka, Critical Perspectives on Accounting, Vol. 16, No. 3, pp Al-Ali, N. (2003) Comprehensive Intellectual Capital Management, John Wiley & Sons Inc., New Jersey. Allee, V. (2000) The value evolution: addressing larger implications of an intellectual capital and intangibles perspective, Journal of Intellectual Capital, Vol. 1, No. 1, pp April, K.A., Bosma, P. and Deglon, D.A. (2003) IC measurement and reporting: establishing a practice in S.A. mining, Journal of Intellectual Capital, Vol. 4, No. 2, pp

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