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Reply to the discussion of “Reporting intangible assets: Voluntary disclosure practices of top emerging market companies”
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The International Journal of Accounting 46 (2011) 428 – 430
Reply
Reply to the discussion of “Reporting intangible assets: Voluntary disclosure practices of top emerging market companies” Helen H. Kang a,⁎, Sidney J. Gray b a
School of Accounting, University of New South Wales, Sydney, Australia b The University of Sydney Business School, Sydney, Australia Received 25 August 2010
1. Introduction We appreciate the discussion and comments provided by Dr. Michela Cordazzo (the discussant), the anonymous referees, and the editors. In this response, we provide clarifications to the discussant's issues of concern and, in addition, suggest how some of these issues can be addressed and extended in future research. 2. Limitations The discussant raises three limitations in our study. The first concern regards a lack of justification for the use of Lev's (2001) Value Chain Scoreboard™ as our main reporting framework. Sveiby (2010) has identified 42 different methods of measuring intangible assets across four categories: direct intellectual capital method, market capitalization method, return on assets method, and scorecard method. The Value Chain Scoreboard™ falls under the scorecard method, which can create a more comprehensive picture of an organization's intangible resources. This particular index also has an additional advantage of following three distinct categories of the value-creating phases of a firm. That is, the index follows a natural progression of intangible assets, starting with their discovery and learning, followed by their implementation, and, finally, the commercialization of such assets. All ⁎ Corresponding author. E-mail address: [email protected] (H.H. Kang). 0020-7063/$ - see front matter © 2011 University of Illinois. All rights reserved. doi:10.1016/j.intacc.2011.09.009
H.H. Kang, S.J. Gray / The International Journal of Accounting 46 (2011) 428–430
429
three phases create value for the firm and, as such, we expect firms to disclose information about intangible assets stemming from each phase. As discussed in our paper, we, however, expect the level of disclosure to be different for each phase since firms are less likely to disclose information about how they implement intangible assets to create value. The second limitation raised by the discussant is that we do not clearly identify how the voluntary disclosure on intangible assets compensates for the inadequacies of such a valuation missing from financial statements. The extant literature has argued that firms will engage in voluntary disclosure practices if, and only if, the benefits associated with such disclosures outweigh the costs involved. While the importance of intangible assets in creating corporate value has long been acknowledged, the valuation of such assets has always been rather controversial due to the fact that they are intangible. While these assets meet the traditional definition of assets put forward by various standard setters, such as the IASB and FASB, most of these assets fail the recognition criteria. As the discussant points out, there have been attempts by the IASB and FASB to address the recognition and measurement problems linked to intangible assets. It is our contention, however, that due to the inherent uncertainty involved in valuation, these assets are unlikely to ever be recognized in financial statements. Accordingly, we suggest that firms will try to differentiate themselves by putting forward additional information about their intangible assets. The benefits of such disclosures are likely to be realized via higher market valuation, albeit indirectly. In addition, higher levels of voluntary disclosures may be associated with inconsistent reporting standards in different countries as firms try to compensate and cope with international diversity (Choi & Levich, 1991). The third and final concern raised by the discussant is that while the hypotheses development is clearly explained and supported by previous literature, what is lacking is how each factor and each hypothesis is linked to the sampled emerging market companies. In our paper, we investigate 12 firm- and country-specific variables, which can be grouped into four categories: (1) variables relating to overall voluntary disclosure practices (size, ownership concentration, and leverage); (2) variables relating to emerging markets (adoption of IFRS and listing status); (3) variables relating to intangible assets (industry, priceto-book ratio, intangible assets recognition, and age of firm); and (4) country-specific variables. It should be noted, however, that these four categories are not mutually exclusive; for example, one can argue that firm size is applicable to all categories. While not all of these variables appear to be specifically related to emerging market companies as such, they are all relevant to the context of emerging markets, an increasingly important context in the global economy. 3. Future research The discussant suggests that future research may focus on a deeper description of the political and economic context of the sample firms and that consideration should be given to refining some of the firm-specific factors such as the level of intangible assets recognition, as well as including culture as a potential factor associated with voluntary disclosures. We agree that additional explanatory variables, both firm- and country-specific, should be considered in determining voluntary disclosure practices of emerging market companies, as well as companies in other markets.
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H.H. Kang, S.J. Gray / The International Journal of Accounting 46 (2011) 428–430
The discussant also proposes that our research can be extended to other voluntary communication tools, in addition to annual reports. Given the increased availability and use of the Internet, we could consider corporate websites as an alternative way of communicating with global investors. This may be especially relevant in examining the voluntary disclosure practices of emerging market companies where stakeholders are likely to be global. Finally, we agree with the discussant that our research may have important implications for policy makers, standards setters, and scholars. For example, there exists anecdotal evidence that firms with higher levels of intangible assets fared better during the current financial crisis (Patel & Narain, 2009). Given the importance of intangible assets, policy makers and standard setters could consider the possibility of providing guidelines for intangible asset disclosures that might be reported outside of the formal financial statements. References Choi, F. D. S., & Levich, R. M. (1991). Behavioral effects of international accounting diversity. Accounting Horizons, 1–13 (June). Lev, B. (2001). Intangibles: Management, measurement, and reporting. Washington, DC: Brookings Institution. Patel, N., & Narain, U. (2009). Can intangible assets act as a cushion in a downturn? http://www.watsonwyatt. com/pubs/directions/media/2009_EU_12783_Directions_CP05_Intangibles.pdf (Last accessed 23rd August 2010). Sveiby, K. (2010). Methods for measuring intangible assets. http://www.sveiby.com/articles/IntangibleMethods. htm (Last accessed 23rd August 2010).
The International Journal of Accounting 46 (2011) 428 – 430
Reply
Reply to the discussion of “Reporting intangible assets: Voluntary disclosure practices of top emerging market companies” Helen H. Kang a,⁎, Sidney J. Gray b a
School of Accounting, University of New South Wales, Sydney, Australia b The University of Sydney Business School, Sydney, Australia Received 25 August 2010
1. Introduction We appreciate the discussion and comments provided by Dr. Michela Cordazzo (the discussant), the anonymous referees, and the editors. In this response, we provide clarifications to the discussant's issues of concern and, in addition, suggest how some of these issues can be addressed and extended in future research. 2. Limitations The discussant raises three limitations in our study. The first concern regards a lack of justification for the use of Lev's (2001) Value Chain Scoreboard™ as our main reporting framework. Sveiby (2010) has identified 42 different methods of measuring intangible assets across four categories: direct intellectual capital method, market capitalization method, return on assets method, and scorecard method. The Value Chain Scoreboard™ falls under the scorecard method, which can create a more comprehensive picture of an organization's intangible resources. This particular index also has an additional advantage of following three distinct categories of the value-creating phases of a firm. That is, the index follows a natural progression of intangible assets, starting with their discovery and learning, followed by their implementation, and, finally, the commercialization of such assets. All ⁎ Corresponding author. E-mail address: [email protected] (H.H. Kang). 0020-7063/$ - see front matter © 2011 University of Illinois. All rights reserved. doi:10.1016/j.intacc.2011.09.009
H.H. Kang, S.J. Gray / The International Journal of Accounting 46 (2011) 428–430
429
three phases create value for the firm and, as such, we expect firms to disclose information about intangible assets stemming from each phase. As discussed in our paper, we, however, expect the level of disclosure to be different for each phase since firms are less likely to disclose information about how they implement intangible assets to create value. The second limitation raised by the discussant is that we do not clearly identify how the voluntary disclosure on intangible assets compensates for the inadequacies of such a valuation missing from financial statements. The extant literature has argued that firms will engage in voluntary disclosure practices if, and only if, the benefits associated with such disclosures outweigh the costs involved. While the importance of intangible assets in creating corporate value has long been acknowledged, the valuation of such assets has always been rather controversial due to the fact that they are intangible. While these assets meet the traditional definition of assets put forward by various standard setters, such as the IASB and FASB, most of these assets fail the recognition criteria. As the discussant points out, there have been attempts by the IASB and FASB to address the recognition and measurement problems linked to intangible assets. It is our contention, however, that due to the inherent uncertainty involved in valuation, these assets are unlikely to ever be recognized in financial statements. Accordingly, we suggest that firms will try to differentiate themselves by putting forward additional information about their intangible assets. The benefits of such disclosures are likely to be realized via higher market valuation, albeit indirectly. In addition, higher levels of voluntary disclosures may be associated with inconsistent reporting standards in different countries as firms try to compensate and cope with international diversity (Choi & Levich, 1991). The third and final concern raised by the discussant is that while the hypotheses development is clearly explained and supported by previous literature, what is lacking is how each factor and each hypothesis is linked to the sampled emerging market companies. In our paper, we investigate 12 firm- and country-specific variables, which can be grouped into four categories: (1) variables relating to overall voluntary disclosure practices (size, ownership concentration, and leverage); (2) variables relating to emerging markets (adoption of IFRS and listing status); (3) variables relating to intangible assets (industry, priceto-book ratio, intangible assets recognition, and age of firm); and (4) country-specific variables. It should be noted, however, that these four categories are not mutually exclusive; for example, one can argue that firm size is applicable to all categories. While not all of these variables appear to be specifically related to emerging market companies as such, they are all relevant to the context of emerging markets, an increasingly important context in the global economy. 3. Future research The discussant suggests that future research may focus on a deeper description of the political and economic context of the sample firms and that consideration should be given to refining some of the firm-specific factors such as the level of intangible assets recognition, as well as including culture as a potential factor associated with voluntary disclosures. We agree that additional explanatory variables, both firm- and country-specific, should be considered in determining voluntary disclosure practices of emerging market companies, as well as companies in other markets.
430
H.H. Kang, S.J. Gray / The International Journal of Accounting 46 (2011) 428–430
The discussant also proposes that our research can be extended to other voluntary communication tools, in addition to annual reports. Given the increased availability and use of the Internet, we could consider corporate websites as an alternative way of communicating with global investors. This may be especially relevant in examining the voluntary disclosure practices of emerging market companies where stakeholders are likely to be global. Finally, we agree with the discussant that our research may have important implications for policy makers, standards setters, and scholars. For example, there exists anecdotal evidence that firms with higher levels of intangible assets fared better during the current financial crisis (Patel & Narain, 2009). Given the importance of intangible assets, policy makers and standard setters could consider the possibility of providing guidelines for intangible asset disclosures that might be reported outside of the formal financial statements. References Choi, F. D. S., & Levich, R. M. (1991). Behavioral effects of international accounting diversity. Accounting Horizons, 1–13 (June). Lev, B. (2001). Intangibles: Management, measurement, and reporting. Washington, DC: Brookings Institution. Patel, N., & Narain, U. (2009). Can intangible assets act as a cushion in a downturn? http://www.watsonwyatt. com/pubs/directions/media/2009_EU_12783_Directions_CP05_Intangibles.pdf (Last accessed 23rd August 2010). Sveiby, K. (2010). Methods for measuring intangible assets. http://www.sveiby.com/articles/IntangibleMethods. htm (Last accessed 23rd August 2010).