Modern Economy, 2011, 2, 455-467
doi:10.4236/me.2011.24051 Published Online September 2011 (
Copyright © 2011 SciRes. ME
Disclosure of Intellectual Capital in Annual Reports:
An Empirical Study of the Indian IT Corporations
Madan Lal Bhasin
Bang College of Business, Kazakhstan Institute of Management, Economics and Strategic Research (KIMEP),
Almaty, Republic of Khazakhstan
E-mail: m
Received January 27, 2011; revised March 25 , 20 1 1; accepted April 12, 201 1
At present, disclosure of IC information across the globe is done by very few leading corporations purely on
a “voluntary” basis. Unfortunately, the omission of IC information may adversely influence the quality of
decisions made by shareholders, or lead to material misstatements. This study attempts to provide an insight
in to the “narrative” style of IC disclosures done by Indian corporations. Initially, a longitudinal study was
carried out to analyze how Indian firms—Reliance Industries Limited, Balrampur Chini Mills, and Shree
Cement Limited—measure and report their IC reports. In order to survey the recent IC disclosure scenario,
we conducted another study of 16 Indian IT corporations in which the “content analysis” was done on their
2007 to 2009 annual reports. The results of this study confirmed that IC disclosure in these IT corporations is
almost negligible and its disclosure had not received any preference from the mentors of these corporations.
IC reports may initially be used for “internal” management purposes; but an “external” stakeholder-focus of
IC report should be the ultimate goal.
Keywords: Intellectual Capital, Disclosure, Annual Reports, IT Corporations, Empirical Study, IC Reports
1. Introduction
Business dynamics of the 21st century are increasingly
determined and driven by Intellectual Capital (IC) elem-
ents. The future drivers of any economy will no longer
be capital, land or equipment, but the “people” and their
“knowledge” reservoir. A knowledge-intensive corpor-
ation leverages their know-how, innovation and reput-
ation to achieve success in the marketplace (Jose et al.,
2010) [1]. Market participants, practitioners and regul-
ators alike argue that there is an important need for gre-
ater investigation and understanding of IC disclosure (or
reporting) as the usefulness of financial information in
explaining firm profitability con tinues to deteriorate. Bu-
kh (2005) [2], for example, asserts that traditional disclo-
sure mechanisms are not able to cope adequately with the
disclosure requirements of new economy firms. He obse-
rved an increasing dissatisfaction with traditional finan-
cial disclosure and its ability to convey to investors the
wealth-creation potential of firms. Despite growing inte-
rest and demand for IC information, prior research till
date suggests a persistent and significant variation, both
in the “quantity” and “quality” of information reported
by firms on this pivotal resource. As existing economic
and business metrics track a declining proportion of the
real economy, the deficiency and inconsistency in the
disclosure of IC-related information is creating growing
information “asymmetry” between “informed” and “uni-
nformed” investors. This provides a fertile ground for
informed investors to extract higher abnormal returns
(Chiucchi et al., 2008) [3]. Thus, IC is increasingly b eing
recognized as having much greater significance in crea-
ting and maintaining competitive advantage and share-
holder value. This clearly calls for a refreshed underst-
anding of business principles, information disclosure,
and decision-making processes.
The concept of IC measurement, management and
disclosure is still relatively new. Accountants, business
managers and policy makers hav e still to grapple with its
concepts and detailed application. As expected, defi-
nition of IC varies substantially. According to Stewart
(2002) [4]: “It has become standard to say that a corpora-
tions’ IC is the sum of its human capital (talent), struc-
tural capital (intellectual property, methodologies, soft-
ware, documents, and other knowledge artifacts), and
customer capital (client relationships).” One of the most
comprehensive definitions of IC is offered by the Char-
tered Institute of Management Accountants (CIMA, 2001)
[5]: “The possession of knowledge and experience, pro-
fessional knowledge and skill, good relationships, and
technological capacities, which when applied will give
organizations competitive ad vantage.”
An expert opine, IC is a combination of human capi-
tal—the brains, skills, insights, and potential of those in
an organization—and structural capital—things like the
capital wrapped up in customers, processes, databases,
brands, and IT systems. It is the ability to transform kno-
wledge and intangible assets into wealth creating res-
ources, by multiplying human capital with structural cap-
ital. For instance, Sveiby (2004) [6] first proposed a
classification for IC into three broad areas of intangibles,
viz., Human capital, Structural capital and Customer
capital—a classification that was later modified and ext-
ended by replacing customer capital by relational capital.
Some examples of IC are shown in Table 1.
When there is a large disparity between a firm’s
“market” value and “book” value, that difference is often
attributed to “IC”. Market value is, of course, the corpo-
ration’s total shares outstanding times the stock market
price of each. Book value is the excess of total assets
over total liabilities. But what is the value of IC? Meas-
uring the value of IC is difficult, but there are methods
that can do it (Holmen 2005) [7]. As per a study con-
ducted by Pike and Ross (2006) [8], they have catego-
rized 12 different approaches to measuring IC, and an-
other researcher has identified more than 30. The various
forms of IC disclosure provide valuable information for
investors as they help reduce uncertainty about future
prospects and facilitate a more precise valuation of the
corporations. However, financial reports fail to reflect
such a wide-range of value-creating intangible assets,
giving rise to increasing information asymmetry between
firms and users, and creating inefficiencies in the
resource allocation process within capital markets.
2. Literature Review on IC Disclosure
The main IC disclosure studies were typically cross-
sectional and country-specific, although some longitudinal
studies have been reported too. Some of the leading IC
disclosure studies, widely reported in the literature, were
conducted in Australia, U K & Ireland, Sweden, Canada,
Malaysia, Sri Lanka, New Zealand, Bangladesh and India.
While most studies employed “content analysis” as the
research methodology, other studies have used question-
naire surveys (Beattie 2007) [9]. Despite the fact that the
importance of IC has increased in recent times, there are
inadequate dis closures of IC in the financial sta tements of
corporations (Bruggen et. al. 2009) [ 10].
Table 1. Components of intellectual capital.
Human Capital Structural Capital Customer Capital
Customer relations
Customer Loyalty
Repeat business...
Relational Capital
Individual &
Communities of prac-
Business processes
Manuals/ policies
Research findings
Relations with vendors
Investor trust and
In a review of the current state of financial and external
disclosure research, Parker (2007) [11] identified IC
accounting as a major area for further research. However,
most of the IC disclosure studies were cross-sectional
and country-specific. Examples include studies in Aust-
ralia (e.g. Guthrie and Petty; Sujan and Abeysekera),
Ireland (Brennan), Italy (e.g. Bozzolan et al.), Malaysia
(Goh and Lim), UK (e.g. Williams), and Canada (Bontis).
Relatively very few longitudinal studies have been repo-
rted (e.g. Abeysekera and Guthrie). Moreover, some stu-
dies focused on the specific aspects of IC disclosure,
such as human capital disclosure (e.g. Subbarao and Zeg-
hal), while others conducted international comparative
studies (e.g. Vergauwen and van Alem; Cerbioni and Pa-
rbonetti). Some IC disclosure studies have looked beyo-
nd annual reports to examine other communication chan-
nels, such as, analyst p resentations.
Studies have also been conducted to explor e IC re lated
issues from the firm’s perspective. Chaminade and Rob-
erts investigate the implementatio n of IC disclosure syst-
ems in Norway and Spain. Habersam and Piper emplo-
yed case studies to explore the relevance and awareness
of IC in hospitals. Studies that look ed at possible determ-
inants of voluntary IC disclosure include García-Meca et
al. and Cerbioni and Parbonetti. Based on analyst presen-
tation reports of listed Spanish corporations, García-
Meca et al. found significant association between IC
disclosure and size and type of disclosure meeting but
not ownership diffusion, international listing status, indu-
stry type and profitability. Guthrie and Petty’s (2004,
2006) analysis of IC disclosure practices suggests that
disclosure has been expressed in discursive rather than
numerical terms and that little attempt has been made to
translate the rhetoric into measures that enable perfor-
mance of vari o us f o rms of IC to be evaluated.
India presents an ideal case for the analysis of IC
disclosures by the IT corporations because the economy
has been undergoing rapid economic transformation in
the financial services, tourism, IT sectors and the niche
manufacturing gaining momentum. In the Indian-context,
there has been very limited number of IC disclosure
studies, as compared to its European counterparts. How-
ever, two recent studies are available on IC disclosu re in
Copyright © 2011 SciRes. ME
India using content analysis, which were done by Ka-
math (2008) [12], and Joshi et al. (2009) [13]. The
foregoing discussion suggests that the literature on the
determinants of IC disclosure in Indian-context is very
limited and inconclusive. Thus, our study builds on the
previous literature of IC disclosure practice and overall
IC disclosure scenario in the Indian corporate sector,
especially knowledge-based IT firms. The scope of the
study has been confined to 16 corporations from the IT
sector [14-29], and a content analysis was performed on
their annual reports for two years, namely, 2007-2008
and 2008-2009 re spectively.
3. Research Methodology Used
With the rise of the knowledge economy, the man-
agement of IC is becoming even more important and,
therefore, it should be disclosed in the annual reports. In
the knowledge-based economy, therefore, most of the
organizations have realized that the true potential of cre-
ating value for their organizations lies in the measure-
ment, valuation, and disclosure of their IC (Jing et al.,
2007) [30]. However, due to lack of regional research
on IC disclosures in India, we decided to focus on a
longitudinal study of IC reports published by the In-
dian pioneer firms. After some initial research on busi-
ness and intangible resources in the Indian corporations,
we found that three corporations had published their first
IC reports in 1997, which were discontinued later on.
These firms are: Balrampur Chini Mills Limited, Reli-
ance Industries Limited, and Shree Cement Limited. Af-
ter some initial difficulties, we collected copies of IC
reports published by these firms. The aim was to study
the idiosyncrasy of th e reports built in the Indian sub con-
This r esear ch also aims a t mapping the current state of
IC-related disclosures in the Indian scenario. Accord-
ingly, the sample-size of this study consists of 16 top IT-
sector corporations. However, these corporations were
primarily selected on the basis of their total income, as
per the 2008 publication of “Dun and Bradstreet,” a pre-
mier survey agency of the country. The electronic copies
of the annual reports for these selected corporations were
obtained for two years, 2007-08 and 2008-09 from their
respective corporate Websites. In the past, several re-
search studies have been conducted in various countries,
using the “content analysis” of annual reports, to analyze
the IC disclosure practices. A list of IC related terms was
searched within the annual reports yielding a signify-
cantly small number of instances in which IC disclosure
took place. Therefore, an attempt has been made here to
use the same technique (i.e., content analysis) to analyze
the extent of disclosure of IC by these IT corporations.
However, research in other countries revealed that dis-
closure practice stays well behind on a global scale, de-
spite the perceived importance by corporate managers.
4. Development of Intellectual Capital
Endeavors to reconstruct corporate annual reports to in-
clude IC indicators were spearheaded in the early 1990 s
by a small number of corporations, such as, the Swedish
insurance corporations “Skandia and Celemi,” the Dan-
ish corporations “Ramboll and the “Dow Chemical Cor-
porations”. In fact, all these pioneering corporations in-
cluded various aspects of their IC in their 1994 annual
reports. As per Cuganesan et al., (2006) [31], “An IC
Report (ICR) consists of three components: 1) vision of
the organization and the values that it seeks to follow;
the strategic objectives, competencies, critical intangibles
or ‘dream tickets’ (intangible assets that a corporations
cannot do without to achieve its objectives); 2) a sum-
mary of the IC (intangible assets, intellectual resources,
intangible activities) and the efforts undertaken by the
organization to nurture the IC; and 3) indicators or pa-
rameters that quantify the IC. Indicators, in fact, provide
measurable quotients for the audience of the ICR to cor-
rectly estimate the value of an organization’s IC and its
expected poten t i al and payoff .”
The Skandia Navigator (1994) [32] incorporated a to-
tal of 30 key indicators in the various areas, which are
monitored internally on a yearly b asis. To give an exam-
ple, the key indicators for “customer” focus include
number of accounts, number of brokers and number of
lost customers, “process” focus include number of ac-
counts per employee and administrative costs per em-
ployee, “human” focus include personnel turnover, pro-
portion of managers, proportion of female managers, and
training and/or education costs per employee, and finally,
“development/renewal” focus include satisfied employee
index, marketing expense/customer, and share of training
The ICR serves to make the organizational “intangi-
ble” resources “visible” and to measure them. The ICR
could be prepared for the purpose of giving external
partners’ relevant information ‘supplementary’ to the
other parts of the annual report and/or for using it as an
‘ad-hoc’ management tool for the development of the
organization. Although the primary target groups of the
ICR are existing and potential customers and employees,
it also catches the attention of capital investors, the press,
and the university researcher community (Brennan 2001)
[33]. Some leading European and a few Indian firms had
in the past published two types of reports: the intellectual
capital report and the financial report. Some firms, in-
deed, elaborate and publish the ICR separately as a “sup-
Copyright © 2011 SciRes. ME
plement” to their financial report. However, both types
of reports are complementary and seek to offer a more
“holistic” view of the firm. The ICR is aimed at provid-
ing a ‘holistic’ picture of the firm on the basis of chosen
strategies, actions taken and current challenges. Rather
than focusing on financial resources in accounting re-
ports, the ICR is focused on “softer” resources, such as,
intellectual capital (CIMA 2001) [5]. In essence, it is a
“supplement” to the financial accounts, as well as, a
valuable strategic management tool.
4.1. The Birth of World’s First Intellectual
Capital Report
The first ICR was born and made public in the year 1994 .
Its ‘father’ was Leif Edvinsson at Skandia, and its birth
constituted a milestone in the field of IC measurement,
management and disclosure. From that year onwards,
many firms realized the strategic importance of measure-
ing and disclosure IC but so far just a few firms decided
to build it. Looking at Skandia’s first, and subsequent IC
reports, this pioneer firm decided to assume the chal-
lenges of building IC reports without the existence of any
IC “guidelines” put forward by any regulatory bodies
and/or any other certifying agency.
Skandia’s first ICR was focused on “intellectual capi-
tal as a whole.” It addressed organizational hidden values,
indicators for the future, a vision of the satisfied cus-
tomer, the search for success factors, quality of the sys-
tem, people and technology, competency, renewal and
growth, the path forward, and a glossary of terms related
to IC. The first IC report had 22 pages, and subsequent
ones issued in 1995 and 1996 had 7 and 11 pages, re-
The first, 1994 report also described a “new” disclo-
sure model called, the “Skandia Navigator”. As it is well-
known, this famous tool was designed to describe and
measure the IC of an organization. The Navigator models
(1996) [34] visualize value components that make up IC,
as well as, the method of managing them and disclosure
on their development. It is designed to provide a bal-
anced picture of the financial and IC (1995) [35]. Its
greatest advantage is “the balanced total picture it pro-
vides of the operations” (Skandia, 1998) [36]. The focus
on financial results, capital and monetary flows is com-
plemented by a description of IC and its development.
Indicators that specify both the level and change are
highlighted. At Skandia, the IC ratios are grouped into
four major focus areas viz., the customer, human, proc-
ess, and renewal & development focus, as shown in Ta-
ble 2.
The Skandia Navigator is not intended to “provide a
specific value for the various components of its IC.
Rather, the navigator is designed to provide a balanced
Table 2. Assigning Values to Skandia’s Intellectual Capital
(Measurement Me thodology).
1997 1996 1995 1994*
Financial Focus
Operating income
(MSEK)** 104 86 85 75
Total operating
income (MSEK) 398 373 351 226
Income/expense ratio
after loan losses 1.35 1.30 1.32 1.49
Capital ratio (%) 12.90 14.95 24.48 25
Customer Focus
Number of customers 197,000 157,000 126,00038,000
Human Focus
Average number of
employees 218 200 163 130
Of whom, women (%)56 49 45 42
Process Focus
costs/administrative ex-
penses (%) 49 46 42 38
Renewal &
Development Focus
Total assets (MSEK) 9100 8100 5600 3600
Share of new customers,
12 months (%) 25 25 232 N/a
Deposits and
borrowing, general
public (MSEK) 7600 6200 4300 1300
Lending and leasing
(MSEK) 8500 7600 3700 3200
Net asset value of
funds (MSEK) *** 9900 7400 6300 4700
*Accounting-based indicators for 1994 have not been recalculated in accor-
dance with the new Swedish Insurance Annual Accounts Act, which took
effect on January 1, 1996. **MSEK = Million Swedish Krona ***Changed
calculation methods for 1996 and 1997. (Source: Skandia, “Human Capital
in Transformation,” Intellectual Capital Prototype Report—A Supplement
to Skandia’s 1 998 Annual R eport.)
overview, as well as, a basis for the systematic manage-
ment process that is essential for the creation a future
value. The four focus areas of Skandia’s model are the
same for the other parts of Skandia’s organizational,
while the indicators vary from unit to unit.”
4.2. The Second Generation of Intellectual
Capital Report
The second milestone in the ICR field happened in the
year 1997. In that year, most of the pioneer firms pub-
lished their first IC reports. Mainly these corporations
were from Denmark, Sweden, Spain and India. The ex-
perience of the European IC reports is well covered in
the literature: the Danish case (Danish Agency for Trade
and Industry), the Nor wegian case (Roberts), the Spanish
case (Ordóñez de Pablos) and the Swedish case (Celemi;
However, we should not fo rget that th ere is a long way
to march ahead to cover in the field of the IC report. It is
necessary to design IC report “guidelines,” which are
accepted and carried out by those firms that decide to
Copyright © 2011 SciRes. ME
measure and report their IC or in a not-so-distant future
may be enforced by regulatory bodies—as it is the case
of physical and financial resources and certain intangible
resources like goodwill and intellectual property (FASB
2001) [37].
5. Intellectual Capital Disclosure S c e nario in
India: A Longitudinal Study
Attracted by the lack of “regional” research on IC dis-
closures in India, we decided to focus on a “longitudinal”
study of IC reports published by the pioneer Indian firms.
After some initial research on business and intangible
resources in the Indian corporations, we found that three
private-sector corporations had published their first IC
report in the year 1997. These firms are: Balrampur
Chini Mills Limited, Reliance Industries Limited, and
Shree Cement Limited. After some initial difficulties, we
collected IC reports published by these firms. The aim
was to study the “idiosyncrasy of the reports built in the
Indian subcontinent.” Why did these firms decide to
build this innovative report? The reason is that the IC
report contributes to the management of intangible re-
sources, and also provides the shareholders’ with a “ho-
listic” picture of the organizational resources. Let us
study the experience of three leading firms, which had
taken the lead by providing IC-related disclosures, so as
to learn some valuable lessons from them.
5.1. Balrampur Chini Mills Limited
The Balrampur Chini Mills Limited (visit www.chini.
com) is one of India’s largest sugar corporations, with
three factories in Uttar Pradesh. In addition to the core
sugar business, the corporation also produces and sells
molasses and alcohol.
In 1996-97 Annual Report the firm elaborates about
the rationale of IC and intangible report as: “to provide
share owner a different and broader perspective of the
corporations, and the fundamentals that drive its busi-
ness.” The Balrampur Model is specific to the corpora-
tions (1997-98) [38] as “it reflects our priorities, our
method of working, our attitude and our people.” If suc-
cessfully activated, this model becomes regenerative.
The corporation states in its 1998-99 [39] report, “As we
keep this intellectual capital wheel in motion, the Bal-
rampur will always be a growing corporation.”
According to the firm, the five elements of IC are:
credibility, efficiency, human, structural, and customer
capital. Customer capital has a strategic importance for
the firm. As it states, “This is the apex of Balrampur’s
intellectual capital model. All the expertise built up on
the manufacturing and marketing side s of the business is
eventually judged on the ability of the corporations to
produce sugar of acceptable quality.” (2000-2001) [40]
Moreover, the corporation stresses the benefits of
valuing brands. The ability to outperform the sugar in-
dustry average is a reflection of the considerable intel-
lectual capital that it has built into its business—at the
farm, factory and marketing levels (2000-2001). The
Balrampur Chini Mills’ ICR constitutes an independent
document to the annual report. These reports had 11
pages (1996- 1997), 24 (1997-1998), 48 (1999-2000) and
40 (2000-2001), respectively.
5.2. Reliance Industries Limited
The Reliance Industries Limited (RIL) activities include
exploration and production of oil and gas, refining and
marketing, power, telecommunications, petrochemicals,
textiles, financial services and insurance, and info-com
initiatives. It has emerged as India’s most admired busi-
ness house, for the third successive year in a TNS Mode
survey for 2003. The Reliance’s employee skills are its
competitive muscle. Its skills differentiate Reliance fro m
its competitors—whether it be through the speedier im-
plementation of a project or in its implementation at a
cost which is significantly lower than that of the compe-
tition, or in the ability to extract more out of capital
equipment, even when it ages. These skills are germi-
nated in the Reliance culture (1998) [41].
The ICR of RIL ( aims to: “redress the
imbalance between non-financial and financial data, in
recognition of the belief that value of organizations will,
in times to come, increasingly reside in their intangible
assets.” (1998) The ICR is just focused on intellectual
capital and addresses several key topics: the importance
of the IC report itself, IC and value creation, human
capital, structural capital, customer capital, and investor
capital. However, it does not address the business model.
It constitutes an independent document from the annual
report with a total of 20 pages.
The firm recognizes that “the development and the use
of human potential and a learning organization is Reli-
ance’s bridge to continued success in the future.” It uses
the term “customer capital” not “relational capital” as
most firms do. In this area, variables that matter are
market creation, quality of customers, customer retention
and growth, market share and the quality facto r. Regard-
ing structural capital, the firm admits that it must develop
an organizational capability covering “strategy, speed of
decision processes, ability to raise funds and priortiza-
tion…Organizational ability covers system architecture,
the business process (horizontal integration), people
processes, as well as, education, learning and knowledge
building.” Finally, investor capital was the growth engine
of Reliance. In this section (1998), the firm discusses
issues focused on institutional shareholding, return to
Copyright © 2011 SciRes. ME
investors, stability in ownership, awareness initiatives,
investor education and investor servicing.
5.3. Shree Cement Limited
The Shree Cement Limited (visit www.shreecementltd.
com) is operating in the cement industry, which pos-
sesses two cement plants at Beawar, Rajasthan. It also
has one of the few R&D centres in the Indian cement
industry. It has a worldwide reputation for maximizing
capacity utilization an d low energy consumption lev e l.
Shree Cement Limited’s IC report is an independent
document (having 28 pages) that constitutes a ‘Supple-
ment’ to the Annual Report 2001 [42]. The firm under-
stands that IC is “capturing our various experiences for
organizational benefit, cross-pollinating our collective
knowledge across various operational tiers, maximizing
output with the minimum of resources, and doing things
right the first time.” The Corporations IC resides in its
own employees. Thus, the firm has retained the majority
of its members possessing valuable technical, financial
and manufacturing skills.
Shree Cement Limited’s drivers of excellence have an
intangible nature. As it recognizes, they are: “an achiev-
ement-oriented culture, continuous innovation, widesp-
read employee participation, sustained plant moderniza-
tion, cross-functional information sharing, constructive
dissatisfaction, personal pride in collective achievement,
a family work culture, operational discipline, caring ma-
nagement, aggressive empowerment, reward and recog-
nition system, workplace enthusiasm, mix of youth and
experience, informal environment, spirit of “must do”,
and quality obsessio n.” The ICR of the firm is in “narra-
tive style” as it does not incorporate double-entry tables
with indicators for its intellectual capital.
6. Peculiarities of Intellectual Capital
Reports in India
There is a vast difference in the disclosure mechanisms
and methodology followed by the Indian corporations. In
this context, Dr. Kamath (2008) [12] lucidly concludes
as: “Some firms have been considering IC as an insepa-
rable part of their total assets and disclosed it in their
annual reports as ICR using the standard disclosure
models. And, others publish those reports as a supple-
ment to their annual reports, and some others give the
details of growth in their IC over th e previous p eriod in a
separate section in their annual report.” There is no doubt
that in India, IC disclosure is still in its “evolutionary”
stages and all the three means of disclosure are accepted.
Moreover, we appreciate the growing awareness and
attempts made by some leading IT corporations to dis-
close IC in their annual reports.
The Indian I CR does no t fo cus on any bu siness model,
values, mission and vision, and/or knowledge manage-
ment issues, as is the case with the European ICR. It
presents information in a “narrative” style: it describes a
firm’s IC and analyses its components without focusing
extensively on specific indicators that measure these
components. This is a major distinctive feature of Indian
ICR. In sharp contrast with the European Union ICR,
Indian reports do not combine a “narrative” and “quanti-
fying” style (Abeysekera 2007) [43]. All Indian ICR
analyzed in this study constitute an “independent” docu-
ment that “complement” the Annual Reports. However,
their length is much larger than the European Union re-
ports. It is clear that corporations in the European Union
are way ahead of their counterparts elsewhere when it
comes to the measurement, disclosure and management
of their IC (Andriessen 2004) [44]. Finally, one of the
firms in this study—Reliance Industries Limited—even
created a specific term for investor relations (the investor
capital) and provides an in-dep th analysis of this capital.
7. Study of IC Disclosures Done by the IT
Corporations in India
In the knowledge economy, most of the organizations
have realized that the true potential of creating value for
their organization lies in the measurement, valuation and
disclosure of their IC. Therefore, measurement and dis-
closure of IC is no more a choice but imperative for the
IC driven firm’s performance. Nielsen et al., (2006) [45]
very forcefully asserts: “Annual reports are an ideal
place to apply an IC framework because they allow us to
compare IC positions and trends across different corpo-
rations, industries and countries. They are an instrument
for communicating issues comprehensively and con-
cisely, and they are produced regularly, so they can be
used to analyze manag ement attitud es and policies acro ss
reporting periods.”
One objective of the present study was “to survey the
prevailing practices of IC disclosure by the informa-
tion-technology ( IT) sector in India.” The sample size of
this study consists of 16 IT corporations of India. They
were primarily selected on the basis of their total income
as per the 2008 publication of “Dun and Bradstreet,” a
premier survey agency of the country. The annual report s
of the selected corporations were obtained directly from
the Websites of these corporations, and the annual re-
ports for two years (2008 & 2009) were ex amined.
The “content analysis” of annual reports involves
codification of qualitative and quantitative information
into pre-defined categories in order to derive patterns in
the presentation and reporting of information (Joshi et al.,
2010) [46]. Moreover, the coding process involved read-
ing the annual report of each corporations and coding the
Copyright © 2011 SciRes. ME
information according to pre-defined categories of IC.
Over the last decade, content analysis has been used by
several leading researchers to study the IC performance
and reporting (Beattie 2 006 ) [9 ]. Therefore, as pa rt of the
present study, “content analysis” has been used to ana-
lyze the extent of IC disclosure by the IT corporations.
By looking at the disclosure of terminology within their
annual reports, one can examine the extent to which In-
dian corporations publicly document the presence (or
importance) of IC. In identifying corporations disclosing
IC, a list of related “IC-terminology” was compiled.
Subsequently, a survey and review of several IC books
and articles was conducted. According to Bontis (2003)
[47], “The panel of researchers from the World Congress
on Intellectual Capital finalized the list of IC ite ms into a
collection of 39 terms that encompassed much of the IC
literature.” The list used by Bontis was considered com-
prehensive for this type of research on knowledge-based
information-technology corporations. The final list of IC
terms is shown in Table 3. Each of these terms was
“electronically” searched individually in the annual re-
ports to find out the presence or absence of the said terms,
and count of how many times. By and large, most IC
terms were disclosed only once in each annual report,
and there was lack of consistency about the terms dis-
closed. Results were tabulated on the basis of the number
of corporations disclosing these terms in their annual
reports. Corporations-wise analysis, along with testing
the degree of variance, has also been undertaken. The
content-wise analysis has been shown in Table 4, corpo-
rations-wise analysis in Table 5, and the variation in
Table 3. The intellectual capital--39 search terms.
Employee efficien cy Intellectual property
reputation Employee skill Intellectual resources
intelligence Employee value KM
Corporate learning Knowledge assets Expert networks
Corporate university Expert teams Knowledge management
Cultural diversity Knowle d g e sharing Human ass e t s
Customer capital Knowledge stock Human capital
knowledge Mana gement quality Human value
Value added IC Organizational culture
Employee expertise Information systems Organizational learning
know-how Relational capital Intellectual assets
knowledge Intellectual capital Structural capital
productivity Intellectual material Superior knowledge
(Source: Bontis, Nick, “Intellectual Capital Disclosure in Canadian Corpo-
rations,” Journal of Human Resource Costing and Accounting, 2003, page
Table 4. Content-wise analysis of intellectual capital terms
S. No.Items of
Intellectual Capital No. of Corporations
Business Knowledge
Corporations reputation
Competitive intelligence
Corporate learning
Corporate university
Cultural diversity
Customer capital
Customer knowledge
Economic Value added
Employee expertise
Employee know-how
Employee knowledge
Employee productivity
Employee efficiency
Employee skill
Employee value
Knowledge assets
Expert teams
Knowledge sharing
Knowledge stock
Management quality
Information systems
Relational capital
Intellectual capital
Intellectual material
Intellectual property
Intellectual resources
Expert networks
Knowledge management
Human assets
Human capital
Human value
Organizational cultu re
Organizational learning
Intellectual assets
Structural capital
Superior knowledge
(Source: Compiled by the author from the Annual Reports of Corporations
for the ye ar 2007-2008 and 2008-200 9).
disclosure has been presen ted in Table 6.
Findings of Study and Analysis of Results
Table 4 indicates that only 18 (46%) items, out of the
total list of 39 IC-terms, were disclosed in the annual
reports of the 16 Indian IT corporations. Most of the
IC-terms (viz., business knowledge, employee productiv-
ity, employee skill and value, knowledge assets, man-
agement quality, KM, human value, organizational lear-
ning, and intellectual assets) were disclosed only “once”
in the annual reports, and there was utmost “lack of con-
sistency” across-time about the terms disclosed. Our
findings are very much similar to the findings of other
studies done in the past. Surprisingly, the most popular
term disclosed in this study was “intellectual property
rights (IPR),” which represents such intangibles as pat-
ents, brands valuations, and the outcomes of R&D in-
Copyright © 2011 SciRes. ME
vestment. This is quite obvious due to the vital role
played by the “intangible assets (or IC)” in the case of
knowledge-intensive IT corporation s. However, this term
has a very specific legal connotation from an accounting
and legal perspectives. Therefore, the term “intellectual
property” (IC term No. 27) had the maximum (93%)
disclosure done by all the 16 IT corporations, followed
by the 50% disclosure of the term “information systems”
(IC term No. 23). This was not surprising due to the na-
ture of knowled ge-based IT corporations under study.
Unfortunately, the term “intellectual capital (IC),” was
specifically disclosed by just 2 ou t of the 16 corporations ,
namely, Moser Baer India Limited, and Patni Computer
System Limited. A closer examination of both these
corporations clearly revealed that the presence of “IC”
term was generally used in the “management discussion
& analysis (MD&A)” section of the annual reports. It is
very strange, there is no evidence at all in any of the
firm’s identified, that an actual IC statement/report was
developed, or that any other IC metrics were being pub-
lished. Moreover, our survey and subsequent analysis of
the IC disclosure practices suggests that disclosure has
been vaguely expressed in very “discursive,” rather than
“numerical” terms, and that little or no attempt has been
made to translate the rhetoric into measures that enable
performance of various forms of IC to be evaluated.
For instance, Moser Baer India Limited [14] declared in
its annual report, under the MD&A section, for the year
2007-08 as: “Quality of our human resources charts the
success and growth potential of our business. The Cor-
porations has managed to keep attrition rates well in
control by imbibing a sense of ownership and pride, and
strong HR initiatives geared to nurturing latent talent,
and unlocking the power of IC. The Corporations con-
tinues to drive organization development and also build
management resources for a multi-business enterprise.”
Recently, Moser Baer had stated in its 2008-09 annual
report, as follows: “Your corporations continuously
benchmarks HR policies and practices with the best in
industry and carries out necessary improvements to at-
tract and retain best talent and build in tellectual capital.”
Similarly, another IT corporation, Patni Computer Sys-
tems Limited [15] makes a “casual” mention of its IC in
its annual report for the year 2007-08 as under: “The
global sourcing market has matured from those days
when India was considered to be a source of ‘low-cost
manpower’. Today, it has earned the distinction of being
a ‘preferred destination for intellectual capital’ that ac-
celerates the trend—globalization of services. Going
ahead, Indian corporations are bracing up for the chal-
lenge of providing end-to-end business domain-focused
solutions, leveraging intellectual property (IP) in form of
solution accelerators, frameworks and service delivery
Table 5. Corporations-wise analysis of intellectual capital
terms, count of disclosures.
No. Name of
Terms of IC
(Count of Item)
Total No. of IC
Terms Dis-
1Infosys Technologies
1(1), 9(6) , 16(2), 17(2),
19(1), 21(1), 23(8),
27(15), 29(3), 31(7),
33(6), 36(1), 37(1)
2Moser Baer
India Limited 25(1), 27(1), 33(4),
34(1), 35(1) 05
3Patni Computer
Systems Limited 23(1), 25(1), 27(10) 03
4Tata Consultancy
Services Limited 9(2), 23(1), 27(5),
31(5), 33(1) 05
5Wipro Limited 27(5) 01
6H CL Infosystems
Limited 23(1) 01
7MphasiS Limited 23(2), 27(2), 35(1) 03
8CMC Limited 19(1), 27(1) 02
9Polaris Software
Lab Limited 15(1), 23( 1), 27(14) 03
10 Siemens Information
System Limited 23(2), 27(1) 02
11 Financial Technologies
(India) Limited 23(2), 25(1), 27(3) 03
12 I-Flex Solutions
Limited 27(1), 31(2), 33(2) 03
13 Satyam Computer
Services Limited 27(1) 01
14Tech Mahindra Limited27(4) 01
15 HCL Technologies
Limited 27(3), 33(1) 02
16 Larsen &Toubro
Infotech Limited 9(2), 13(2), 19(1),
27(4), 31(1), 33(1) 06
(Source: Compiled by the author from the Annual Reports of Corporations
for the ye ar 2007-2008 and 2008-200 9).
Table 6. Variation in item-wise disclosure.
Number of Items Covered 2007 to 2009
No. of Disclosing Corporations
0 - 3
3 - 6
6 - 9
9 - 12
12 - 15
Mean Disclosure 3.9
Standard Deviation 3.12
Coefficient of Variation 80%
(Source: Compiled by the author from the Annual Reports of Corporations
for the ye ar 2007-2008 and 2008-200 9).
The term “knowledge management (KM)” (IC term
No. 31 & 29), which is supposed to occupy a place of
prominence in the knowledge-based IT corporations of
India, was disclosed by a meager 6 (37%) corporations.
However, most of the terms relating to the employees
(except employee productivity, skill, value), and cus-
tomers could not find any deserving place in the annual
reports of the selected corporations. The most important
constituents of IC—relational capital, structural capital
and customer capital—did not figure even once in any of
the annual reports of the corporations under study.
Copyright © 2011 SciRes. ME
Table 5 very clearly highlights that Infosys Technolo-
gies Limited, a corporations acclaimed widely by the
international community and the media too, had dis-
closed the maximum number (13) of IC-related items
from the total list of 39 items. It is worth mentioning
here that Infosys was the first Indian corporations to win
the ‘Most Admired Knowledge Enterprise in Asia’ award
in the year 2002. However, it is surprising to note that
this corporation did not make any mention of term “IC”
in its annual reports for the years 2007 to 2009 . Perhaps,
Infosys is the only IT-corporations in India, which has
been regularly disclosing its “Intangible Assets Score
Sheet,” as a measure of intangible assets (or IC), as
shown in Appendix 1. For example, the corporation in its
2008-09 annual report makes the following remarks:
“We published models for valuing two of our most im-
portant intangible assets—human resources and the “In-
fosys” brand. This score sheet is broadly adopted from
the intangible asset score sheet provided in the book ti-
tled, ‘The New Organizational Wealth,’ written by Dr.
Karl-Erik Sveiby, and published by Barrett-Koehler Pub-
lishers Inc., San Francisco. We believe such representa-
tion of intangible assets provides a tool to our investors
for evaluating our market-worthiness.”
Based on the “content analysis” of this study, Larsen
& Toubro Infotech Limited disclosed the second-highest
6 out of 18 (33%) IC-terms, which were followed up by
Tata Consultancy Services and Moser Baer India Limited,
respectively, both with a disclosure score of 5 out of 18
IC-terms. However, we are surprised to note that Patni
Computers Limited, MphasiS Limited, I-Flex Solutions
Limited, Polaris Software Lab Limited and Financial
Technologies (India) Limited, by far comprising the
largest segment of the IT corporations having 6 corpora-
tions from the sample size of 16 corporations, disclosed
just 3 out of 18 IC-related terms in their annual reports
for the period of study. Rest of the 7 corporations, form-
ing a big chunk of our study, disclosed in the range of
just 1 to 2 terms, as for as the disclosure of IC-terms are
concerned. For example, CMC Limited, Siemens Infor-
mation System Limited and HCL Technologies Limited
disclosed just 2 items, while only 1 item was disclosed
by Wipro Limited, HCL Infosystems Limited, Satyam
Computer Services Limited, and Tech Mahindra Limited.
It is also important to note that the disclosed IC items
have been shown at widely “scattered-places” in the an-
nual reports, and there appears to be an utmost “lack of
consistency” across-time regarding the terms disclosed.
The “mean” disclosure, as shown in Table 6, comes to
be as low as 3.9 items. There is a variation of 3.12 items,
on average, as suggested by the value of “standard devia-
tion”. The “coefficient of variation” comes to be as high
as 80%, which indicates a sign ificant variation in item- -
wise disclosure in the annual reports of the corporations.
However, there is no “specific” disclosure of IC as a sp-
ecial part or content of the annual report, despite its very
high relevance in the knowledge-intensive IT industries.
Mr. Nandan Nilekani, CEO, President and MD of
Infosys Technologies [16] remarked: “At Infosys, we are
effectively transforming enterprise knowledge into we-
alth-creating ideas, products and solutions. We are
building portfolios of intellectual capital (IC) and intan-
gible assets, which will enable them to out-perform their
competitors in the fu ture. We consider KM as a po werful
medium for creating sustainable networks of people
across intra-organizational boundaries. It also provides a
symbol- ism for aligning individual initiative and crea-
tivity with organizational growth.” Thus, Infosys has
been duly recognized for its organizational learning and
for transforming enterprise knowledge into shareholder
value. It is worth mentioning here that Infosys is regu-
larly disclosing in its annu al report details about the “In-
tangible Assets Score-Sheet,” as developed by Dr. Sev-
eiby, human resources accounting, brand val uation, etc.
Similarly, Mr. Sambuddha Deb, Chief Quality Officer,
Wipro Technologies [17], observed: “Our knowledge
management initiative continues to be one of the most
strategic initiatives and our knowledge portal, “Knet,”
provides an effective and efficient means of capturing
knowledge, both tacit and explicit across the organiza-
tion, distilling it through a review process and making it
available in a form which is ready to use. Our conscious
and significant investment in the KM initiative is pro-
viding an important edge that the business needs.” No
doubt, comprehensive IC disclosures would not only
help in retaining the competitive advantage in the long-
run, when other firms start emulating such pioneering
practices, but it would also prove as an added informa-
ion available, which can also be used to measure the lin k
between the performance, growth and stability of the
firm with its IC.
Based on the results of the present research study, the
following broad generalizations can be made: 1) IC dis-
closure is very much an academic discussion; 2) There is
no evidence at all that IC disclosure has generated any
traction for Indian corporations; 3) IC reports published
by the Indian corpo rations is almost negligible; and 4) IC
disclosure has not received any priority from the mentors
of the Indian corporations. Obviously, using the language
of IC is an important antecedent to developing IC reports,
but Indian corporate sector seems to be significantly be-
hind its Scandinavian and other counterparts. We are
hopeful that as the field of IC gains momentum, disclo-
sure of IC evidence would also gradually increase. How-
ever, the average number (3.9) of items reported by the
Indian IT-sector corporations is very low, which suggests
that there is neither awareness nor any interest to record
and report IC variables by these corporations. Even the
Copyright © 2011 SciRes. ME
few items which were just reported were expressed in
“discursive” rather than in “numerical” terms. Moreover,
it has also been found that there exists no clear-cut pat-
tern or system of IC disclosure in the annual reports. The
disclosure was not uniform and no evidence of its well-
defined measurement basis (except for the Infosys “In-
tangible Score-Card”) was found in the annual reports. It
is very surprising to note that the Information Technol-
ogy corporations, which are most dominating group in
the knowledge sector, have failed to report IC in their
annual reports. Undoubtedly, Indian corporations are far
lagging behind in the field of measurement, management
and disclosure of IC, as compared to the Scandinavian
and/or European corporations. Thus, there is an urgent
need to highlight the importance of IC disclosure to these
knowledge-based IT firms and encourage them to pro-
vide “voluntary” IC disclosures.
Surprisingly, our findings are very similar in comp-
arison to the various other studies on the same subject
(viz., Bontis, 2003, Brennan, 200, Ordonez de Pablos,
2002, Kamath, 2008 etc.), which also signify very low
level of IC disclosures. For instance, as per the OECD
(1999) [48] research report, “corporations in the Europe
are way ahead of their counterparts elsewhere when it
comes to the measurement, disclosure and management
of their IC.” While there is some evidence that Austra-
lian enterprises are engaging in the process of identifying
their stock of IC, overall Australian corporations do not
com- pare favorably with their overseas counterparts in
their ability to manage, develop, support, measure and
report their IC (Bruggen et al., 2009) [10]. Similarly,
Bontis (2003) [47] concludes: “There is no evidence at
all that IC disclosure has garnered any traction for the
Canadian corporations. Only a small percentage of Can-
adian corporations (68 out of 10,000) even used the
terms in their annual reports. Obviously, using the lan-
guage of IC is an important antecedent to developing IC
statements, but Canada seems to be significantly behind
its Scandinavian counterparts.”
8. Conclusions and Recommendations
Intellectual capital can be a source of competitive ad-
vantage for businesses and stimulate innovation that
leads to wealth generation (Marr et al., 2003) [49]. The
measurement and disclosure of IC is relatively new, with
only a smattering of pioneering corporations using the
“newer” measures. It is still too early to be making pre-
dictions about whether or not a model or system for
measuring IC will be successfully articulated and inte-
grated into the existing management and financial dis-
closure system. A careful examination of the history of
IC clearly indicates that there is a long way to move
ahead in this field.
This brief review of the measurement and disclosure
of IC terrain highlights the case for “re-engineering” the
traditional accounting and management disclosure proc-
esses (Daniel 2004) [50]. If efforts are not made towards
incorporating the v alue o f in tangibles into a “formalized”
disclosure framework then, for many public and private
sector organizations, the management’s disclosure in the
financial statements will become increasingly irrelevant
as a tool supporting meaningful decision-making (Cuga-
nesan et al. 2006) [31]. There is overwhelming evidence,
as per Bernard et al. (2003) [51], in support of the notion
that there are several benefits to managing, measuring
and disclosing IC in the annual reports. Many firms
across the EU are already publishing IC statements on a
voluntary basis. They see it as a way of increasing “tra-
nsparency” and explaining their view of the corpora-
tion’s business model to the market. While separate IC
statements may be appealing to users of information, es-
pecially individual shareholders, they may place an “un-
welcome burden” on corporations already facing greater
demands for transparency.
Much of what has been done to date in the field of re-
searching IC has an intuitive appeal, but is this enough to
attract and convince the critical mass of supporters (par-
ticularly within the accounting profession) whose sup-
port is very much needed for the change to take place?
Both the CIMA and CICA, leading accounting bodies,
have supported the IC disclosure initiatives of their
FASB cousins. No doubt, some progress has already be-
en made in this direction by the publication of IC guide-
lines developed by the Danish Agency of Trade and In-
dustry (2000, 2001) [52], the Meritum Project (2002)
[53], the 3R Model (Ordóñez de Pablos, 2001, 2002) [54,
55], etc. Based on best practices observed in more than
100 European Union corporations, the Meritum projects
have resulted in “guidelines” on how to report IC. Al-
though the guidelines vary slightly in content and termi-
nology, the underlying ideas are the same.
Leading IT corporations in India that were applying IC
measures have found that it gives them better under-
standing of the “drivers of value” and is improving ma-
nagement and growth of these vital assets. Both, Wipro
Technologies and Infosys Technologies corporations ha-
ve been recognized for their organizational learning and
for transforming enterprise knowledge into shareholder
value. Unfortunately, IC disclosure in the Indian IT firms,
for the period of study, is seen to be almost negligible
and partial, in tune with the developed countries. Only a
small number of the total firms studied actually reported
IC-related terms. Moreover, the disclosure of IC was not
at all uniform, and there is lack of eviden ce regarding the
usage of the measurement, management techniques, and
tools by these firms. Thus, there is an urgent need to
highlight the importance of IC disclosure to these kno-
Copyright © 2011 SciRes. ME
wledge-based IT firms and encourage them to provide
voluntary IC disclosures. A brief summary of the present
research study reveals the following aspects:
The “key” components of IC are poorly understood,
inadequately identified, inefficiently managed, and
are not reported within a consistent framework.
The findings of over 20 internatio nal research studies
reflect the ‘exploratory’ nature of the IC disclosure
work, and the fact that we are at an ‘embr yonic’ stage
of investigation.
The extent of disclosure is generally ‘minimum’ but
the types of IC that tend to be most often reported in-
clude human resources, technology and intellectual
property rights, and organizational and workplace
A review of industry clusters within the study sug-
gests that no individual industry is significantly ahead
of any other in its IC disclosure practices.
By and large, most corporations’ representatives be-
lieve that the management of IC is an important fac-
tor in determining future corporations’ success and
facing competitiveness. However, few executives are
able to identify initiatives within their organization
that are designed to assist in managing IC.
IC disclosures made by the Indian IT firms is very
“negligible, partial, and descriptive, lack of consis-
tency in reporting etc.,” in sharp contrast with the
developed countries. A very small number of the total
firms studied actually reported IC-related terms, dis-
closure was not unifor m, and there is lack of evidence
regarding the usage of the measurement, management
techniques, and tools by these firms.
So far, published guidelines represent good initiatives
undertaken by the academics based on the experience of
some pioneer firms in developed countries that build the
IC report. They provide practical guidelines on how to
measure and report IC. However, firms are not enforced
to follow these guidelines, and therefore, they just offer
an orientation. The development of a set of homogeneous
norms, principles, indicators and structure is a high pri-
ority in the IC report agenda. The following recommend-
dations are made.
Even though, IC has a very strong impact on the
drivers of future earnings, but unfortunately, it is
largely ignored in the financial disclosure. We
strongly recommend that corporations must create a
culture that emphasizes the importance of IC in
achieving business a d vant a ge.
Those corporations that are concerned with their rela-
tionship with the capital markets are to develop ‘stra-
tegic’ and ‘tactical’ initiatives that provide for ‘vol-
untary’ IC disclosures.
The IC reports may initially be used for “internal”
management purposes but an “external” stakeholder
focus report should be the long-term ultimate goal.
The professional accounting bodies, at the global
level, should join hands to develop an internationally
accepted valuation system, and standardized and
harmonized app r oaches for discl osu re of IC.
The regulatory bodies should establish “key” pa-
rameters for the disclosure of IC in a similar fashion,
as have been defined for disclosure of Corporate
Governance (CG), as per Clause 49 of the Securities
Exchange Board of India (SEBI) in order to make a
beginning in the field.
To adopt “voluntary” IC disclosure practices, espe-
cially for Indian IT firms in the knowledge-sector,
where competitiveness of the firms are determined by
their intangible assets.
Indeed, the whole field of IC disclosure is still rela-
tively ‘new’ and very slowly evolving. Therefore, ac-
countants, business managers, and policy makers have all
to grapple with its concepts, philosophy, and detailed
methodologies for IC applications. Real-life corporate
experience suggests that rushing into the details of IC
measurement before understanding the fundamentals is
going to prove counter-productive. Now, we feel the
time is ripe for international professional bodies to de-
velop that understanding and to develop new measures
that will guide them more clearly to a prosperous future.
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