Accounting Treatment of Intangible Assets - Analysis of Computer Programming Companies

Accounting Treatment of Intangible Assets - Analysis of Computer Programming Companies

Ana Rep (Faculty of Economics and Business, Zagreb, Croatia)
Copyright: © 2019 |Pages: 17
DOI: 10.4018/IJESMA.2019070105
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Information technology has a crucial role in all types of businesses and is a product of intellectual capital. Intellectual capital is not recognized as an asset of a company since there is no generally accepted model for measurement of human capital. Research was performed in order to investigate the awareness of financial statement preparers regarding the importance of using the professional judgement in the context of intangible assets. The content analysis method and the method of induction have been used. Nonetheless, an analysis of activity ratios has been done in order to gain an insight into the effectiveness of the company's assets. Empirical research conducted on a sample of computer programming companies has shown the lack of professional judgment in the context of accounting policies applied. Additionally, the value of intangible assets is underestimated. Computer programming companies should give greater emphasis to disclosures in the notes of financial statements since the non-financial disclosures are found to be at a low level.
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1. Introduction

Over the past few decades, information technology (IT), also called information and communication technology (ICT) has been developing rapidly and affecting all sectors of the economy. “Although the emergence of first computers was followed by the fear of technology, in the meantime our attitude towards technology has changed completely and we are accepting it widely” (Pejić Bach, 2014, p. 336). “Differentiation and innovation become critical and capabilities and assets such as research and development (R&D), creativity, brand image, patents and copyrights are essential to achieving a competitive advantage” (Lev, Cañibano and Marr, 2005, p. 42). “In the era of the knowledge-based economy, the key factor that drives and creates a firm’s value is intellectual capital” (Wang and Chang, 2005, p. 225). “Organizations have to rely more on Intangible Assets (IAs) than on tangible ones to prosper and even to survive” (Tomé and Gonzales-Loureiro, 2012, p. 127). The most valuable assets of organizations are employees and their knowledge and experience recognized as human capital. According to Bontis (1998) “an individual can have a high level of intellect, but if the organization has poor systems and procedures by which to track his or her actions, the overall intellect capital will not reach its fullest potential” (p. 66). On the other hand, organization’s infrastructure and systems as well as procedures and policies creates structural capital. “Structuring intellectual assets with information systems can turn individual know-how into group property” (Nicolini, 1993; in Bontis, 1998, p. 66). Edvinsson (1997) gives “a simplified definition of intellectual capital: Human capital + Structural capital = Intellectual capital” (p. 368). Besides human and structural capital, there is also relational capital as “the result of organization’s ability to interact positively with members of the community to whom it belongs to enhance wealth creation through their Human Capital and Structural Capital” (Tomé and Gonzales-Loureiro, 2012, pp. 130-131).

The accounting profession has also been affected by the changes and challenges caused by the development of the information technology. Manual data processing has been replaced by computer data processing. When it comes to the accounting, it is difficult to measure intellectual capital and therefore it is not presented as the organization’s assets under the balance sheet. IT companies which develop and improve software, generally called accounting information systems, play the main role in the automation of accounting processes. These systems present intangible asset of a company that uses them, but, at the same time, are a product of the company that develops them, a product of using the intellectual capital of the company. Based on that, Edvinsson (1997) states that “investing in the areas of human capital and IT leads to a short-term deterioration of profits which in turn reduces the value of the balance sheet, thereby reducing the book value of the organizations” (p. 366). There are several kinds of studies related to the intellectual capital. On one hand, there are studies in which researchers have examined the measurement of intellectual capital (Bontis, 1998; Sveiby, 2001; Rodov and Leliaert, 2002; Andriessen, 2004; Todorova, Gourova and Birov, 2010; Fritzsche, 2012; Yazdanfar, 2013; Oleynikova and Balbaniuk, 2017). These studies have resulted in several proposed models for measuring and managing intellectual capital. On the other hand, there are studies in which researchers have investigated the correlation between intellectual capital and company’s performance (Carlucci, Marr and Schiuma, 2004; Chen, Cheng and Hwang, 2005; Černe, 2011; Nuryaman, 2015; Muda and Ridhuan, 2018; Khalique, Bontis, Shaari, Yaacob and Ngah, 2018). Majority of studies have proved that there is a positive relation between intellectual capital and company’s performance. Besides, there are studies regarding the intellectual capital disclosures that have been conducted using the method of content analysis or regression method (Joshi, Ubha and Sidhu, 2012; Boujelbene and Affes, 2013; Muttakin, Khan, and Belal, 2015; Wang, Sharma and Davey, 2016). Nevertheless, Černe (2011) gave a proposal to development of accounting information subsystem of intellectual capital.

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