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Determinants of Disclosure of Intangible Asset in Financial Reporting in Nigeria
This study examined the determinants of disclosure of intangible assets in financial reporting using thirty (30) companies listed on the Nigeria Stock Exchange (NSE) for a period of seven years (2011–2015). The objective was to determine the relationship between company size, profitability, leverage, company age, auditor type, liquidity and intangible asset disclosure. The Panel Least Square (PLS) was employed in analyzing and testing the hypotheses, the findings revealed that there is a positive and significant relationship between company size, profitability and voluntary disclosure of intangible assets. The study reveals that a positive and insignificant relationship exist between leverage, auditor type, liquidity and disclosure of intangible assets. While company age exhibit a negative and significant relationship with voluntary disclosure of intangible assets. It is concluded that an oft-stated concern that the disclosure on intangibles has not kept pace with the capital market’s demand for increased information. In line with the findings, we therefore recommend to regulatory authorities in Nigeria for a review of mandatory disclosure requirement with a view of making some voluntary disclosures mandatory irrespective of the firms’ size.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
Chapter One: Introduction
1.1 Background to the Study 1
1.2 Statement of Problem 4
1.3 Research Questions 5
1.4 Objectives of the Study 6
1.5 Statement of Hypotheses 7
1.6 Significance of the Study 8
1.7 Scope of the Study 9
1.8 Limitations of the Study 10
1.9 Definition of Terms 10
Chapter Two: Review of Related Literature
2.1 Introduction 13
2.2 Literature Review on Selected Variables 14
2.2.1 Company Size and Intangible Asset Disclosure 20
2.2.2 Profitability and Intangible Asset Disclosure 23
2.2.3 Leverage and Intangible Asset Disclosure 26
2.2.4 Company Age and Intangible Asset Disclosure 28
2.2.5 Auditor Type and Intangible Asset Disclosure 30
2.2.6 Liquidity and Intangible Asset Disclosure 32
2.3 Review of Empirical (Prior) Studies 33
2.4 Conceptual Framework 37
2.5 Theoretical Framework 44
Chapter Three: Research Methods and Design
3.1 Introduction 46
3.2 Research design 46
3.3 Description of the Population of the Study 46
3.4 Sample Size 47
3.5 Sampling Techniques 47
3.6 Sources of Data Collection 47
3.7 Method of Data Presentation 48
3.8 Method of Data Analysis 48
Chapter Four: Data Presentation, Analysis and Hypothesis Testing
4.1 Introduction 54
4.2 Presentation of Data 55
4.3 Data Analysis 55
Chapter Five: Summary of Findings, Conclusion
5.1 Introduction 63
5.2 Summary of Findings 63
5.3 Conclusion 64
5.4 Recommendations 65
1.1 Background to the Study
One of the most popular alternative ways of communicating is the use of narrative reporting where intangible asset information is voluntarily disclosed in narrative sections of the annual reports, outside the financial statements and their notes, as part of broader business reporting practices. Intangible assets are of increasing importance for the corporate value creation processes of all kind of organizations. This has severe consequences for internal and external reporting and hence for the decision making processes. Intangibles treated as resources of distinctive value should then be developed and allocated according to “objective“ measures and according to excepted economic criteria (Ghamari, Saeidinia, Hashemi & Aghaei, 2012)
Alves and Martins (2010) support that, intangible assets show a set of characteristics – namely, high risk and uncertainty, firm-specificity and human capital intensity - that make them markedly distinct from other sorts of assets. Consequently, one can argue that differences in corporate asset structures – namely the level and the nature of the intangible assets – may affect the distribution of rents among managers, shareholders and debt holders. Managers contribute with human capital, whereas debt holders and shareholders contribute with financial capital (of different nature) to the firm.
In his opinion, Svensson (2010) asserted that, intangible assets have become more and more important as the information and knowledge society has been prevalent in the end of the 2000 century. At the same time, the intangibles have been more important to disclose to different stakeholders, for companies. The book values of companies have constantly been shrinking in relation to market value. He further opined that, the value and impact of intangibles are not adequately reflected in the traditional mandatory accounting framework. Intangibles can be denoted as a kind of unaccounted assets in the traditional accounting system. There is an international pressure on corporations to improve their accounting disclosure. Wide ranges of participant groups and other organizations have also diverse interests and concerns to see that accounting practices of disclosure are improved. In literature, practices of disclosure are basically related to the communication framework of capital market.
Omoye (2013) observed that the objective of preparing a company’s financial statement is to make known the company’s performance. Specifically, it provides information about a company’s financial performance, financial position, and cash flows. However, if the financial statement must effectively meet this objective, it must provide adequate information that relates to the various items or components (capital and recurrent) of the final accounts. Also, it is observed that firms and organizations in Nigeria prepare financial statements at the end of their accounting year or any period usually yearly i.e. twelve (12) months. In preparing these financial statements, assets and liabilities are reported at their net book values to determine the financial performance and position of the firm and ultimately, the net worth of the business. However, one vital aspect of these financial reporting which is unduly neglected in the balance sheet is the reporting of intangible assets. Furthermore, it has been observed that more often than not, a company’s market value is usually greater than its book value and the disparity can be attributed to the non-disclosure of intangible assets in the company’s balance sheet.
Omoye (2013) also tow the same line of reasoning as he asserts that the role of intangibles and their associated benefit can be assessed from the changing market-to-book value differences. That is, the magnitude of the difference in market values and book values of companies is an indication of the impact of intangibles in these companies.
In the light of the above discussion, this study shall examine the determinants of disclosure of intangible assets.
1.2 Statement of Problem
Over the last fifteen (15) years or so there have been a number of calls for accounting reforms, with claims that the traditional historic cost approach has outlived its usefulness. One of the claims often made in these debates is that the economy has changed in fundamental ways that business is now fundamentally “knowledge-based” rather than industrial, and that “intangibles” are the new drivers of economic activity. Based on these claims, commentators contend that one of the key problems faced by financial disclosure is that financial statements failing to recognize many of the most important knowledge-based intangibles, such as intellectual capital, and that this has adversely affected investments in intangibles.
The problem of this study is to investigate whether company size, profitability, leverage, company age, auditor type, liquidity influence firm decision to disclose intangible asset.
1.3 Research Questions
Against this backdrop, the following research questions are raised:
1. Is there a significant relationship between company size and intangible asset disclosure?
2. Is there a significant relationship between profitability and intangible asset disclosure?
3. Is there a significant relationship between leverage and intangible asset disclosure?
4. Is there a significant relationship between company age and intangible asset disclosure?
5. Is there a significant relationship between auditor type (BIG 4) and intangible asset disclosure?
6. Is there a significant relationship between liquidity and intangible asset disclosure?
1.4 Objectives of the Study
The broad objective of this study is to examine the determinants of disclosure of intangible asset in Nigerian quoted companies. The specific objectives are to:
1. determine if there is significant relationship between company size and intangible asset disclosure;
2. examine if there is significant relationship between profitability and intangible asset disclosure;
3. ascertain if there is significant relationship between leverage and intangible asset disclosure;
4. determine the relationship between company age and intangible asset disclosure;
5. investigate the relationship between auditor type and intangible asset disclosure; and
6. verify the relationship between liquidity and intangible asset disclosure;
1.5 Statement of Hypotheses
The following hypotheses stated in null and alternative forms were tested in the course of the study;
HO: There is no significant relationship between company size and intangible asset disclosure.
HI: There is significant relationship between company size and intangible asset disclosure.
HO: There is no significant relationship between profitability and intangible asset disclosure.
HI: There is significant relationship between profitability and intangible asset disclosure.
HO: There is no significant relationship between leverage and intangible asset disclosure.
HI: There is significant relationship between leverage and intangible asset disclosure.
HO: There is no significant relationship between company age and intangible asset disclosure.
HI: There is significant relationship between company age and intangible asset disclosure.
HO: There is no significant relationship between auditor type and intangible asset disclosure.
HI: There is significant relationship between auditor type and intangible asset disclosure.
HO: There is no significant relationship between liquidity and intangible asset disclosure.
HI: There is significant relationship between liquidity and intangible asset disclosure.
1.6 Significance of the Study
It is expected that this study would consolidate existing literature on the issues surrounding the disclosure of intangible assets in Nigeria. The study would also facilitate the examination of the effects of disclosure of intangible assets in Nigeria and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variable examined in the study.
The result of the study would be of benefits to investment analysts, investors and corporations in examining the effectiveness of disclosure of intangible assets. It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economic like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.
1.7 Scope of the Study
This study focuses on the determinants of disclosure of intangible asset in financial reporting in Nigeria. The population of the study is entire two hundred and fifty (250) companies in the Nigeria Stock Exchange. Thirty (30) quoted companies in the Nigeria Stock Exchange shall constitute the sample size of this study. The study will cover a period of five (6) years i.e. (2011 – 2015).
1.8 Limitations of the Study
The following are the limitations encountered;
1. The study was conducted solely on listed companies. The results may not be generalisable to non-listed companies
2. The study is limited by time and data. Due to time constraint, the data and information used is not the product of primary research but are published information obtained from articles, journals and financial statements.
3. The ability to obtain a completely random sample.
1.9 Definition of Terms
a. Financial Reporting: Financial reporting is concerned with the recoding and interpreting of transaction for a business enterprise or other economic unit and the periodic preparation of various report from such records is also a systematic gathering, summarizing and interpreting of business transaction in monetary terms such that it provides information which permits informed judgement by the users of the information.
b. Management: This can be defined as the rational selection of causes of action to optimize the interrelationship of man, material and money for the survival and growth of the organization. It can be regarded as the process of getting things done through other people. A person who manages is called a manager.
c. Business: This is a process whereby human, material and capital resources are combined to earn/satisfy human needs and wants. An entity which carries on such organized efforts is known as a business entity.
d. Standards: It is a set out rules and procedures relating to the measurement, valuation and disclosure of accounting transactions.
e. Accounting Standards: A definitive standard for financial accounting and reporting establish in the form of a International Accounting Standard Board (IASB) issued by the International Accounting Standards committee.
f. Listed Company: A company that has a listing agreement with a major stock exchange and whose shears have a quotation on that exchange.
g. Investors: A person or an organization that invest money into business or something that will yield more income.