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The Role of Financial and Non-Financial Reporting in Systematic and Comprehensive Monitoring of Companies’ Business Activities

Today, more than ever, every kind of business is influenced by a new way of thinking and acting. Information communication technology (ICT) is developing rapidly making an impact on all segments of business. Traditional ways of thinking and acting have been replaced by modern ones. In that context, intangible assets (IAs) have become an inevitable part of the firm’s resources, making a huge impact on the firm’s value. There are two types of intangibles: intangible assets recognized in the balance sheet under the long-term intangible assets and intangibles not recognized in the balance sheet. Development expenditures, concessions, patents, licenses, trademarks and service marks, software, goodwill, prepayments for the acquisition of intangible assets are recognized under the long-term intangible assets in the balance sheet since there are generally accepted measurement methods for such intangible assets. On the other side, there is no generally accepted measurement method for measuring employees’ knowledge, knowledge management, know-how, customers lists, mailing lists of clients, brand name, firms’ procedures and strategies. Such intangible asset is not recognized in the balance sheet even it increases the market value of the firm and, unfortunately, is not disclosed by the general purpose financial statements. There is an option to disclose such information in the notes to financial statements, but previous researchers have found that such disclosures do not exist or are at a low level. However, by the time, firms are encouraged to disclose such non-financial information on other reports like non-financial report, annual report, management report, balanced scorecard, integrated report. Such information is a valuable resource for firms’ stakeholders, in the first line for investors. Regardless of external reporting, firms also prepare internal reports. The balanced scorecard has been recognized as a powerful tool for reporting on and measuring of intangible assets as well as firms’ set goals and strategy. There are many studies that have proven that firms which prepare additional reports and disclose additional information make better results in terms of business performance and sustainability. In order to get an insight into the influence of additional reporting on business performance and sustainability the research will be carried out. The goals of this research are to investigate (1) the existence of additional information disclosure regarding the intellectual capital, (2) the frequency of preparing internal reports in order to monitor the impact of set goals and strategy, and (3) the measurement methods used for the valuation of intellectual capital which is not presented in the balance sheet, if such method is used in the firm. A theoretical part of the research will include a review of current studies related to the identification and measurement of intellectual capital, reporting on it, its influence on business performance and cost of equity as well as studies regarding the importance of internal and external reporting. The empirical research will be carried out through the questionnaire which will be distributed by the email. The first part of the questionnaire will include general questions regarding the organization’s structure and performance based on the multiple-choice questions. The second part of the questionnaire will include specific questions regarding the internal and external reporting and the methods of measurement used for traditional accounting reporting as well as for additional measurement of intellectual capital. Using the descriptive statistic and statistic’s tests the results will be interpreted. The research sample will include high-tech firms registered in Croatia since they should have a great value of intellectual capital which is not presented under the heading of long-term intangible assets in their balance sheet. Similar researches regarding measurement of intangible assets, impact on business performance, and monitoring of set goals and strategy through internal and external reports has already been carried out in many countries. The results of those studies will be compared with the results of this research. The research is expected to result in constructive insight into perceptions of selected firms regarding the importance of financial and non-financial reporting. It is expected that the smaller firms would not be interested in additional reporting compared with the bigger ones since it causes some additional time and employees, and costs in general. In addition, since costs are usually the cause of the reluctance of additional reporting, newly established firms are trying to minimize them. A firm should have to invest in reporting, either external or internal, as long as benefits from such reporting exceed the costs. It is considered that the major problem of insufficient reporting is lack of awareness that the transparent internal and external reporting that implies systematic monitoring of the achievement of set goals and strategy is of great importance for success and sustainability of a firm. The research results should be of great importance for scientific and professional community, for further researches and for standard setters and policy makers. It should be a foundation for further improvements in internal and external reporting as well as in awareness of the importance of applying professional judgment when it comes to accounting policies and estimates applied.

Information Communication Technology, Intangible Assets, Intellectual Capital, Information Disclosure

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