Despite it being an important organizational asset in the “knowledge era”, Intellectual Capital is still not reported in the traditional balance sheet. Thus, there has been speculation that the balance sheet is losing its relevance as a key financial statement. This paper investigates the impact of Intellectual Capital, on the perceived relevance of the balance sheet as an indicator of the firm’s future financial performance. It represents an attempt to integrate previously fragmented literature on Intellectual Capital to a single framework, while providing an empirical examination of Intellectual Capital components on the perceived relevance of the balance sheet. The sample was obtained from 71 Malaysian small and medium enterprises. Results from the study have demonstrated that the balance sheet was indeed perceived to be irrelevant as an indicator of future financial performance and was significantly associated with the level of investment in Intellectual Capital. As anticipated, this association was largely contributed by the Social Capital component. However, both Human and Structural Capital showed no significant association. The results of this study are important as they show that Intellectual Capital is an organizational asset that should be measured and reported in the organizational balance sheet. Organizations that fail to disclose it will find their balance sheets no longer perceived relevant as an indicator to their future financial performance. Further, in disclosing Intellectual Capital in the balance sheet, more attention needs to be given to the Social Capital component.
|Keywords:||Intellectual Capital, Relevance of Balance Sheet|
Assistant Professor, Business Administration Department, ALHOSN University, Abu Dhabi, United Arab Emirates
Dean, School of Management, Malaysian Science University, Penang, Malaysia
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