Corporate Reporting, Global Accounting, and International Finance - Essay Example

Corporate Reporting and Global Accounting & International Finance Table of Contents Corporate Reporting and Global Accounting 3 Importance of Intellectual Capital 3 Search for Intellectual Capital Information 6 Other Sources of Information 9 Policy Implications 10 Asian financial crisis of 1997-98 13 References 20 Bibliographies 24 Corporate Reporting and Global Accounting Importance of Intellectual Capital Intellectual capital refers to collection of all those resources that together give value to the organisation. It is the intangible asset which comprises of the following elements: Relational Capital - It includes all those elements that are external to the organisation like that of customers, suppliers, and partners. Human Capital - Human capital can be referred as the set of knowledge possessed by the company's employees. Organisational Capital - Organisational capital is the collection of the know-how within the organisation. Such know-how includes intellectual system, information system and other form of policies. In present world, every organisation should be a learning organisation and for that intellectual capital provides support. Intellectual capital is a combination of commitment and competency of workers like how they think and perform their duties along with how the organisation forms policies for getting the work done (Ulrich, D., "Intellectual Capital = Competence x Commitment"). In simplest form one can say that "(Market Value - Value of Fixed Assets) = Intangible Assets, i.e., Intellectual Capital" (Kesan, "Role of Patents in Technology Commercialization"). Intellectual capital helps an organisation in different way such as For attaining organisational goal In planning research and development programs Decision making regarding reengineering Arranging organizational training and educational plans Assess organisation for setting benchmarks Expands organisations ability to identify resource and avoid reinvestment (Brinker, n.d.) In the present competitive scenario, various kinds of management models are available to strategically manage an organisation and to gain competitive advantage. The different managerial techniques used by management department are R & D management, Human Resource management, Total Quality management, Just in Time (JIT) concept and communication management among others. But intellectual capital management is little different from these managerial tools because it takes into account the intangible component of an organisation's wealth. Intellectual capital directly influences the customers, human and structural factors which are considered as the three major pillars of any organisation. Certain degrees of mismanagement in intellectual capital can lead to high risk to growth and sustainability of the organisation. It has been found that the organisations which had performed well in the past had managed to handle these pillars in best possible manner such as attaining shortest processing time, constant improvement in the quality standers within the whole organisation, reduction in waste and maintaining optimum number of employees (Source: Al-Ali, N. 2003, p. 8). But the tricks of the trade are fast changing. In the present world, to maintain its competitive advantage, the organisation has to incorporate new knowledge and application of old knowledge in new way within the production process. An organisation should learn to use knowledge and intellectual recourses at each and every aspect so that it remains as a learning organisation. Figure 1: The cycle of knowledge, innovation and production (Source: Al-Ali, N. 2003, p. 8) Search for Intellectual Capital Information The stake holders prefer intellectual capital information for gathering information regarding the company's performance. Reason behind this is simple, as a company's balance sheet only reveals the performance of its tangible asset; hence it gives no information regarding intangible assets. So to understand the company's actual value, stake holders try to gather information about its intellectual capital through different sources (Burgman & Eccles, n.d., p. 4). Enhancing business reporting system might not be possible for the organisation as the format is highly rigid and it is set by legislation. One of the solutions to this problem is providing market base information to the users as a supplement to the financial report. The Enhance Business Reporting Consortium was formulated to solve such problem and to facilitate better collaboration between market participants (EBRC, n.d.). Investors take the intellectual information seriously while gathering real value of the organisation. Skandia, one of the largest insurance and financial service companies of Scandinavia, published its first intellectual capital report in May 1995. This model was followed by many companies later. Also many of the other companies developed their own models (Brinker, 2000). A company's intellectual is the only asset that appreciates with time unlike of building or plant and machinery. So it is the managers' job that company's intellectual capital should grow day by day and this should be converted into customers' value. In the segment of service industry such as retail, investment and information technology the growth is very rapid. This growth in service industry need further improvement in intellectual capital and for any and every organisation, its employee are its biggest intellectual assets thus the work force should progress along with the growth of company. Figure 2: knowledge, intellectual capital and strategy (Source: Choo & Bontis, 2002, p. 17) The present financial reporting methods are unable to communicate the real state of an organisation and its future plans. The financial reports can only convey information about the tangible assets of a company which account for just 20% of the total assets where as rest 80% is intangible. The market value of a firm consist of both its tangible and intangible assets thus traditional way of financial reporting cannot convey those information which investors and other stake holders search for. Financial reporting bears all historical data which are insufficient to disclose information regarding intellectual capital. Problem of financial reporting system in disclosing the intellectual information became clearly visible when market-to-book ratio of 500 S&P companies was taken into consideration. The ratios increased by 1 to 5 percent indicating that 80 percent of market value was not incorporated in financial reports (Bontics & Wu, 2005, p. 12). Figure 3: reason for difference between market value and book value of a firm (Source: Bontics & Wu, 2005, p. 12) Other Sources of Information With the passage of time many changes has been taken place in the intellectual capital reporting. At present such reporting are of two kinds, the first one is internal information for company's management that is used by the company's management for taking vital decisions. This report has information regarding human resource, resource utilisation, and clients' dynamics. Management makes comparison between reports of different year to analyse the performance of the company (year on year or quarter to quarter) and on the basis of such results, they set strategy for future years. This helps the management in identifying those areas which requires further attention for improving performance of the organisation and also the areas of higher potential. The second one is external information for the stake holders that get published along with financial report. Such report helps the stakeholders to draw a clearer picture of the organisation. While making investment in a company, an investor not only take its financial condition into consideration but also try to evaluate the market value of the company, the type of relationship it maintain with the employees and with the customers. The stakeholders are also interested in knowing that who could be the future clients and the future partners of the company. Hence, the investors does not depend on company's financial report for gathering information but they also use different other data points e.g. if the employees satisfied with their employers, the employee turnover ratio of the company, the type of training the company provide to its employees and whether career planning is done for their employees. They also try to find out that how efficient is company's Human Resource Management Planning. Along with company's Human Resource, stakeholders also evaluate the relationship of the company maintains with its customers. In the present market, if a company has to grow and diversify itself, it should have a large base of satisfied customers. Investors also check for the Customer Relation Management (CRM) tools used by company. The other factors are quality of company's product and demand in market and the company's social responsibility toward the whole society. Investors prefer that the company should take environmental factor into consideration seriously and make investment in those technologies that help in reduction of pollution level. Policy Implications Companies are well aware of the fact that intellectual capital information is very vital for their future growth; hence they take every care to ensure that correct information should be conveyed to their stakeholders. For this various reporting tools can be used. These tools are capable enough in overcoming the problems which were prevailing in traditional financial reporting technique. Companies take proper care to gather information and then create a data base. This helps them to capture all the information related to functioning of the organisation. This data base will be of great importance because different kind of information can easily be drawn out from such base and the management can spontaneously identify the changes prevalent in customers' purchasing pattern and the variation in demand with changing economical situation. Intellectual capital is a rich source of knowledge, thus management conduct intellectual capital audit al regular interval of time. The process of carrying out the audit is explained through the diagram given below: Figure 4: the steps involved in carrying out Intellectual Capital audit process (Source: Brooking, 1996, p. 88) Management should ensure effective precautionary measures to manage its intellectual capital. The whole process can be broken down into different steps so that the full process gets executed in proper manner. These steps are as follows: Capturing intellectual capital information Knowledge acquisition process Decomposing the knowledge acquisition task Focus on pattern recognition as the basis of expertise Asian financial crisis of 1997-98 The period in between June 1997 to January 1998 was crucial not only for the Asian Economy, but its dark shadow engulfed almost the whole world. The financial crisis within South Eastern Asian economy spread like brush fire (Hill, C. W. L., n.d., Asian Contagion). The nations that were primarily responsible for the cause of this crisis were Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea. Just before the crisis, these nations were considered as the major drivers of world economy. All of these economies were enjoying high economic growth (in between 6 percent to 8 percent) per year as per the Domestic Gross Product (GDP). But in late 1997 all these growths came to an abrupt end. The capital market of all these countries started falling and currency market showed sudden decline. This fall continued till January 1998, and when the dust started shuttling down it was observed that stock market of these nations, once considered as major driver of world economy had lost almost 70% of their stock market value. Their currency was highly depreciated against dollar (Hill, C. W. L.n.d., Asian Contagion). The proud leaders of early 1997, turned to borrowers and had to beg for massive financial loans from International Monitory Fund (IMF). This was an unforgettable incident that imparted lesson to not only the South Eastern Asian nations but also to the whole world that uncontrolled development can lead to serious disaster. Origin: The origin of this crisis was due to the loop holes in the financial system which failed to imply proper governance rules (IMF External Relations Department, 1999, "Origins of the Crisis"). During the early 1997 most of the South Eastern Asian countries like that of Hong Kong, Malaysia, Singapore, Indonesia and South Korea had GDP as high as 8-12%. One of the causes was easy availability to finance from IMF and World Bank. This created huge current account deficit in these countries. Thus, a high degree of international liquidity was available (Chang, 1998). The other reason was financial liberalisation. This was supported by the fall in international rate and easy access to create. At that time market policies were not so good so that they can keep a tag on the movement of money in between nations. These unstabilised bank rates lead to collapse in fixed exchange rates. This was the formation of twin crisis that is collapse in financial market along with balance payment crisis. The commencement of the crisis was with the collapse of Thailand. Thailand government took the decision to float their currency (Thai baht) freely to cut its peg to US Dollar. Before this major decision, Thailand's condition was not very good and it was almost suffering with bankruptcy. Due to this crisis the foreign debt to GDP ratio increased from 100 percent to 167 percent and finally touched to 180 percent in the year 1997 (Hill, W.L. Charles, n.d.). If the entire major events can be arranged in chronological order that it will be easy to understand that when the crisis started and when does it came to an end. 1997 Japan raised its interest rate to defend the Yen. This distorted the global sentiment regarding global investment and troubled the shred and currency market. July 2 Thailand after using $33 billion announced that Thailand will be going to float it currency. At the counter defend, Philippians defended Peso. July 18 IMF gave extension to $1.1 billion credit to Philippians. July 24 the Asian currency drastically fall and Malaysian prime minister attacked rogue speculators. August 13 Indonesian Rupiah had faced a huge pressure and the country declared that they are abolishing the system of managing their exchanger rate through use of band. August 24 IMF provided a loan of $17.2 billion to Thailand as a supporting package. August 28 the Asian stock market showed huge fall. Jakarta was down by 4.5 percent and manila was down to 9.3 percent. September 20 Mahathir told the delegates to IMF and World Bank that currency trading should be banned as it is highly immoral. October 8 Rupiah reached to its lowest level and taking the depressing condition into account Indonesia decided that they will approach to IMF for further assistance. October 14 a package was announced by Thailand to assistance their financial market. October 20 Hong Kong dollar got attacked by speculators and to defend Hong Kong took aggressive steps. Their stock market dropped along with massive fall in other share markets. October 28 onward value of Korean won started depreciating and this was fallowed by heavy selling in their stock market. November 5 a stability package was announced to Indonesia by IMF for attaining stability and followed by a standby credit by US of $3 billion. November 3-21 was the most disastrous phase for Japan as they faced break own in security and brokerage firm along with 10 largest banks were collapsed. November 21 South Korea decided that they are going to ask for help from IMF. November 25 was an important date as on that day APEC summit leaded by 18 Asia Pacific countries announced their frame work to cope with the crisis. December 3 both Malaysia and Korea agreed to provide a support package to $57 billion. December 5 Malaysia had taken stringent reform steps to reduce its balance of payment deficit. December 25 South Korea received loan of $10 billion from IMF and other nations. January 6 new budget was announced in Indonesia that was not as per the guide line provided by IMF and as a result, value of Rupiah depreciated. January 8 both South Korea and IMF agreed for 90 days short term loan. January 12 the holding of Honk Kong in Peregrine Investments collapsed and Japan declared that around $580 billion which were present in their bank were in form of bad or questionable loan. January 15 an agreement was signed in between IMF and Indonesia for reforming the economy. January 29 13 international banks along with South Korea for conversion of $24 billion in short term loan that was due from March 1998 in the form of government backed loan. January 31 an order of was passed by South Korea to close of 10 of 14 ailing merchant banks. February 2 was the indicator of revival as stock markets showed good sign and the phase of financial came to an end. (Nanto, 1998, "Chronology of the Asian Financial Crisis"). The crisis of Asian countries was due to the weak points of currency market rules and the lack of control in financial markets. To understand that state of currency movement, it is very important that one should realize that how currency moved from 1970 to 1998. For the purpose, the following table makes the situation clear. Table 1: the movement of south Asian currency (Source: Woo, Carleton & Rosario, 2000, p. 22) As per the IMF, the Asian financial crisis will provide a frame work that will provide help to the world to realise that a bit of leniency in the financial regulatory system can lead to a disastrous result which can engulf the economy of any well developed nation. The crisis did not end on January 1998, rather the impact continued for longer period of time. This crisis didn't remain within Asian courtiers rather its impact was clearly seen in many other western nations like US and Russia. The crude oil price fell to just $8 per barrel in 1998 and it also contributed in Russian Financial crisis and caused Long Term Capital Management in US and it lost $4.6 billion in four month. Federal Reserve Bank of New York provided a bailout of $3.625 billion to reduce the impact of crisis; Brazil and Argentina, those among the key emerging economies also felt the crisis. The world learned a lot from this crisis and started building their foreign exchange reserves to hedge; Pan Asian currency swaps had also been introduced. The world got a lesson for this financial crisis and several improvements were made into international policies so that such situation does not develop in the future. IMF also bought some changes so that if any such situation again immerges in future it can play the vital role to take care and can help countries to over come as soon as possible. References Al-Ali, N. Comprehensive intellectual capital management: step-by-step. 2003. John Wiley and Sons. Bontis, N. & Wu, S. 2005. Tiger brainpower: Taiwan's intellectual capital development. Emerald Group Publishing. Brooking, A. 1996. Intellectual capital. Cengage Learning EMEA. Burgman, R. J. & Eccles, R. G. No date. The Creation, Valuation and Disclosure of Intellectual Assets through Enhanced Business Reporting. [online]. available from: http://www.ebr360.org/downloads/ISI2007_EBR_Burgman_&_Eccles.pdf [Accessed August 10, 2009]. Brinker, B. 2000. Intellectual Capital: Tomorrow's Asset, Today's Challenge. CPA. [online]. available from: http://www.cpavision.org/vision/wpaper05b.cfm [Accessed August 10, 2009]. Choo, C. W. & Bontis, N. The strategic management of intellectual capital and organizational knowledge. 2002. US: Oxford University Press. Chang, R. & Velasco, A. November 1998. The 1997-98 Financial Crisis: Why in Asia' Why Not in Latin America' [online]. available from: http://www.colorado.edu/AmStudies/lewis/ecology/asiancrisiscause.pdf [Accessed August 11, 2009]. 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