Conservatism of intellectual capital and relevance of earnings

Abstract

This paper critically reviews the conservatism of accounting (by applying M/B value ratio) to pave the avenue of encouraging and the recognition of intellectual capital in financial reports of firms. This paper justifies this assessment in order to extend recognition and disclosure of intellectual capital to increase value relevance of earnings and also decrease the gap between market and book value. Review of this paper suggests that generally accepted accounting principle (GAAP), accounting standards and conservative of accounting prevent the recognition of intellectual capital. These standards should be improved to fulfill the stipulations of the new economy. Therefore , this paper proposes a model that evaluates the impact of conservatism of intellectual capital on relevance of earnings.