Revenue Recognition on Percentage of Completion Basis and Firm Value
Revenue recognition timing has caused conflicts between the reliability and usefulness of accounting information and become an important issue. Unbilled receivables are inevitable in long-term construction projects,but they can also result frompremature revenue recognition for earnings management. This study evaluated the correlation between unbilled receivables and earnings management,between unbilled receivables and firm value, and between unbilled receivables with loss allowances andfirm value from 2010 to 2016. The analysis results confirmed that companies engaged inearnings management viaunbilled receivables. Unbilled receivables had a significantly negative correlation with firm value. The result implied that unbilled receivables were interpreted as a signal of poor management,and the market responded negatively. However, for companies that had established loss allowances for unbilled receivables, the correlation results were not significant or less significantthan they were for companies without loss allowances. The results revealed that the market responded less negatively when loss allowanceswere established appropriately.
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