No abstract

This study explores revenue recognition and reporting expenses relevant to the stage of completion of the contract agreements. Literature suggests that the taxation effects financial reporting, realization of capital gains as well as revenue recognition. We argue that construction firms make use of these estimates to postpone revenue and value added tax recognition. The analysis grounds on the assumption that the value added tax effects timely recognition of revenues from construction agreements, where managers are incentivized to underestimating stage of completion and suppress recognition of gross earnings to better align emerging of the value tax related liability with contracted and expected inflows of cash. Results show that the revenue recognition is positively associated with reported income before tax and cost of material as a direct expense that can be allocated to the execution of construction agreements. These findings build baseline for future research that assesses effects of newly adopted standard IFRS 15 on real earnings management practice in construction industry of Bosnia and Herzegovina.

Earnings management literature extensively explores tax regime and debt contracting as possible incentives in financial reporting. Firms engage with aggressive financial reporting to bias earnings in periods when the need for external financing increases. Contrary to this, the tax burden represents incentive for more conservative reporting. We argue that the level of firm's financial reporting aggressiveness is not constant but rather floating from period to period, directly affecting the quality of financial reports. We assume that firm's management on its own discretion determines the level of conservatism, balancing between these two incentives. The prevailing of two incentives, the need for external financing and the tax burden, determines the level of conservatism in particular reporting period. We hypothesised that the reduction in tax burden incentive overcomes the debt contracting incentive in the years of decreasing external financing need, implying more conservative accounting to balance between economic and taxable income. The total accruals are used as a measure of earnings management reflected to working capital accruals. The data analysis conducted on financial reports of 297 firms in the time-series of five years shows a significant correlation between total accruals, external financing needs and difference between economic and taxable income.

This study investigates relationships between reported assets growth, human capital effectiveness, ability to do business with state and firms' growth. Longitudinal data were extracted from annual financial reports. Sample includes 80 companies in construction industry of Bosnia and Herzegovina from 2008-2013. Generalized estimating equations (GEE) approach is used for investigation of previously mentioned associations. We found that working with the state in Bosnian construction sector is dominant factor for outstanding increase in net reported income, while the human capital efficiency is negatively associated to its change. These findings support the theory of markets with asymmetric information, suggesting that the relational and social capital of the firm in the imperfect markets, where the state is dominant customer, drives the growth and that precedes firm’s investments into development of intellectual capital.