Table of Contents

1. Introduction.......................................................................................................................................1
2. Main body of the article.......................................................................................................................1
2.1 Purposes of the article..................................................................................................................1
2.2 Methodology employed by the article..........................................................................................1
2.3 Main findings of the article..........................................................................................................2
2.4 Strength and weakness of the article............................................................................................2
2.5 My final judgment on the value of the article..............................................................................2

0
 1. Introduction

The empirical article under review is about revenue recognition on percentage of completion
basis and firm value. As it is well known, revenue recognition timing has caused conflicts
between the reliability and usefulness of accounting information and become an important issue.
In particular, order-made production industries, including the construction and shipbuilding
industries, which manufacture products over long periods of time, are relied on the percentage of
completion method for revenue recognition. Unbilled receivables are inevitable in long-term
construction projects, and this article primary focus is that they can also result from premature
revenue recognition for earnings management. Accordingly purposes of the article, methodology
employed by the article, main findings of the article, strength and weakness of the article, and
my final judgment on the value of the article are reviewed below.

2. Main body of the article

2.1 Purposes of the article

General objective of the article is assessment of the relationship between revenue recognition on
percentage of completion basis and firm value. In doing so, specific objectives of the study
includes assessment of the correlation between unbilled receivables and earnings management,
correlation between unbilled receivables and firm value, and correlation between unbilled
receivables with loss allowances and firm value.

2.2 Methodology employed by the article

This study employs financial data made available by KIS-DATA, a database developed by Korea
Investors Service, Inc., for the years 2010 to 2016. The sample only includes publicly traded
nonfinancial firms on the Korean Stock Exchange (KSE) having a fiscal year-end of December
31.

For an empirical analysis purpose, the OLS model is employed with discretionary accruals as the
dependent variable. The regression model is as follows.

Disacci,t = α + β1Unbilledi.t + ΣαjXj + ΣαkINDk + ΣαlYEARl + εi,t (1)

Where, Disacci,t is discretionary accruals, Unbilledi.t is the amount of unbilled receivables, X is

the other factors affecting earnings management using accruals (explained below), IND is the
industry indicator variable, and YEAR is the year indicator variable. The model also includes
control variables that can affect earnings management. These variables include leverage, size,
ROA, sales growth, and the market-to-book ratio. Finally, industry dummy variables, defined by
the one-digit Korea Standard Industry Code, and year dummy variables are included as control
variables.

1
 2.3 Main findings of the article

The result of the regression model show that the amount of unbilled receivables is significantly
and positively associated with earnings management (p < 0.01), which provides support for the
hypothesis. The regression model also includes the amount of discretionary (abnormal) unbilled
receivables as the explanatory variable. The results imply that firms strategically use unbilled
receivables accounts for earnings management. Significant associations are also seen between
earnings management and the control variables. Two of the control variables – LEV and ROA
are significantly and positively associated with earnings management, and two others – SIZE and
GROW are significantly and negatively associated with earnings management.

2.4 Strength and weakness of the article

Major strengths of the article under review include it identified sound explanatory variables
about unbilled receivables such as earning management, firm value, and loss allowances; It
profoundly reviewed both theoretical and empirical literatures related to unbilled receivables and
earning management, and it follows a systematic and appropriate research methodology as
described above. In addition, it presented the findings of the analysis in tabular forms with
sufficient narrations.

On the other hand, despite the article is full of strengths, the only major weakness of the article is
that a single source of data, KIS-DATA database developed by Korea Investors Service, Inc., is
used.

2.5 My final judgment on the value of the article

The article is ‘17 page sized’ detail empirical study about the relationship between revenue
recognition on percentage of completion basis and firm value in the case of 955 companies of
South Korea that ranges in different industries. As an empirical study, the article attempt to
understand the relationship between revenue recognition on percentage of completion basis and
firm value. In addition, I got the article very much important to understand the effect of earning
management, firm value, and loss allowances towards unbilled receivables.