text: Journal of Accounting and Management CROATIAN ACCOUNTANT 9 771848 137005 Vol.2 No. 2, 1-66, December 2012 I SSN 1 8 4 8 - 1 3 7X Journal of Accounting and Management UDC 316.3/336.2/336.7/347.7/37 Vol. 2 No. 2 1-66 ISSN 1848-137X Croatian Accountant December 2012 Journal of Accounting and Management Vol. 2 No. 2 Zagreb – December 2012 Journal of Accounting and Management Founder Croatian Accountant – Independent Association of Accountants, Tax Advisors and Finance Professionals Published by Croatian Accountant © Copyright 2012. UDC 316.3/336.2/336.7/347.7/37 ISSN 1848-137X Editor-in-Chief Prof. Vinko Belak, PhD (CRO) Full Professor Associate Editors Željana Aljinović Barać, PhD (CRO) Associate Professor Ljerka Markota, PhD (CRO) Professor Editorial Board Meliha Bašić, PhD (BiH) Vlado Brkanić, PhD (CRO) Vedran Capkun, PhD (FRA) Mladen Habek, PhD (CRO) Marko Hočevar, PhD (SLO) Jonatan Jelen, PhD (USA) Kosta Josifidis, PhD (SRB) Marko Kolaković, PhD (CRO) Brano Markić, PhD (BiH) Dragan Mikerević, PhD (BiH) Dragovan Miličević, PhD (SRB) Ivica Pervan, PhD (CRO) Nina Pološki Vokić, PhD (CRO) Address of the Editorial Office Hrvatski računovodja, HR – 10000 Zagreb, Vlaška 68 Phone: + 385 1 4699 700, Fax: + 385 1 4699 703 e-mail: [email protected] www.hrvatski-racunovodja.hr PREFACE This is the third issue of the Journal of Accounting and Management. The Journal contains the selected papers presented at the 13th International Scientific and Professional Conference "Accounting and Management" organized by the Association Croatian Accountant. All the papers have been blindly peerreviewed and have been accepted by two independent reviewers to be published in this Journal. The Journal has been conceptualized as a medium for publication of highly original theoretical and practical scientific research, dealing with various aspects of changes in accounting and management. We are very pleased to announce that we signed fully executed agreement for including content of the Journal of Accounting and Management in EBSCO information products database. We hope that in the future abstracting and indexing of the Journal in other relevant bibliographic and research databases will be ensured, in order to provide a valuable reference for all those interested in the topics of accounting and management. Editors: Vinko Belak, Editor in Chief Željana Aljinović Barać, Associate Editor Ljerka Markota, Associate Editor CONTENTS PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY Klára Katona 1 THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE 17 TAX BURDENS IN INSOLVENCY PROCEDURE 29 CORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES 39 THE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT 51 Saša Muminović, Vladan Pavlović Jasenka Bubić, Vlasta Roška Dubravka Krivačić Tarek Mami V Received: 04.04.2012. Accepted: 03.05.2012. Original scientific paper UDC 336.22/334.716 PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY1 Klára Katona2 ABSTRACT Tax competition, supported by most of the governments, results in the reduction of tax revenues evidently, but it does not contribute considerably to the attractiveness of the domestic market in (foreign) investors' eyes. The transfer prices make it possible for firms to replace capital mobility with profit mobility. The main target of the analysis is to reveal the effectiveness of the taxation policy on the competitiveness and productivity of corporations in Hungary. The study reviews those effects of the Hungarian taxation policy which had direct influences on corporate costs. From this aspect, the relevant common charges are corporate tax -in connection with tax allowances and different modifications of rateable value - and social security contribution as a special type of tax burden. The base of the investigation is the Cobb-Douglass production function and the examined period is from 1992 to 2009. Key words: productivity, competitiveness, corporate taxes, Hungary 1.INTRODUCTION The desirable tax system should be economically efficient, administratively simple, flexible, politically accountable and fair (Stiglitz, 2000. pp 401). The tax system is economically efficient if it does not distort the economic decisions which are made by individuals. The system has to be neutral. That is the system should allow the collection of funds required by the government with 1 The paper supported by TÁMOP-4.2.1.B-11/2/KMR-2011-0002. 2 Klára Katona, Faculty of Law, Pázmány Péter Catholic University, Budapest, Hungary 1 Journal of Accounting and Management the minimum impact on economic life and the allocation of resources. In a good tax system it should be easy to access information, so every individual would know what they are paying and when they are expected to pay. A properly designed system of tax has to be flexible in a way that it changes or can be changed easily in response to economic changes. If the system of taxation is politically accountable, it means that individuals know what they are paying. Without this character some politicians would simply confuse the tax payers and lead them to vote for a smaller budget, which would lead to a reduction of important public services. The tax system should be equitable. A fair tax system should not benefit or harm some groups at the expense of others. The Pareto effective tax system maximizes the social welfare of individuals and it provides the required tax revenue for the government. Under multiple-goal theory, goals must be traded off. Elkins (2009) proposes a taxonomy of taxation. Table 1: Purpose of the Tax Taxpayer's actions are considered Legitimate Illegitimate Restore the Market Distribution Commutative taxation Restitutive taxation Change the Market Distribution Distributive taxation Punitive taxation (Elkins 2009) Commutative taxation serves the purpose of overcoming market failures. Distributive taxation modifies the market distribution, restitutive taxation confiscates ill-gotten wealth, and punitive taxation discourages unwanted behaviour. The fact that the market is operating in a highly efficient manner does not mean that the need for redistribution is any less. (Elkins 2009, pp105). The market cannot provide public goods, but public goods would contribute to the efficient allocation of resources and increase the general welfare. The main argument for corporate taxes is that the companies have resort to public goods, consequently the government can require the price of them (Brown-Jackson 1996). At the same time governments try to make the economy attractive for capital investments, which is fundamental for GDP growth. Governments offer an attractive package of public goods and taxes to companies, because it has an influence on spatial decision of firms. This competition for the investments among governments results in lower tax rates than it would be desirable from the aspect of the social welfare. 2 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY The analysis studies the economic significance of tax revenues starting on a macro-level, then studying their impacts on micro-level points out the economic political relevance of the question. The two selected categories (revenues from a macroeconomic aspect and expenditures from microeconomic aspect) are corporate tax and social security contribution. The structure of the paper is as follows: Section 2 summarizes the empirical and theoretical evidences concerning the effects of taxation on competitiveness and investments, Section 3 presents taxation policy in Hungary. Section 4 interprets methodology and regression model. Section 5 provides the results on the productivity of Hungarian firms during 1993-2009. Section 6 contains conclusions. 2. EMPIRICAL EVIDENCES Some empirical studies proved that the tax elasticity of foreign direct investment (FDI) is negative in general. Since other conditions of investment are more similar in different countries, the role of tax incentives increases. Tax competition has a positive effect on the allocation of capital, but it has a negative effect on tax revenues, because it contributes to tax erosion. (Gropp, R.- Kostial, K. 2000) As a consequence of tax competition, the tax burden shifts from mobile tax base (capital) into immobile tax base (labour force, consuming), meaning that residents have to finance the cost of those public goods which foreign investors use. The governments with larger tax base can finance their public expenditures by low tax rates. (Mike 2003). Other experts say that the perfect capital mobility does not necessarily mean high sensitivity of capital movements (and especially FDI) to tax differentials. (Bénassy-Quéré et al 2003) The tax base relocation is proportionally more important in small countries than in large ones, and small countries have stronger incentives than large ones to cut taxes. (However, results of the cross-country studies appear to be very sensitive to the exact assumptions and methodology used.) The impact is not symmetric to the signs of tax discrepancies. While lower tax rates in the host countries fail to significantly attract FDI, higher taxes tend to discourage new FDI inflows. The impact of positive tax differentials is not homogeneous regarding the tax scheme in operation in the investing country. In total, while narrow tax differentials do not discourage inward FDI, large tax discrepancies produce proportionally more important FDI outflows. The transfer pricing and intra-firm debt contracting allow firms to locate profits where taxation is lowest, and to disconnect the location of activity and 3 Journal of Accounting and Management profit Firms can replace capital mobility with profit mobility. It means that tax differentials do not play a serious role in spatial decisions. In post-socialist countries empirical researches on the effectiveness of introduced incentives for the attraction of FDI failed to prove any significant relationship between tax incentives and the level of FDI. (Beyer 2002, FeldHeckemeyer, 2009) The importance of cost reduction was observable mainly at export oriented companies. Tax preferences per se could not be effective tools to motivate foreign direct investors in CEE In the case of inward FDI in the Czech Republic the result of the researches proved that tax incentives could not attract relevant investors into the country (J.S. Mallya et al 2002). The proper infrastructure, geopolitical reasons, transparent regulation, investment into education and R&D had priority over taxation policy. In Hungary (Katona 2007) the explanatory power of corporate tax rate was robust concerning FDI inflow in short time but its long-term effect on FDI stock was irrelevant. The host country has to have a well-developed administrative system as well, that can help the investors to realise their projects without additional administrative costs. On the other hand, the inflow of FDI contributed to the growth of GDP and to the successful restructuring of the economies in CentralEastern Europe. (Khac- Sedmihradsky 2001). Ramcharran (2000) drew the attention to the importance of the legal system and country risk in the region. Edmiston et al(2003) raised the question of taxation in an initiative way in Central Eastern Europe. The study tried to find the connection between the tax system, the law of tax and thevolume of FDI in the region examining the effects of the changes in tax rates (increasing or decreasing), the changes in the definitions of taxes, the range of exceptions, the modifications of the tax base, and the amount of adverse direction of changes. The research involved 25 countries and a six year long period. The authors concluded that the inconsequential changes, the incalculable legal system, the ambiguous legal concepts had a significant negative effect on foreign direct investors. Tax policy involves - beyond the level of tax rates -, different tax advantages, tax incentives, international tax treaties, (e.g. avoidance of double taxation) as well. Tax policy has an effect also on the cost of capital and consequently on returns of investments. From the several types of taxes corporate tax, local business tax (HIPA) and social security contribution can be considered as the real costs for corporations. That is why it is evidential that competitiveness of a corporation is not independent from the tax policy of the host country. 4 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY 3. TAXATION POLICY IN HUNGARY COMPARING TO ITS RIVALS Although the literature failed to prove the existence of a significant correlation between the tax rate and capital inflow, CEE countries are running a tax race for investors and take turns in offering the highest benefits and tax cuts to them. In competing countries, the legal frameworks has already been harmonised with EU legislation before EU accession. Foreign investors enjoyed the same rights as their domestic peers. The freedom of capital inflows and capital and profit transfers were all provided for in Central and Eastern Europe. Consequently, it is the field of taxes where a significant difference can be captured in respect of competitiveness. Comparatively, Hungary - and its regional rivals as well - is in the midcourse of OECD countries if the proportion of its total yield of taxation to the GDP is taken into consideration. This is due to the fact that CEE countries are below the OECD average regarding the share of income tax revenues in the GDP, but while the extent of the profit tax may be half of the European average, the proportion of consumption taxes considerably exceeds the average. (This does not deteriorate the competitiveness directly because its burden may be shifted onto the final user). Table 2: Total tax revenue as a percentage of GDP Czech Republic Hungary Poland Slovak Republic Slovenia OECD average 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 35,3 35,6 36,3 37,3 37,8 37,5 37 37,3 36 34,8 38,5 37,9 37,8 37,8 37,4 37,4 37,2 39,7 40,2 39,1 32,8 32,6 33,1 32,6 31,7 33 34 34,8 34,3 .. 34,1 33,1 33,3 33,1 31,7 31,5 29,4 29,4 29,3 29,3 37,5 37,7 38 38,2 38,3 38,6 38,3 37,8 37,2 37,9 35,5 35 34,7 34,7 34,6 35,2 35,4 35,4 34,8 … OECD statistics In the early nineties, tax revenues as a percentage of the GDP were in line with the OECD average even in Hungary and Poland, but due to the tax competition among the countries, these indicators decreased significantly. Hungary, the country with the highest figure, reached two thirds of the OECD average while, the Slovak Republic, the country with the lowest tax revenues, failed to reach even half of that level. 5 Journal of Accounting and Management Table 3: Taxes on income and profits as a percentage of GDP Czech Republic Hungary Poland Slovak Republic Slovenia OECD average 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 8 8,6 9 9,5 9,5 9,1 9,1 9,4 7,9 7,4 9,3 9,7 10 9,3 8,8 8,8 9,1 10 10,4 9,6 6,8 6,4 6,3 6 5,9 6,4 7 8 8,1 .. 7 7,1 6,6 6,7 5,7 5,6 5,7 5,8 6,2 5,6 6,9 7,1 7,4 7,6 7,8 8,3 8,7 8,8 8,4 7,9 12,7 12,4 12 11,8 11,9 12,4 12,7 12,9 12,5 … OECD statistics In Hungary, indirect taxes and/or social security contributions represent the greatest proportion of the major revenues in the budget. In the past, the revenues in the budget from the employers' contributions showed a continuous and relative decline. The revenues from personal income tax have been growing slightly. The share of the corporate tax in the revenues of the budget is very small. However, it should be noted that parallel to the steady growth of economic performance, the volume of these revenues is increasing dynamically, and its extent determines the willingness to venture. Graph 1: Source: ECOSTAT The Hungarian governments made serious efforts to motivate investors with tax reductions and control of wages increase. In the period before the EU accession, the magnitude and scope of tax allowances and subsidies also played an important role besides tax rates. In the competing countries, tax al6 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY lowances were available to foreign investors on nearly identical terms (export oriented production, job creation, minimum investment – usually 5 to 10 million USD – for 10 years). The option to set up special economic zones was still availableafter the EU accession. These areas are intended to help the development of certain regions of a country by enticing foreign capital. The tax cuts produced a loss in fiscal revenue, and this loss needed to be compensated for by a welfare decrease. 3.1. CORPORATE TAX Among the different types of taxes corporate tax has an outstanding importance for the investors because it is a real cost for them. Hungary set a corporate tax rate that was extraordinarily low not only in comparison to the EU average (30–35 %) but compared to the tax rates of other Central and Eastern European countries as well. After the initial 40 % in the beginning of '90s, Hungary's corporate tax rate was reduced dramatically from 36 to 18 per cent in 1995. This rate was the lowest in the region in the late nineties. From 2004 business only paid a 16 % tax on their profits. In 2006 this tax rate became progressive; under 5 million HUF revenue it decreased to 10%, but 5 million HUF plus it remains 16%. This system remained until 2010, when the upper rate increased to 19%. As shown in Table 4, Hungary retained its competitive advantage in respect of corporate tax in the 21st century as well, since Slovakia and Poland (and later Czech Republic) were the only rival countries that introduced a similarly low tax rate. (Just to compare, the corporate tax rate was 35 %t in the USA, 30 % in the UK and 26 % in Germany in 2007.) After EU accession a new challenge emerged and the contest entered into a new phase as many countries introduced a flat tax. Although most of these countries are in Central and Eastern Europe, Hungary is not among them. (Estonia, Latvia, Lithuania, Romania and Slovakia introduced a flat tax, too.) As a flat tax regime is simple, easy to manage and last but not least involves a low rate, it provides the most attractive environment to companies. 7 Journal of Accounting and Management Table 4: Corporate tax rates in CEE (%) Country Czech Republic Estonia 2000 2001 2002 2003 2004 2005 2006 24 2007 2008 24 21 31 31 31 31 28 26 26 26 26 26 26 24 Hungary 18 18 18 18 16 16 Poland Slovak Republic Slovenia 30 28 28 27 19 19 29 29 25 25 19 19 19 19 19 25 25 25 25 25 25 25 23 23 2009 2010 2011 20 19 19 21 21 19 19 19 19 19 19 20 21 20 20 23 22 22 21 17.33 20.0 20.0 20.0 (16.0) (16.0) (16.0) (16.0) 19 19 19 19 www.oecd.hu In Hungary, the legal environment and corporate law is harmonised with the EU norms, i.e. foreign investors are entitled to have the same rights as domestic investors. However, at the beginning of the '90s, foreign companies were entitled to special advantages. Companies with at least 30 % foreign contribution, (the volume of the investment had to be over 50,000,000 HUF, about 500,000 USD) could reduce their tax liability by 60 % in the first 5 years of their operations and by 40 % in additional 5 years. This system was repealed in 1993. Yet, in the next year the government introduced for ten years an exemption from corporate tax for reinvestments exceeding 500 million HUF in Hungary. Since 1998 the investors who invest at least 10 billion HUF in less developed areas, are eligible for a 10-year-long tax holiday, if the investor creates 500 new jobs and the turnover grows annually by at least 5%. These incentives were available until 2011. The Hungarian government also established a few special economic zones in regions with high unemployment, which grant 5-year-long tax holidays. These regions were attractive because of the low threshold of the investment to qualify for the advantages. Hungary has a special law regarding offshore companies as well. Therefore, this form of harmful tax competition appeared on the OECD list. Such a company can tax its profit by a 3% rate, and should have the following characteristic: • none of the owners is a Hungarian resident, • its management members are mostly Hungarian residents, • does not have interest in any other Hungarian companies, • is audited by a Hungarian company, • operational expenses are financed from a bank account in Hungary 8 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY This preferential system was for companies registered by 2000 until the end of 2005 and for companies registered later but meeting the requirements until the end of 2003. The customs free zones, which were preferable for foreign enterprises, are special types of allowances because these fields treated as foreign territory, thus, they are not subject to the Hungarian taxation system. Therefore, foreign enterprises which were established in customs free zones did not take advantage from the low Hungarian corporate taxes and other tax allowances. 3.2. SOCIAL SECURITY CONTRIBUTION - COST OF LABOUR In order to judge the capital market competitiveness of a country based on the cost of labour, changes of multiple factors must be taken into consideration simultaneously. These factors are as follows: net value of wages, changes of income tax obligations and social security contribution levied on wages, other contributions payable by employers and last but not least the changes of labour productivity. Gross wages are fundamentally determined by the rate of income tax and employee contributions charged on net wages. In the region, Hungary has the highest percentage marginal tax rate (personal income tax and social security contributions) of employees charged on average wages. In the 21st century, these rates have been consistently above 50 percent while counted at an average, the related burdens are 10 per cent lower in the other countries of the region. By introducing a flat tax, the Slovak Republic reduced the overall rate of taxes charged to employees to 38.5 per cent by 2007 which more or less harmonises with the OECD average (37.7 per cent). From the employer's viewpoint, the rate of social security contribution and employer contribution are more important as these levies are payable exclusively by the employer. Social security contributions charged on wages are nearly identical in the countries under review and match the EU average (social security contributions in EU countries range from 25 to 35 per cent). The Slovak Republic continues to be an exception with reducing one of the highest rates, 38 per cent to less than 15 per cent over 10 years. If we were to pass a judgement strictly on the basis of percentages, we could conclude that the overall personnel- related expenditures of businesses operating in Hungary is higher than that of their Western or Central European peers (Schlett, 2003). This approach can be especially damaging for a "superficially informed" foreign investor when making investment decisions. It is a fact, however that the costs of wages, i.e. the calculation base of any income tax and other employer contributions charged on wages are far below 9 Journal of Accounting and Management the European level in the region. Average gross wages in the euro zone were 8 times higher than Hungarian wages. Then due to economic growth, this multiplier dropped to five (Eurostat). In connection with the revenues of contributions, the considerable reduction of labour costs was a high priority in all governmental program in Hungary. The governments intended to reduce the employers' labour costs to increase competitiveness. The social security contribution an employer is liable to pay by wages is reduced gradually from 44% to 29 % in the '90s, which exceeds the EU average. The social security contribution in the EU ranges from 25 % to 30 %. It is worth mentioning that the proportion of personal costs within the total operating costs at foreign enterprises decreased from 1996 to 2000. This fact indicates the declining relevance of this type of production cost. The relevance of the labour cost cannot be analysed separately from the productivity of the enterprises. In the period indicated, the rate of the foreign enterprises did not exceed 12% of the whole venture sector. In spite of this, their revenues and contribution to the GDP are more than 50% of the total performance of the companies in Hungary. The productivity of the foreign enterprises increased to greater extent than labour costs in the same period. In the measure of the profitability, foreign enterprises also overshot the efficiency of the Hungarian firms. 4. METHOD, REGRESSION MODELL This research is based upon a linear regression model. The methodology used a database of Hungarian enterprises made by ECOSTAT, which represents close to 90% of the firms in the country. The average number of firms in this database is close to 4800 for each year, but includes entries onto and exits from the market. The period covers 17 years between 1992 and 2009, 11,5 years before the date of EU integration (1st of May 2004) and 5,5 years after it. The records contain all relevant information from annual reports, e.g. balance sheets, profit and loss figures, etc. In the regression model, the proxy for productivity was the total factor productivity (TFP), which was calculated on the basis of a standard Cobb-Douglas production function. This allowed for analysis of the interaction between TFP growth on the one hand, and corporate taxes, social security contribution, tax allowances and other possible determinants of productive efficiency on the other. The impact of taxes on total factor productivity in Hungary was assessed in all sectors and in the total period as a whole. 10 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY The following regression equation is estimated: Yt = b0+b1Cijt+b2Lijt+b3CITijt+b4ALLOWijt+b5SSCijt+b6LCijt+b7ICijt+eijt The definitions are as follows: Y: the real output of firm i operating in sector j at time t, calculated by net sales C: the capital of firm i operating in sector j at time t defined by the value of tangible fixed assets L: the labour of firm i operating in sector j at time t, expressed by number of employees CIT: the paid corporate income tax of firm i operating in sector j at time t determined as the difference between profit before tax and profit after tax (this difference reflects the effect of possible modifications of tax base as well) ALLOW: the resorted tax allowances of firm i operating in sector j at time t SSC: the paid social security contribution of firm i operating in sector j at time t: LC: the long term credits of firm i operating in sector j at time t IC: credit for investments of firm I operating in sector j at time t The model includes long-term credits, and investment credits as well, because these factors can modify the effect of taxation since paid interests of these credits reduce the tax base. Consequently those firms, which finance their investments from credits, will pay less corporate income tax and the decreasing tax rate won't have essential impact on them. In order to examine the effects of the ownership we estimated the regression model on the base of domestic and foreign firms separately as well. 5.RESULTS The aim of the regression model was to reveal the potential effect of corporate tax and social security contribution (as real costs) on Hungarian economy, productivity and competitiveness during the period of 1993-2009. In the framework of a microeconomic analysis, the model sought to verify or reject the following research hypotheses: H1: The productivity of firms did not increase linearly with the decrease of corporate tax. 11 Journal of Accounting and Management H2: The productivity of firms did not increase linearly with the decrease of social security contribution H3: Tax allowances had more positive effect on foreign firms than on domestic companies, but corporate tax and social security contribution had neutral effect on the productivity of foreign enterprises. Results of the regression are in Table 5 and 6. Table 5: Coefficients (All firms) Model (Constant) L ALLOW IC LC CIT SSC C Unstandardized Standardized t Sig. Coefficients Coefficients B Std. Error Beta 6066,013 268,888 22,560 ,000 -5,603 ,148 -,240 -37,846 ,000 34,062 ,406 ,377 83,923 ,000 ,196 ,072 ,014 2,711 ,007 -,643 ,024 -,163 -26,444 ,000 3,274 ,061 ,232 53,571 ,000 23,764 ,508 ,435 46,790 ,000 ,601 ,019 ,260 31,945 ,000 Table 6: Model (Constant) L ALLOW IC LC CIT SSC C Coefficients (Domestic firms) Unstandardized Standardized t Coefficients Coefficients Std. B Beta Error 5578,115 157,444 35,429 -2,402 ,079 -,297 -30,265 13,351 1,268 ,067 10,533 ,502 ,085 ,043 5,911 -,410 ,014 -,264 -28,305 1,733 ,096 ,122 18,090 9,594 ,311 ,445 30,869 ,495 ,013 ,493 39,495 Sig. ,000 ,000 ,000 ,000 ,000 ,000 ,000 ,000 Coefficients (Foreign firms) Unstandardized Standardized t Coefficients Coefficients Std. B Beta Error 1476,204 649,541 2,273 -8,068 ,599 -,123 -13,473 24,486 ,613 ,285 39,938 -1,865 ,125 -,125 -14,975 ,250 ,065 ,038 3,865 2,364 ,096 ,169 24,693 51,113 1,163 ,560 43,944 ,474 ,038 ,144 12,629 The adjusted R square of the model is 0,530, which means a good explanatory power. According to their robustness the priority order of the variables are as follows: social security contribution (positive effect!), tax allowances, capital, labour (negative effect!), corporate income tax (positive effect!), long-term credits (negative effect), and investment credit. 12 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY The capital and labour input did not play a determining role in the performance of the enterprises in the total database. In all examined data, the robustness of these explanatory variables was low (betac= 0,26 betal= -0,24) and in the case of labour the effect was negative. The cause of this unexpected correlation is that the panel contains all sectors, and the different sector characteristics (industry is capital intensive, service is labour intensive) extinguish each other. Another possible explanation of this result is that in Hungary the capital intensive manufacturing sector was dominant and productive in the investigated period. This means that in using more capital, and employing more workers, enterprises did not stand a better chance of increasing the volume of their sales, it depends on the sector characteristic. From the point of view of the research, these traditional factors and their effects are not essential. The research focuses on the impact of taxation on the total factor productivity in Hungary. The robustness of these explanatory variables, and the whole model in the sampled period was appropriate, and the correlation of all factors with the volume of net sales was significant. H1: The productivity of firms did not increase linearly with decrease of corporate tax. Decreasing corporate tax rate did not generate growth in the volume of the sales of firms; the results support just the opposite of this expectation. The robustness of corporate income tax was low and it had a positive effect on productivity of the firms. This fact shows that corporate income tax did not have an essential impact on the productivity of the companies and the rate of it did not discourage the firms from their activity. Government's tax policy does not reach its goal. The investigation confirmed the first hypothesis. H2: The productivity of firms did not increase linearly with the decrease of social security contribution Similar conclusions to the corporate income tax have been made in case of social security contribution. Here the correlation between net sales and this tax burden shows a positive number and the explanatory power of it is strongest among the variables. It means that contrary to the general point of view the comparatively high social security contribution in Hungary doesn't reduce the productivity of the firms. Higher contribution reflects higher wages and it assumes higher qualification of the labour force. Consequently we can suppose that qualified human capital is much more important concerning productivity, than its cost. H3: Tax allowances had more positive effect on foreign firms than on domestic companies, but corporate tax and social security contribution had neutral effect on the productivity of foreign enterprises. 13 Journal of Accounting and Management As it was predictable the tax allowances had stronger correlation with net sales in the case of foreign firms than that of domestic corporations. Tax policy, as mentioned above, preferred foreign investors to domestic ones. The results verified this part of the hypothesis. Concerning the other statement of this hypothesis only the effect of corporate income tax proved irrelevant to the productivity of foreign firm. This fact is an evident consequence of tax preference which foreign corporations enjoyed before EU accession. At the same time the result rejected the assumption that social security contribution is not essential to the productivity of foreign enterprises. The correlation of this factor is greater than in case of domestic firms, but the direction of this effect is positive. The explanation of this phenomenon is similar to the above mentioned reasons, qualified labour force was the relevant factor in the productivity of foreign companies. We have to note that the effect of long-term credits was negative on productivity throughout the database, because the interest of Hungarian credits were so high which could eliminate the possible profits of the domestic firms. 6.CONCLUSIONS In the last two decades Hungarian government - like its regional rivals - made serious efforts to develop the productiveness of the corporations by participating in tax competition. The empirical evidences did not prove that tax reductions and tax incentives per se could enhance the attractiveness of the capital market and motivated the foreign investors either in the region or in Hungary. At the same time tax competition contributed to the erosion of tax revenues in all countries in CEE. This study tried to reveal whether tax policy had any positive impact on the productivity of the enterprises in Hungary. The microeconomic examination focused on the impact of corporate income tax, social security contribution, and tax advantages. The model investigated these effects separately on the domestic and foreign firms as well. The regression model proved all hypotheses concerning the impact factors. The result of the regression supports the assumptions that the productivity of the companies is independent from tax policy. But at the same time, it is very important to note that tax allowances contributed to the competitiveness of foreign firms in Hungary. 14 Klára Katona: PRODUCTIVITY AND CORPORATE TAXES IN HUNGARY REFERENCES BÉNASSY-Q, A. – FONTAGNé, L. – LAHRÉCHE-R, A: Tax Competiton and Foreign Direct Investment CEPII, Workin Paper No 2003-17 BEYER, J., "Please invest in our country" –how successful were the tax incentives for foreign investment in transition countries? - Communist and Post-Communist Studies, Volume 35, Issue 2, 2002. 191-211. pp BROWN, C. V.–JACKSON, P. M.: Public Sector Economics. Blackwell, Oxford, Egyesült Királyság, Cambridge MA. 1996 EDMISTON, K. – MUDD, S. – VALEV, N., Tax Structures and FDI: The Deterrent Effects of Complexity and Uncertainty – Institute for Fiscal Stidies, vol.24, no.3, 2003. 341-359 pp Elkins, D: Taxation and the terms of justice.University of toledo la wreview 2009.. Vol. 41. 73-105 FELD- HECKMEYER FDI and taxation. A Meta Study- CESIFO WORKING PAPER NO. 2540, 2009 GROPP, R.- KOSTIAL, K.::The Disappearing Tax Base: Is Foreign Direct Investment (FDI) Eroding Corporate Income Taxes? –IMF Working Peper 00/173 2000. KATONA, Klára: Vonzások és választások a tőkepiacon. Budapest: Gondolat, 2007, pp244. KLAZAR, S. - SEDMIHRADSKY, M., Tax Competition for FDI in Central-European Countries. CES ifo Working Paper No. 647 2002. (1) MALLYA, T. J. S. – KUKULKA, Z. – JENSEN, C. , The Political – Economy of Foreign Direct Investment Incentives in Transition – CEES Working Paper No. 46. December 2002. Mike, K.: A gazdaságpolitikai döntéshozatal nemzetek fölötti centralizációja és a közösségi gazdaságtan Közgazdasági Szemle, L. évf., 2003. március 254–268. o. RAMCHARRAN, H., Foreign Direct Investments in Central and Eastern Europe: An Analysis of Regulatory and Country Risk Factors, 2000 SCHLETT,, A: Restructuring of the Social System. Private pension financing (Question marks of a proposal solution) In: Development and Integration in transition. Universitea "BabesBolyai" Kolozsvár, Cluj-Napoca,2003 STIGLITZ, J. E.: A kormányzati szektor gazdaságtana – KJK-KERSZÖV 2000. 15 Journal of Accounting and Management PRODUKTIVNOST I POREZI NA TVRTKU U MAĐARSKOJ SAŽETAK Porezna konkurencija, koju potiču većina vlada, očito ima za posljedicu smanjenje prihoda od poreza, ali značajno ne doprinosi privlačnosti domaćeg tržišta u očima (stranih) investitora. Transferne cijene omogućuju tvrtkama zamjenjivanje mobilnosti kapitala s mobilnošću dobitka. Glavni cilj analize je otkriti učinkovitost porezne politike na konkurentnost i produktivnost korporacija u Mađarskoj. Studija prikazuje učinke porezne politike u Mađarskoj, koja je imala direktan utjecaj na korporativne troškove. Vezano uz to, relevantne uobičajene naknade su porezi na tvrtku, povezani s poreznim odbitcima i različitim oblicima proporcionalnih vrijednosti, kao i doprinosi za socijalno osiguranje kao poseban oblik poreznog opterećenja. Osnova istraživanja je Cobb-Douglass funkcija proizvodnje u promatranom razdoblju od 1992. do 2009. Ključne riječi: p roduktivnost, konkurentnost, porez na tvrtku, Mađarska. 16 Received: 21.03.2012. Accepted: 04.05.2012. Preliminary communication UDC 336.761.5 THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE Saša Muminović1 and Vladan Pavlović2 ABSTRACT As use of BEX in the region increases, it has also become important to understand what could influence the calculated value and how that influence could be mitigated. In this paper it has been shown that there is a significant positive correlation between the changes in BEX index values and the changes in share of revaluation reserve in capital on the observed sample. However, the significance of excluding the revaluation is important only if the company's BEX value is close to the next, higher, rank. Also, if the company has negative values of BEX index the excluding of revaluation from calculation is irrelevant. Key words:BEX index, revalorisation, models for bankruptcy prediction, models for assessment of the creditworthiness, Belgrade Stock Exchange 1.INTRODUCTION The anticipation of a potential bankruptcy, i.e. signalization of potential business and financial difficulties has always been a subject of high interest. It also represents one of the basic tasks of financial analysts. Although BEX has been developed on the paradigm of the Croatian capital market, its use in the region is becoming increasingly important. Croatian capital market is in its characteristics much closer to the Serbian one than the capital market in the 1 2 Saša Muminović, Julon d.d. Ljubljana, Aquafil Group, Slovenia Vladan Pavlović, Megatrend University, Graduate School of Business Studies Belgrade, Serbia 17 Journal of Accounting and Management U.S. or in the UK where the majority of the models for predicting bankruptcy and assessment of creditworthiness were developed. Why is it important to test the revaluation (hereinafter used as a synonym for revalorisation) impact on BEX index? The first reason lies in the fact that during the development of the BEX model impact of the revaluation of fixed assets on the ratios and the intensity of the impact were excluded before discriminant analysis has been used. (Belak, V. 2011, pp. 314). Secondly, BEX is an accounting based model. Such models may require redevelopment from time to time to take into account changes in the economic environment to which they are being applied. As such, their performance needs to be carefully monitored to ensure their continuing operational utility. (Mensah, 1984, pp. 380-395). And the third reason is connected to revaluation itself. Subsequent to initial recognition of an asset at cost, classes of property, plant and equipment may be carried at revalued amounts. The revalued amount should be the fair value - the market price determined by appraisal. If the allowed alternative treatment is used, revaluations should be made regularly so that the carrying amount of the asset does not differ materially from the fair value at the Balance Sheet date (IAS 16). The importance of revaluation is not only connected to accounting issues. Several researches, for example, in Brazil and UK, have demonstrated that revaluations of fixed assets are positively related to changes in future performance measured by an operating income. Also, revaluations are also significantly positively related to stock prices showing that revaluation reserves are value relevant ((Lopes, A.B. & Walker, M., 2012) & (Aboody, D., et al. 1999)). Although revaluation is not a change in the economic environment, it is a change in balance sheet without cash flow and it has impact on company's performance. For a new and widely-used model like BEX, this kind of analysis is important for further development. 2. DESIGN / METHODOLOGY / APPROACH We have tested the sensitivity of BEX index on revaluation on a sample of Serbian companies. Calculations for stocks that represent the Serbian capital market are based on data published in prospectuses on the website of Belgrade Stock Exchange. Stocks of non-banking sector which entered into the composition of Belexline index during the period 2006-2010 were included in the calculation. 46 companies which have the revaluation in their financial statements were chosen this way, or 134 financial statements. As always, we have to emphasize that the lack of reliable data is a constant problem influencing all analyses on Serbian capital market. The original sample was divided into those with negative and those with positive BEX index. We have observed the degree of relationship between changes in BEX index due to the revaluation share in total 18 Saša Muminović, Vladan Pavlović: THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE assets, fixed assets and the revaluation share reserve in capital. The samples were tested on heteroskedasticity and the assumption was rejected. Based od described problem, we have set out basic hypothesis that we have seek to prove in the empirical part of the research: H1: Revaluation has a significant impact on the value of BEX index because of its role in the balance sheet to increase the value of revalued assets on the one hand and the increase of capital on the other. The aim of this paper is to establish how significant the impact of revaluation on BEX index calculation is. 3.THEORETICAL BACKGROUND OF BUSINESS EXCELLENCE MODEL – BEX INDEX The Business Excellence Model – BEX index – represents models based on balance indicators developed for the capital market in Croatia. The model tends to enable a fast and simple evaluation of a company's solvency. (Belak, V. & Aljinović-Barać, Ž. 2007, pp.17). The BEX index is calculated according to the following formula: BEX = 0.388 ex1 + 0.579 ex2 + 0.153 ex3 + 0.316 ex4, Where: ex1 – Earnings before Interest and Taxes/Total Assets ex2 – Net Profit /Equity Capital x capital price ex3 – Net Working Capital /Total Assets ex4 – 5 x (Net Profit +Depreciation + Amortization) /Total Debt Extended as: BEX = 0.388 x EBIT / Total Assets + 0.579 x Net Operating Profit /Equity Capital x capital price + 0.153 x Net Working Capital /Total Assets + 0.316 x 5 x (Net Profit +Depreciation + Amortization) /Total Debt Companies with the BEX index higher than 6.01 are classified as the world class companies, between 4.01 and 6.00 as excellent – a candidate for the world class, between 2.01 – 4.00 as very good, 1.01 – 2.00 as good, 0.00 – 1.00 are in the border area, and companies with the BEX index lower than 0 as companies whose existence is endangered. The original formula was changed in 2008 (Belak, V. & Aljinović-Barać, Ž. 2008, pp. 31) when in parameter ex2 – net profit was replaced with net operat19 Journal of Accounting and Management ing profit. Further adjustment was made with correction for avoiding revaluation effect in 2011 (Belak, V. 2011, pp. 314): BEXR = 0.388 x (EBIT + Rp) / (Total Assets - Rr - Dt) + 0.579 x (Net Operating Profit + RAp) / (Equity Capital – Rr) x capital price + 0.153 x Net Working Capital / (Total Assets - Rr – Dt) + 0.316 x 5 x (Net Profit +Depreciation + Amortization) / (Total Debt – Dt) Where: Rp – revaluation reserves transformed into retained earnings Rr - revaluation reserves Dt – deferred taxes on profit RAp – revaluation reserves from depreciation transformed into retained earnings 4. RESULTS OF THE RESEARCH 4.1. SAMPLE WITH POSITIVE VALUE OF BEX INDEX First observing sample was stocks with positive BEX values – 42 stocks i.e. 110 financial statements. The average increase in values of BEX index after applying modified formula was 17.16%, (0.210 points) with standard deviation of 0.2. The degree of relationship between changes in BEX index due to the revaluation share in total assets for a selected sample of balance sheets with positive value of BEX was 0.72, which shows medium positive correlation (Chart 1). The equation of regression line is Y= 0.029 + 1.368X. A statistical measure of how well the regression line approximates the real data points or coefficient of determination was 0.52. Values of t-tests and F-test are presented in Table 1.The average revaluation share in total assets for selected sample was 10.42% with standard deviation 0.106 and median value of 0.09081. 20 Saša Muminović, Vladan Pavlović: THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE Chart 1: BEX index changes related to the revaluation share in total assets Source: Authors` calculation The relationship between changes in BEX index due to the revaluation share in fixed assets for a selected sample of balance sheets with positive value of BEX was 0.66, leading to the conclusion that there is medium positive correlation between them (Chart 2). Coefficient of determination was 0.43, menaning that the regression line approximates the real data points by only 43%. The average revaluation share in fixed assets for a selected sample was 21.12% with standard deviation 0.223 and median 0.1554. Chart 2: BEX index changes related to the revaluation share in fixed assets Source: Authors' calculation The relationship between changes in BEX index due to the revaluation share in capital for selected sample of balance sheets with positive value of BEX was 0.89 - the correlation was strongly positive (Chart 3). The equation of regression line is Y= -0.028 +1.220X. Coefficient of determination was 0.80 which means that the regression line approximates the real data points very well, and better then in the previous two cases. The average revalua21 Journal of Accounting and Management tion share in capital for selected sample was 16.35% with standard deviation 0.1478 and median 0.1359. Chart 3: BEX index changes related to the revaluation share in capital Source: Authors' calculation The relationship between revaluation share in capital and absolute changes in BEX index was lower. The correlation was medium positive (0.66) with coefficient of determination of 0.44 (Chart 4). Chart 4: BEX index absolute changes related to the revaluation share in capital Source: Authors` calculation 4.2. SAMPLE WITH NEGATIVE VALUE OF BEX INDEX Observing the sample of stocks with negative BEX values (14 stocks i.e. 24 financial statements) the relationship between changes in BEX index due to the revaluation share in total assets, fixed assets and share in capital, a very strong negative correlation in all three cases could be seen. The correlation coefficient for BEX index changes related to the revaluation share in total assets was -0.80 22 Saša Muminović, Vladan Pavlović: THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE (coefficient of determination 0.65), whereas correlation coefficient for BEX index changes related to the revaluation share in capital was -0.86 (coefficient of determination 0.75) – Charts 4 and 6. Values of t-tests and F-test are presented in Table 2. Chart 5: BEX index changes related to the revaluation share in total assets Source: Authors' calculation The average revaluation share in total asssets for a selected sample was 13.75% with standard deviation 0.1284 and median value of 0.151, and the average revaluation share in fixed asssets for selected sample was 24.35% with standard deviation 0.2486 and median 0.2108 (Table 4). However, the strongest connection can be seen between changes in BEX index due to the revaluation share in fixed assets. Correlation coefficient was -0.94 (coefficient of determination 0.89) – Charts 5. The average revaluation share in capital for selected sample was 19.43% with standard deviation 0.1718 and median 0.1977. Chart 6: BEX index changes related to the revaluation share in fixed assets Source: Authors` calculation 23 Journal of Accounting and Management It must be emphasized that elimination of revaluation from the BEX formula for the companies/stocks with negative BEX index would not improve/ increase the value of the index; on the contrary, it would only deteriorate it, because there is strong negative correlation between them. The average decrease in values of BEX index after applying modified formula was -39.27%, (-0.272 points) with standard deviation of 0.42. Chart 7: BEX index changes related to the revaluation share in capital Source: Authors` calculation 5.DISCUSSION Revaluation makes BEX index worse as a consequence of the fact that two of the Model's parameters are based on profitability (ex1 and ex2). The profitability always decreases if the value of the assets increases and the value of profit (gain) remains the same. On the other hand there is no debt to equity ratio in Model that would be improved with revaluation. For the presented sample the correlation between the share of revaluation in capital (as the highest value) and the changes in BEX index, is proven (Table 1). But the real question is: How significant is the impact of revaluation? That impact is significant only if with elimination of the revaluation stock (company) could be put on the next level in the BEX index range (Table 3). The differences between BEX index ranks are 1, 2, 2 and 2, starting from zero. Under the assumption of the equation of regression line Y= -0.028 +1.220X in Chart 4, for an average of 84% share of revaluation in capital company (stock) will gain an average of 100% increase of BEX index. So, companies with high share of revaluation in the capital but low value of BEX index, with elimination of revaluation, will gain high percentage additional value but low absolute additional value. On the other hand, companies with high share of revaluation in capital and higher value of BEX index, with 24 Saša Muminović, Vladan Pavlović: THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE elimination of revaluation, will gain high percentage of additional value and higher absolute additional value. For both of them, absolute additional value is important only if BEX value is close to the next, higher, rank. Table 1: Summary of relationship between changes in BEX index and the revaluation BEX reaction on Revaluation share in total assets Revaluation share in fixed assets Revaluation share in capital Sample of positive BEX values (110) Multiple R R Square t Stat P-value* F test (Correlation) (Determination) Significance F 0.72 0.52 10,82 0,0000 117,27 0,0000 0.66 0.43 9,15 0,0000 83,77 0,0000 0.90 0.80 20,831 0,0000 433,95 0,0000 * Significant at 1% Source: Authors' calculation Table 2: Summary of the relationship between changes in BEX index and the revaluation BEX reaction on Revaluation share in total assets Revaluation share in fixed assets Revaluation share in capital Sample of negative BEX values (24) Multiple R R Square t Stat P-value* F test (Correlation) (Determination) Significance F -0.80 0.64 -6,31 0,0000 39,92 0,0000 -0.94 0.89 -13,40 0,0000 179,60 0,0000 -0.86 0.75 -8,11 0,0000 65,91 0,0000 Source: Authors' calculation Comparing balance sheets without negative value of BEX index, only 15 of the selected 110 or 13.6% was ranked better after elimination of revaluation impact (Table 3). For the second sample it was zero, and in totals 15 out of 134 – 11.2%. The average increase of BEX index was only 0.21 points, far from the requested number to make a difference. 25 Journal of Accounting and Management Table 3: Changes in values of BEX index BEX rank More then 6.01 4.01 – 6.00 2.01 – 4.00 1.01 – 2.00 0.00 – 1.00 negative BEX 0 8 23 32 47 24 BEXr 1 8 27 35 39 24 Delta +1; +1; -1 +5: -1 +8; -5 -8 0 Source: Authors' calculation Table 4: Summary statistics sample 110 24 Revaluation Revaluation Revaluation BEX change BEX change share in share in share in in points in % total assets fixed assets capital Mean 10,42% 21,12% 16,35% 0,1635 17,16% Std. Error 0,0101 0,0213 0,0141 0,0141 0,0192 Median 0,0908 0,1554 0,1359 0,1359 0,1079 Std. deviation 0,1063 0,2233 0,1478 0,1478 0,2016 Sam. variance 0,0113 0,0499 0,0219 0,0219 0,0406 Minimum 0,0000 0,0001 0,0001 0,0001 0,0000 Maximum 0,4853 1,3282 0,5733 0,5733 0,9557 Mean 13,75% 24,35% 19,43% -0,2725 -39,27% Std. Error 0,0262 0,0507 0,0351 0,1331 0,0882 Median 0,1510 0,2108 0,1977 -0,0729 -0,2866 Std.Deviation 0,1284 0,2486 0,1718 0,6520 0,4320 Sam. Variance 0,0165 0,0618 0,0295 0,4251 0,1867 Minimum 0,0002 0,0003 0,0003 -3,1640 -1,4981 Maximum 0,4232 0,7524 0,4928 -0,0001 -0,0003 Source: Authors' calculation 6.CONCLUSION As the use of BEX index in the region is becoming increasingly important, it is also important to understand what could influence the calculated value and how that influence could be mitigated. Although BEX was developed for Croatian market which is more similar to the Serbian than American or British, some problems may arise if bankruptcy prediction models are inappropriately applied. Study (Grice, J.S. & Dugan, M. T. 2001) has shown that applying the models to time periods and industries other than those used to develop the models may result in a significant decline in the models' accuracies. 26 Saša Muminović, Vladan Pavlović: THE IMPACT OF REVALUATION ON BEX INDEX CALCULATION FOR STOCKS LISTED ON BELGRADE STOCK EXCHANGE And also, we must not forget Taffler's remark about z-score model which could be applied to all MDA - Multiple Discriminant Analysis models: Strictly speaking, what a z-score model asks is does this firm have a financial profile more similar to the failed group of firms from which the model was developed or the solvent set? (Taffler, R. 1983, pp. 296). The hypothesis H1, of this research, was confirmed partly. Although there is a significant correlation between the changes in share of revaluation in capital on the observed sample, the significance of excluding the revaluation is important only if the company's BEX value is close to the next, higher, rank. Otherwise, there is no need for using the modified formula for elimination revaluation in the calculation of BEX index. Also, if the company has negative values of BEX index, the excluding the revaluation from calculation is completely irrelevant. On the other hand, there are some remaining questions to be answered in the subsequent research. As two of the Model's parameters are based on profitability and the profitability always decreases if the value of the assets increases and the value of gain remains the same, the questions are: What is the impact of investments (and how significant is this impact)? And how does the method of financing (debt or new capital increase) of those investments influence the value of BEX index? REFERENCES 1. Aboody, D., Barth, M.E. & Kasznik, R. (1999): "Revaluations of fixed assets and future firm performance: Evidence from the UK", Journal of Accounting and Economics 26 (1999) 149-178. 2. Belak, V. & Aljinović-Barać, Ž. (2007): "Business excellenca (BEX) indeks – za procjenu poslovne izvrsnosti tvrtki na tržištu kapitala u Republici Hrvatskoj" Zagreb: RRIF, 17(10):15-25. 3. Belak, V. & Aljinović-Barać, Ž. (2008): Tajne tržišta kapitala. Zagreb: Belak Excellens d.o.o. 4. Belak, V. (2011): Poslovna forenzika i forenzičko računovodstvo – Borba protiv prijevare. Zagreb: Belak Excellens d.o.o. 5. Beogradska berza: http://www.belex.rs/ 6. Grice, J.S. & Dugan, M.T. (2001): "The Limitations of Bankruptcy Prediction Models: Some Cautions for the Researcher" Review of Quantitative Finance and Accounting, 17: 151–166. 7. Hitz, J.M. (2007): "The Decision Usefulness of Fair Value Accounting - A Theoretical Perspective." European Accounting Review, 16(2), 323-362. 8. International Accounting Standard 16 Property, Plant and Equipment, http://ec.europa.eu/ internal_market/accounting/docs/consolidated/ias16_en.pdf 9. Lopes, A.B. & Walker, M. (2012): "Asset revaluations, future firm performance and firm-level corporate governance arrangements: New evidence from Brazil" The British Accounting Review, Available online 27 March 2012, In Press, Accepted Manuscript. 10. Mensah, Y. (1984): "An examination of the stationarity of multivariate bankruptcy prediction models: a methodological study" Journal of Accounting Research, 22(1): 380-395. 11. Taffler, R. (1983):"The Assessment of Company Solvency and Performance Using a Statistical Model" Journal Accounting and Business Research, 15(52): 295-308. 27 Journal of Accounting and Management UTJECAJ REVALORIZACIJE NA OBRAČUN BEX INDEKSA ZA DIONICE KOJE KOTIRAJU NA BEOGRADSKOJ BURZI SAŽETAK Obzirom na činjenicu da se BEX sve više koristi u regiji, postalo je važno ustanoviti što može utjecati na obračunatu vrijednost i kako se takav utjecaj može ublažiti. U ovom radu je na uzorku prikazano kako postoji značajna pozitivna korelacija između promjena u vrijednostima BEX indeksa i promjena udjela u revaloriziranim pričuvama kapitala. Međutim, značaj isključivanja revalorizacije je važan samo u slučaju ako je BEX vrijednost tvrtke gotovo u razini sljedeće visoke pozicije. Također, ako tvrtka ima negativne vrijednosti BEX indeksa, isključenje revalorizacije iz obračuna je irelevantno. Ključne riječi: B EX indeks, revalorizacija, modeli pretpostavki bankrota, modeli procjene kreditne sposobnosti, Beogradska burza. 28 Received: 03.04.2012. Accepted: 05.05.2012. Review article UDC 347.736/336.22 TAX BURDENS IN INSOLVENCY PROCEDURE Jasenka Bubić 1 and Vlasta Roška2 SUMMARY Tax systems of most countries are made up of different tax forms such as personal tax, company profit tax, tax on and from wages, property tax, excise duties etc. The Croatian tax system like the systems of a number of countries is made up of direct and indirect previously mentioned tax forms. The Financial theory at the center of observation puts all fiscal forms. The insolvency procedure represents a form of extrajudical legal proceedings conducted against a debtor according to Insolvency law. Once the insolvency procedure has been started the debtor is liable to comply with all tax regulations just as any other company operating on the principle of unlimited dealing. The aim of this paper is to establish and analyse the overall tax burden during insolvency procedures in Croatia as well as its influence on the assets of the debtor int he insolvency process. Key words:tax regulations, tax forms, insolvency procedure, debtor`s assets tax burden. 1. INTRODUCTION Given the legal prerequisites of payment inability or insolvency an insolvency procedure is started on the debtor company. The insolvency procedures can include corporation assets or the assets of an individual debtor (individual dealer or craftsman). The basic objective of any insolvency procedure is collective paying off of creditors. The debtor`s assets are realised and the raised funds 1 2 Jasenka Bubić, University of Split, University Department for Professional Studies, Kopilica 5, Split, Croatia Vlasta Roška, Total Balance d.o.o., Čerinina 4, Zagreb, Croatia 29 Journal of Accounting and Management are distributed to his creditors. It can be a classic liquidation or a non-classic liquidation process upon adopting and implementing an insolvency plan. In this latter case the of the business is planned. The debtor`s statutory trade and fiscal duties of bookkeeping remain mandatory under the lnsolvency law. The debtor in insolvency procedures is subject to all tax regulations. Depending on its economic position any tax form can be applied i.e. value-added tax, income tax, profit tax or tax on the remaining debtor`s asset. The financial theory postulates taken into consideration the question of the appropriateness of applying all tax forms in the insolvency procedure poses itself. Are all tax forms justified? Keeping in mind their characteristics such as fairness, efficiency and stability all tax forms should be continuously reexamined. The aim of this paper is to present critical thinking about all tax forms in insolvency procedures. 2. THE PUBLIC INCOMES THEORY AND TAX SUBSYSTEM Taxes are a classic category of public finances and one of the most decisive socio-economic categoris of public economy (Sever, 1994:132). Tax income category is according to many financial authors the most complicated in its interpretations. Theoretical studies of taxes have mirrored the economic, social, political and other circumstances during social transformation throughout history, and have interrelated with the social rank. The stated circumstances have at the same time contributed to different understanding of tax and its different conceptual interpretation. Issues of the theory of economics have been taken over focusing on the social end economic essential part of tax i.e. what is the state`s justification of intoducing a tax. Different theories have been established reflecting social, economic and political believes of the period. There is a classification into old theories (17th and 18th century) and new theories. Another classification is more accurate, all-inclusive and more selective. This second theory includes more theoretical doctrines: the force theory, the agreement theory, the price theory, the organic theory, the tax reproduction theory or the theory of total compensation, the socialist theory (Jelčić, 1983:86-94). The all-inclusive concept of tax substance as a socio-economic and above all a fiscal category defines tax as a compulsory and forcibly performed transfer of economic entities` part of property and product surplus in favour of a government institution with the aim of carrying out functions and activities of the public sector and a free course of economic-reproductive cycle. Tax is defined by the tax theory as a resource with general characteristics, a monetary resource of natural redistribution of wealth in favour of public entities. Tax are formed mainly by a forcible transfer of a part of product surplus. Tax subsystems act as part of the total system of public needs satisfying. It also 30 Jasenka Bubić, Vlasta Roška: T AX BURDENS IN INSOLVENCY PROCEDURE rapresents an economic, financial and political category of special importance. Parts of tax subsystem are individual tax forms both original and derived ones, of fiscal provenance. It is important to underline that tax subsystems depend on a series of factors such as historical heritage, social and economic structure as well as economic development level, political system but also on the political environment aims and the strategy of the socio-economic development. Tax system is therefore part ot the total system of filling public needs. Its structure can be composed of a number of tax forms. The tax system should be viewed from the aspect of functionality and its management is goal directed of either social, economic or political nature. The tax subsystem management, like any other subsystem management is based on all possible processes and relations. It is clear that all relations and manifestations of this subsystem cannot be coordinated. But theoreticians of public finances point out the importance of consistency of tax system manifestation in its basic form with its manifestation alone. Theoretical attributes that a tax sybsistem should possess draw mostly on desirable features set by J. Stiglitz (1988). According to Stiglitz a tax subsystem/ system should possess the following desirable characteristics: economic efficiency, administrative simplicity, flexibility, political responsibility and fairness. As asserted by Sever (1994:284) the above mentioned qualities are features of a tax sybsistem which it "emits" into its environment (a wider system of filling the public needs or the entire socio-economic system). The analysis of domestic and foreign literature related to the researched subject of tax burden in insolvency procedures is of marginal importance. The previos theoretical treatises highlight only the legal framework of insolvency proceedings without a critical reference on tax burdens. Its accountant and tax aspects were analysed by Dika et.al.(2001). 3. TAX REGULATIONS APPLICABLE TO COMPANIES IN INSOLVENCY PROCEDURES IN THE REPUBLIC OF CROATIA The insolvency law as a lex specialis defines the prerequisites for starting an insolvency procedure on a corporation. Over indebtedness and insolvency are preconditions for opening the insolvency procedure. Once the insolvency procedure has been started legal consequences are to be observed and the debtor's assets administration and selling are determined under special law provisions (Insolvency law, Chapter IV.). The debtor`s assets administration determines among other things the commercial-legal and tax-legal aspects of rendering accounts. With insolvency a new business year begins. The same applies to how tax regulations treat debtor corporations as taxpayers in all activi31 Journal of Accounting and Management ties in insolvency with tax burdens for all taxable activities. The main tax forms during the insolvency procedure are represented in picture 1. Picture 1 Tax burdens during the insolvency procedure INSOLVENCY PROCEDURE Profit Added value Real-estate trading Revenue Corporation Other taxes Origin : author`s paper, according legal regulations on tax burdens during insolvency Profit tax law3 provides the way of filing a tax return for all corporations. Tha law (Art.2) provides that the taxpayer is a trading corporation, resident of the Republic of Croatia, which runs business independently and permanently with the purpose of achieving a profit, a revenue or income or other economically assessable benefits. Profit tax regulations4 specify that "it is essential whether they do business to gain profit regardless of business kind and its legal status:" As the same law and regulations are applied to debtors as well, law provisions are not adapted to corporations in insolvency, i.e. there is no special tax relief for those corporations. The provision of Art. 9 of the Profit Tax Law is relevant for the creditors as it defines the value balance and the writeoff of the claims. Article 17 of the same Law which determines the transfer of tax losses is also important for corporations in insolvency, their creditors and future purchasers of such corporations. Subsection 3. of Article 17 provides that the entrepreneur has the right of transferring the tax loss for five years. Furthermore, the Profit Tax Law (Art.29) determines the period for the establishment of tax burden, which is a calendar year as a rule, but provides as well that the tax period can also be one part of a business year, provided it is either the subsequent period to the last business year from liquidation or insolvency or the period subsequent to the insolvency opening and lasts to the end of the business year. By that provision a corporation in insolvency is obliged to determine tax burden every year during the insolvency procedure and to submit a financial report to the tax office. The profit tax is paid on the tax base at a rate of 20%. However, corporations in the process of insolvency are exempt from profit tax advance payment (Art.48.sub.7. Profit Tax Regulations) which provides that "Taxpayer in insolvency doesn`t pay advances on 3 4 Profit Tax Law, Official Gazette 177/04, 90/05, 57/06, 146/08, 80/10 and 22/12 Profit tax Regulations, Official Gazette n. 95/05, 133/07, 156/08, 146/09, 123/10 32 Jasenka Bubić, Vlasta Roška: T AX BURDENS IN INSOLVENCY PROCEDURE profit tax". Corporations in insolvency performing activities specified in Art.31 of Profit Tax Law can be taxable after deduction at the rate of 15%, except for dividends and profit shares, where the rate of 12% is applied. Value added tax law5 is another important law for corporations in process of insolvency. Tax rates of 25%, 10% and 0%6 are also applied to corporations in insolvency depending on their activities. Article 2 provides that VAT is paid for all payable inland goods and services supplies. Under the provisions of the VAT law an entrepreneur is considered to be any individual or corporation doing business continually and permanently with the purpose of achieving revenue. Each sale brings about revenue, especially when corporations in insolvency are concerned, where the ultimate aim of selling the debtor`s assets is to settle the creditors` claims, but in the case of corporation in insolvency the disputable part of the text regards "continual and permanent business activities". Under provisions of Value added tax Regulations7 it is explicitly specified that during an insolvency procedure all deliveries are taxable. There is a provision concerning an exemption from the stated basic provision as per Art.20. Divestiture of a corporation or a part of corporation constituting an economic unity (Art.20 of the Law) represents a goods delivery if the acquirer can deduct the whole value added tax amount as input VAT, but divestiture of a company or part of company constituting an economic unity is not taxed. The debtor in insolvency remains value added taxpayer after the insolvency procedure has been opened, but during the insolvency procedure, beside their obligation to pay the VAT, they may be entitled to input VAT rebate. The Tax office cannot refuse to reimburse the taxpayer in insolvency with the explanation that the tax liability existed before the insolvency entered into force, and they cannot set off their previous claims which existed before the insolvency procedure was opened with those that arose after the insolvency, as it would represent collection out of order of priority and would damage other creditors` rights. The Ministry of Finance issued a decision which corroborates the mentioned statement8. The Profit Tax Law and the Value Added Law provide that all supplies of goods and services of corporations in insolvency are taxable as well as is the disposal of the remaining debtor`s assets , that goes to the proprietors, which was corroborated by a decision of the Ministry of Finances9. 5 Value added tax Law, Official Gazette 47/94, 106/96, 164/98, 105/99, 54/00, 73/00, 127/00, 48/04, 82/04, 90/05, 75/07, 87/09, 94/09, 22/12. 6 From 2013. Is 5% 7 Value added tax Regulations,Official Gazette 149/09, 89/11, 29/12 8 Ministry of finance : class : 423-01/00-01/10; Prpt.n. 513-07/00-2 dated 15. June 2000. 9 For more see the collection of decisions, class : 410-19/04-01/364, Reg..n. 513-07-21-01/05-2, Zagreb dated 21. 01. 2005. 33 Journal of Accounting and Management Income Tax Law10 and Income tax Regulations11 are applied to all trading corporations including the corporations in insolvency as they provide liabilities both in case of corporate and independent work. Article 4, subsection 2 of the Real-Estate Sales Tax Law12 provides that real estate acquisition includes also the acquisition of real estate during liquidation or insolvency procedure. The real estate sales tax rate is 5%, paid by buyer. Corporations in insolvency are also liable to tax on the company or name (Art.42 of the Law)13. Tax liability starts with the day of entry into the register and is in force until the removal from the register. The tax is payable yearly. Taxpayers that do not do business are not liable to pay the company tax. Depending on its activity an insolvency debtor can be liable to all other taxes concerning their activity, under provisions of one or more of the following laws:14 • Law on excise on petroleum products • Law on excise on beer • Law on excise on soft drinks • Law on excise on alcohol • Law on excise on tobacco • Law on excise on coffee • Law on excise on luxury items. Which tax form will be applied to a trading corporation is determined by a series of factors, such as the form of the insolvency process, possible continuation of business, the amount of settled creditors` claims as well as the possibility of collecting the claims of the debtor himself. 4. CONSISTENCY OF TAX FORMS WITH THE INFLUENCE ON DEBTOR'S ASSETS The aim of this work is a critical reappraisal of the existing model of tax subsystem in insolvency procedures in Croatia. The critical reappraisal refers to all tax forms during an insolvency procedure in relation to their aim and purpose. This paper does not represent the final results of its authors regarding the research into the problems connected with existing model of the tax subsystem in insolvency procedures. 10 Income Tax Law, Official Gazette n. 177/04, 73/08, 80/10, 114/11, 22/12. Income Tax Regulations, Official Gazette n. 95/05, 96/06, 68/07, 146/08, 2/09, 9/09 – correction, 146/09, 123/10, 137/11 12 Sales Tax Law, Official Gazette n.68/97, 26/00, 152/02, 22/11 13 Law on Financing local Government and self-government, Official Gazette n.117/93,33/00, 73/00, 59/01, 107/01, 117/01-correction, 150/02, 147/03, 132/06, 73/08 14 Excise Law, Official Gazette n. 83/09, Law on excise on petroleum products, Official Gazette n. 136/2001 –to 83/2009.; Law on excise on beer, Official Gazette n. 59/94 to 136/02. 11 34 Jasenka Bubić, Vlasta Roška: T AX BURDENS IN INSOLVENCY PROCEDURE The Profit Tax Law determines the way of filing the profit tax return for all trading corporations. Hereafter two fundamental tax forms will be analyzed, which regarding the purpose of the insolvency process can influence the debtor`s assets. It refers primarily to the profit tax and the value added tax in the insolvency procedure. We have so far analyzed tax forms which can burden the debtor. The justification of applying some tax forms has been questioned both regarding basic provisions of tax laws and also the basic accounting principles. The first essay in theoretical debate started in 2001 with Constitution initiative propositions (Bubić, 2000:1) which aimed at pointing out the disputable law provision: independence, permanency and the purpose of obtaining profit. The Constitutional Court ruled that the existing laws and regulations on profit tax should be set aside. So between 2001 and 2004 corporations declared insolvency were not liable to profit taxation. From 2005 the corporations in insolvency have been obliged to file a profit tax return at the end of the year, regardless whether they achieve any income or not. The obligation of filing the tax return applies to the corporations that were made insolvency before 2005 too. The basic principle of the Croatian accounting tax regulations is the going-concern principle. The continuity of business unit principle is certainly not an assumption which can be applied to a business declared insolvency (Roška, 2012:102). Insolvency is contrary to the continuity of business concept. Insolvency processes in most cases end up in liquidation and the removal from the court register. However, in the Republic of Croatia corporations declared insolvency file the same financial and tax reports as companies running business on going-concern principle. If we analyse the definition of a taxpayer specified in the Profit Tax Law and Regulations" hardly any corporation in insolvency could be classified as profit tax payer, for qualifications as" running business permanently, independantly and with the purpose of gaining profit" cannot be applied to a business in insolvency, and yet all of them, without exception are taxpayers and have to file tax returns" (Roška, 2012:110). The disputable category refers to value adjustment and write–off of claims. It is provided by the Law (Art.9.) that the value adjustment of claims is recognized if the claim was entered into the books as income and provided efforts have been made with the care of good manager, to colllect the payment i.e. if the claims have been reported in the insolvency procedure or if during the insolvency procedure a deal has been made with the debtor who is not an individual or a person connected to them. However the Ministry of Finance issued a decision that being declared insolvency is not to be considered as 35 Journal of Accounting and Management being unable for payment, it is necessary to wait for the end of the insolvency procedure and for the settlement out of the debtor`s assets.15 Under the provisions of the Value Added Tax Law any individual or corporation running business continuously and permanently with the purpose of achieving an income is considered as an entrepreneur. Each sale brings about revenue, especially when corporations that were declared insolvency are concerned, where the ultimate aim of selling the debtor`s assets is to settle the creditors` claims. It must be pointed out that the type of business the corporation was running before they were declared insolvency is of the utmost importance here and also whether the corporation has made a commitment to complete the unfinished business, as well as which form of insolvency procedures has been undertaken. Furthermore, there is another disputable element about insolvency and tax legislation which is reflected then into practice – the reality about the structure of Croatian businesses is not taken into consideration. Namely, in a large number of cases there are not enough funds to conduct the insolvency procedure. In other words, on a yearly level, such businesses do not fulfil the condition of their yearly income reaching 85,000.0016 kn. In case a debtor didn`t realise a turnover higher than 85,000.00 kuna in the previous year, they are not liable to Value Added taxation in the following year. When a taxpayer is declared insolvency a new entrepreneurial phase is started. The aim of the insolvency procedure is the sale of the debtor`s assets and paying the creditors. It is those two goals that pose a dilemma regarding this tax form, as to the purpose of the insolvency process.The justification that this tax burden falls onto the end-user is true only in part. Namely, the VAT payer has the right of input VAT use. In case the debtor does not continue running business there is no possibility of any tax burden transfer except onto the debtor`s assets. Businesses in insolvency are liable to other tax forms such as income tax and real-estate sales tax. The former tax form does not alter the rights of the employees regarding their pay. The real-estate tax form does not bring about a reduction of the debtor`s assets, except for the expenses connected with the sale. 15 Ministry of Finance, decision, class: 410-01/06-01/17, Reg.n. 513-07-21-01/06-2, of 10. 02. 2006: Under the VAT one-sided correction of tax liability owing to insolvency is not allowed We point out that under provisions of Art.16 of the VAT Regulations (OG 60/96 to 153/05) that during insolvency proceedings deliveries are liable to taxation, the taxpayers being the debtor, which indicates that tax liabilities are not written off after a business is declared insolvency. Under the provisions of Art.67 of Insolvency Law (OG 44/96 to 116/210 the debtor's assets comprises the total debtor` property at the time they were declared insolvency, as well as the property they gain during the insolvency proceedings… It is therefore our opinion that insolvency cannot be considered as inability of paying according to VAT Law, as until the end of insolvency proceedings there is a possibility of gaining property which will be used to settle the creditors` claims. 16 From 2013 is 230,000 kn 36 Jasenka Bubić, Vlasta Roška: T AX BURDENS IN INSOLVENCY PROCEDURE 5. CONCLUSION Corporations declared insolvency are liable to all tax forms which represent a tax subsystem. The financial, tax theory carefully analyses the traits of tax forms which should be in line with their surroundings. The purpose of the insolvency procdure should be the sale of the debtor`s assets in order to pay off the creditors. However, some tax forms applied during the insolvency procedure can reduce significantly the debtor`s assets. The reason for this is that some due tax forms affect the debtor`s assets, reducing the means of paying off the creditors who are in order of priority. The research shows that there are two tax forms deserving the attention of theoreticians who are continually reexamining the consistency of legislation with the purpose of insolvency procedure and their effect on company assets. Futhermore, the total trade-tax aspect of a company in the process of insolvency should be updated and coordinated with desirable economic features of the tax subsystem and its forms as well as with the purpose and aims of the insolvency procedures. REFERENCES: 1. Bubić, J.: Prijedlog Ustavnom sudu RH o ocjeni ustavnosti Zakonske regulative o porezu na dobit; Split, 2000. 2. Jelčić, B.: Nauka o financijama i financijsko pravo, Informator, Zagreb, 1983. 3. Jelčić, B.: Financije u teoriji i praksi, Informator, Zagreb, 1988. 4. Dika, M. (et.al.): Računovodstvo trgovačkih društava u stečaju i likvidaciji pravni, računovodstveni i porezni aspekt, TEB Poslovno savjetovanje d.o.o., Zagreb, 2001. 5. Pravilnik o porezu na dobit, NN 95/05,137/07, 156/08, 146/09, 123/10, 137/11 6. Pravilnik o porezu na dohodak, NN 95/05, 96/06, 68/07, 146/08, 2/09, 9/09 – ispravak, 146/09, 123/10,137/11. 7. Pravilnik o porezu na dodnu vrijednost, NN 149/89, 89/11, 29/12. 8. Roška, V.: Posebnosti računovodstvenog praćenja društava u stečaju, doktorat, Ekonomski fakultet u Rijeci, Rijeka, 2012. 9. Sever, I.: Javne financije, Razvoj-Osnove teorije-Analiza, EF Rijeka, 1994. 10. Stiglitz, J.: Economics of the Public Sector, Second edition, W.W.Norton &Company, New York, London, 1988. 11. Zakona o financiranju jedinica lokalne uprave i samouprave, NN 117/93, 69/97, 33/00, 73/00, 127/00, 59/01, 107/01-ispravak, 152/02, 147/03, 132/06, 26/07, 73/08, 25/12. 12. Zakon o porezu na dobit, NN 177/04, 90/05, 57/06, 146/08, 80 /10 i 22/12. 13. Zakon o porezu na dohodak, NN 177/04, 73/08, 80/10,114/11, 22/12. 14. Zakon o posebnom porezu na naftne derivate, NN 136/2002 do 83/2009. 15. Zakon o posebnom porezu na pivo, NN 59/94 do 136/02. 16. Zakonu o prometu na porez nekretnina, NN 68/97, 26/00, 152/02, 22/11. 37 Journal of Accounting and Management 17. Zakon o porezu na dodanu vrijednosti, NN 47/95, 106/96, 164/98, 105/99, 54/00, 73/00, 127/00, 48/04, 90/05, 76/07, 87/0, 94/09, 22/12. 18. Zakon o stečaju, NN 44/96 do 116/2010. 19. Zakon o trošarinama, NN 83/09. 20. Zbirka mišljenja ministarstva financija, TEB poslovno savjetovanje, Zagreb, 2009. POREZNA OPTEREĆENJA U STEČAJNOM POSTUPKU SAŽETAK Porezni sustavi većine zemalja sastoje se od različitih poreznih oblika kao što su porez na dohodak pojedinca, dobit poduzeća, porez na plaće i iz plaće, porez na imovinu, trošarine itd. Hrvatski porezni sustav kao i porezni sustavi niza zemalja sastoji se od izravnih i neizravnih poreza prethodno navedenih oblika. Financijska teorija u središte promatranja stavlja sve fiskalne oblike. Stečajni postupak je oblik vanparničnog sudskog postupka koji se provodi protiv dužnika prema odredbama stečajnog zakona. Otvaranjem stečajnog postupka dužnik ima obvezu primjenjivati ukupnost zakonske porezne regulative kao i svako društvo koje posluje po konceptu neograničenosti poslovanja. Cilj rada je utvrditi i analizirati ukupno porezno opterećenje u stečajnom postupku u Hrvatskoj te njegov utjecaj na stečajnu masu. Ključne riječi: p orezna regulativa, porezni oblici, stečajni postupak, stečajna masa, porezna opterećenja 38 Received: 04.04.2012. Accepted: 06.05.2012. Preliminary communication UDC 316.334.5/336.76 CORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES Dubravka Krivačić1 ABSTRACT Nowadays, in order to meet the requirements of accounting information users, in scientific and professional domain is intensively arguing about the need of disclosing additional information about business conducting. The set of accounting information, incorporated in financial statements, is broadened by environmental information which is the "product" of corporate environmental accounting. This paper is focused on the research of environmental statements of Zagreb Stock Exchange listed companies. The objective is to investigate the quantity of corporate disclosure and come to a conclusion about possible connection between companies' specific characteristics and the quantity of their environmental disclosure. Key words: environmental reporting, environmental performance, corporate disclosure 1. INTRODUCTION Nowadays, in scientific and professional domain is intensively arguing about corporate responsibility towards different stakeholders as well as to social community as a whole. The group of stakeholders, besides well known stockholders and investors, is significantly broadened. Stakeholders ask for information of impacts of corporate activities on the natural environment, the life quality and other companies. In order to meet their requirements inter1 Dubravka Krivačić, M. Sc., Karlovac University of Applied Sciences, Karlovac, Croatia 39 Journal of Accounting and Management national organisations and initiatives (e.g. United Nations Environmental Programme and Global Reporting Initiative) encourage corporate social and environmental reporting. 2. THE PROBLEM AND THE OBJECTIVE OF THE RESEARCH The quantity and the quality of reported corporate environmental information differs from a company to company and from a county to country. In fact, corporate environmental reporting in most countries is still voluntary. Even in the most developed, especially European countries, in which that kind of reporting has been mandatory for a number of years (e.g. Scandinavian countries, United Kingdom, Australia, France), the need of reporting additional information is determined in order to ensure better corporate reputation, business transparency and relations with stakeholders. Therefore, voluntary reporting became the matter of interest of many scientists and accounting professionals on the international level. Although in the beginning voluntary environmental reporting refers to those companies which impact on the environment was significant, especially companies with great ecological footprint, like those from chemical, pharmaceutical, electronic and automobile industry etc., the new researches demonstrate that environmental reporting is a practise of utility companies, hotels, banks and others. European countries, for example Denmark, France, United Kingdom, Portugal and Spain, harmonised their accounting legislation with the European Commission Recommendations 2001/453/EC, which regulate the obligation for companies to report information about their impacts on the environment in their financial statements or besides them in separate statements, considering the need to comply with requirements of information users groups which are only partially harmonised with information incorporated in existing corporate financial statements and annual statements. The latest version of the Recommendations is incorporated in the Directive 2003/51/EC of the European Parliament and the Council of EU which is quoting that "to the extent necessary for an understanding of the company's development, performance or position, the analysis shall include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters". The article from the Directive is able to recognise in the Croatian Accounting Law by which "an entrepreneur is obligated to create yearly statement which contains objective description of the development and outcomes from its business activities and its financial position … and information about the environment protection and workers, if is necessary for understanding business activities and the financial position of an entrepreneur". Accordingly, companies in Croatia are, in certain way, still 40 Dubravka Krivačić: C ORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES free in decision making about the environmental reporting, and information they disclose refers prior to corporate environmental policies and certificated environmental systems harmonised with the ISO 14000ff norms. A small number of companies in Croatia report concrete environmental information based on measured environmental performance indicators. Because of an absence of direct definition of environmental reporting in the International Financial Reporting Standards, majority of companies which are reporting information about measured environmental performance indicators, use Global Reporting Initiative's Guidance for reporting. Since it was accepted in 1997, GRI Guidance is focused on developing and promoting comprehensive framework for economic, social and environmental performance reporting of companies and other organisations (triple bottom line reporting). That was the motive for conducting this research. With the objective to add contribution to previous researches in the domain of corporate environmental reporting, as well as to actualize these issues in Croatia, the object of this research is defined and is refer to investigation of environmental reporting practises of companies in Croatia. The results of the research will show is there a difference between factors that are affecting environmental reporting practise of companies in Croatia in comparison to companies in other countries where such researches are already conducted. The research will be the basis for undertaking further efforts in finding the answer on question about readiness of Croatian companies to comply with European directives and about Croatian readiness to design accounting legislation of mandatory environmental reporting in corporate annual reports. 3. PREVIOUS RESEARCHES Considering environmental reporting as mainly voluntary, the majority of researches on international level are focused on measuring of the quantity and the quality of reporting as well as factors that are influencing on the reporting. The majority of researches are conducted in the most developed countries, but in recent years authors from other countries are also engaged in investigating this problem. The beginnings of environmental accounting and reporting development are dating from the 1970s. Achieving higher level of income in the 1970s the interest of society and politics for the first time was directed towards the life quality (Schaltegger, Bennet and Burrit, 2006). At that time companies started to report information about their social goals, activities and impacts on the environment in separate reports, besides traditional financial reports. Unlike the 1970s, during the 1980s only several researches are conducted in the domain of strategic environmental assesment, as the process of system assesment of environmental impacts of adopted environmental policy and other programmes 41 Journal of Accounting and Management and initiatives on macroeconomic level, and the environmental responsibility audit was attracted higher attention (Kaya and Yayla, 2007). At the end of the 1980s and at the begining of the 1990s corporate environmental responsibility was actualized again, and that was a kind of reaction on ecological catastrophes Bhopal and Chernobil. At the year of 1988 Gray introduced paper in which he initiated discussion about the impact of social culture on the accounting practise. Nowadays that problem is still actual and the evidence of that are actual papers with similar approach to the problem (e. g. Finch, 2009). Gray, as one of the most influential authors in the domain of social and environmental accounting, in his papers also argues about effectiveness of introducing the context of social and environmental accounting and reporting. Although he investigates the same problem for a number of years, in recent papers he concluded that companies still need to learn how to be effective in the area of social and environmental accounting and reporting (2001, 2007, 2008). At the end of the 1990s Deegan and Rankin conducted research on the sample of australian companies and invetigated the egsistance of information gap between expectations of the users of environmental performance information and the companies which report that kind of information (Deegan and Rankin, 1999). The authors indicated that such a gap does exist because the users of annual reports (particularly shareholders, academics and review organizations) are more likely to consider environmental information important to their decisions than is perceived to be the case by the annual report preparers, but also because they consider that the accounting profession and government should provide environmental reporting guidelines, relative to annual report preparers. The 1990s was also significant because of consideration about commiting companies on the environmental reporting. The first country which legislated the environmental reporting was Denmark. The Environmental Law from the 1995 commited a thousand of danish companies to make environmental statements, i.e. Green Accounts. The main requirement was to make statements which will contain general information about the company, management statement about the environment protection and quantitative information about environmental performance of the company. By the revison of the Law in the 1999 it was concluded that expectations are not fulfilled, and because of that in the 2002 the Law was made much more rigourous. Towards the new Low companies have to adopt environmental policy, define environmental goals and report about their improvement of environmental performance. Despite that, Jorgensen and Holgaard in their research from the 2004 determined that although many Green Accounts are disclosed, some information still missing. So they concluded that additional revision of the Low which will regulate companies' obligation to audit environmental statement is necessary (Jorgensen and Holgaard, 2004). At the same time Cormier, Magnan and Van Velthover did research on the sample of german companies 42 Dubravka Krivačić: C ORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES which didn't have reporting obligation and concluded that voluntary environmental disclosure are conected with public pressures and company industry, and that companies report because they imitate their competitors (Cormier, Magnan and Van Velthoven, 2004). Few years later Cho and Roberts investigated environmental reports of America's toxic 100 companies reported on corporate Internet pages. The results indicated that environmental disclosure were higher for worse environmental performing companies than their better counterparts and also that the environmental sensitivity of company industry did't have a significant effect on decision about environmental disclosure (Cho and Roberts, 2008). In accordance to previous researches it is able to agree with O'Connor who argues that the period since the 2000 to nowadays is characterised by the following: (i) there has been a relative proliferation of empirical studies being published in academic journals in the social and environmental accounting field, (ii) there has been a significant increase in the depth of empirical work being undertaken, evidenced by a growing number of studies seeking to explain social and environmental reporting practice, a growing number of studies which sought to investigate the faithfulness of social and environmental reporting practice, the emergence of a number of studies which have sought to establish the degree to which social and environmental accounting is leading to organizational change and a significant increase in the number of studies using multiple sources of dana, and (iii) a significant increase in the number of studies located all over the word (adjusted to O'Connor, 2006). The newest researches, especially in countires in which corporate environmental performance issues are beginig to argue and in which environmental reporting is voluntary, are usually focused on investigation of the quantity of environmental reporting and factors that have influence on the quantity of reported environmental information. The evidence of that is the papers of the folowing authors: Ienciu, Muller and Matis (2011), Galani, Gravas and Stavropoulos (2011), Elsayed and Hoque (2010), Cürük (2009), Hossain and Hammami (2009) and Ku Ismail and Ibrahim (2009). Their researches determined that company industry, size and listing on a stock exchange market, as well as media exposure, have an influence on the quantity of reported environmental information. The authors measured the quantity of information differently, for example, using content analisys of environmental reports or by forming disclosure indexes on the base of chosen variables for that exact purpose. Those countries which strive to imitate developed european countires, in which most companies measure their environmental performance and report environmental information, tend to harmonise their legislation with the European Directive 2003/51/EC. However, researches are also confirmed that the enforcement of the Directive have some obstcles, because measuring of non-financial performance indicators could generate high administrative costs, so some of the European Union member states may choose to exempt small 43 Journal of Accounting and Management companies from the obligation regarding non-financial information (Ianiello, 2010). To those researches can be joined researches of the KPMG audit company. Yearly, KPMG conduct research about corporate social responsibility as well as environmental responsibility. Research which was conducted in the 2011, on the sample of companies from 34 countries and 16 sectors, indicated increasing trend of companies which measure their social and environmental responsibility and inform the public (KPMG, 2011). KPMG also indicates that 70% of stock exchange listed companies report social and environmental performance information. Consequently, it can be concluded that relevant accounting literature, which is dealing with environmental accounting and reporting, is exsisting. This paper will join that literature and environmental reporting issues will be investigated on the sample of companies in Croatia. 4. HYPOTHESIS The majotity of researches, which investigete corporate environmental reporting, have been focused on the analysis of stock exchange listed companies, because these companies are usually obligated to disclose environmental information and to provide stock exchanges their annual reports which contain not only financial statements but also other types of reports, like corporate social and environmental reports. Listed companies are representative sample to reflect the environmental reporting since they are most exposed to the public and are expected to provide most information for decision making (Ienciu, Muller and Matis, 2011). The quantity of reported corporate environmental information, i.e. the quantity of reporting is defined as dependent variable. The quantity of reported information are measured by content analysis of: a) the parts of annual reports which contain information of corporate environmental responsibility or b) the separate reports if they are disclosed by a company on the corporate Internet pages or c) information reported on the other parts of corporate Internet pages. Accourding to previous researches in which content analysis is conducted, in this research content analysis is conducted using the word counter of the disclosed text. Annual reports for the year 2010 and reported information on the corporate Internet pages during the March 2012 were analysed. As independent variables which influence on the quantity of reported information are measured are chosen: a) company industry, b) company size measured by total incomes and c) implementation of quality management system certified according to norms of the series of ISO 14000ff. In previous researches company industry has shown as a significant factor of influence on voluntary reporting practise (see Elsayed and Hoque, 2010; Cürük, 2009 and Ku Ismail and Ibrahim, 2009). It is determined that mostly disclose companies from electronic and computer industry, automotive industry, pro44 Dubravka Krivačić: C ORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES duction of pulp and paper, oil and gas, chemical industry, utilities, whereas companies that are far behind are those which operate in transport, construction and prouction of building materials, trade and retail (KPMG, 2011). The size of a company, as an influence factor on reporting practice, can be measured by the value of total incomes, the value of total assets, the number of employees etc. (see KPMG, 2011; Galani, Gravas and Stavropoulos, 2011; Elsayed and Hoque, 2010; Cürük, 2009; Ku Ismail and Ibrahim, 2009; Hossain and Hammami, 2009 and Pervan, 2006). In this research the size of a companies is measured by the value of total incomes during the 2010. Implemented quality system certified according to norms of the series of ISO 14000ff, as a influence factor on reporting practise, is chosen due to expectation that companies which cerfificated their quality systems according to environmental norms will be more environmentaly responsible and that they will disclose information about their environmental responsibility. Accordingly, following hypothesis are defined: H1: Company industry has statisticaly important influence on the quantity of reported corporate environmental information. H2: The size of a company has statisticaly important influence on the quantity of reported corporate environmental information. H3: Implemented quality system certified according to norms of the series of ISO 14000ff has statisticaly important impact on the quantity of reported corporate environmental information. 5. METHODOLOGY For the research of corporate environmental reporting in this paper is chosen 185 Zagreb Stock Exchange listed companies of different industries. The main reason for that was en expectation that those companies will report environmental information, which is in accordance to conclusions of the KPMG research in which 70% stock exchange listed companies disclose social responsibility information, as well as environmental information. The influence of independent variables on the dependent variable is tested by for this purpose formed regression model: QORi = β0 + β1IND + β2SIZE + β3ISO + ei QORi the quantity of reporting β the coefficient of the explanatory variable (constant) ei the difference between the predicted and observed value of the quantity of disclosure for participant i th (the error term) 45 Journal of Accounting and Management 6. RESULTS The analysis of the research results indicates that 22% of Zagreb Stock Exchange listed companies report some kind of environmental information. In comparison, in Scandinavian countries 70% of companies are reporting that kind of information, and in the United Kingdom and Japan all companies are reporting. Separate environmental reports disclose only 3% of the analysed companies. Only 2% of them report environmental information by using the GRI reporting framework. The median of the number of words by which analysed companies describe their environmental responsibility is 94. To investigate influence of different variables on the quantity of the reporting, firstly were calculated correlation coefficients for all variables which were incorporated in the regression model. The results of the Pearson correlation, presented in the table 1, show that the highest determined correlation between variables (IND, SIZE and ISO) is 0.28, which doesn't indicate to problem of multicollinearity, which means that between independent variables is not determined linear multicorrelation. Table 1 C orrelation matrix QOR QOR IND SIZE ISO 1 .137* .737** .327** IND .137* 1 .055 .238** SIZE .737** .055 1 .278** ISO .327** .238** .278** 1 *. Correlation is significant at the 0.05 level (1-tailed). **. Correlation is significant at the 0.01 level (1-tailed). Source: Author Table 2 D ata about the regression model Mod. R 1 .751a R Adjusted Std. Error of R Square Square R Square the Estimate Change .565 .557 316.966 .565 Change Statistics F Sig. F df1 df2 Change Change 78.251 3 181 .000 DurbinWatson 1.951 Source: Author The absence of multicollinearity is also confirmed with variance inflation factor (the values of VIF is between 1.06 and 1.15) and is shown in the table 3. With Durbin-Watson test, the value of which is 1.951, is determined that there is no problem of autocorrelation in the residuals from the regression model. Heteroskedasticity is also not recorded because calculated significance (Sig.=0.000) is lower than determined level of signification (5%), and the function of the residuals of the regression model is normal. 46 Dubravka Krivačić: C ORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES Table 3 R esults of the regression model testing Model 1 (Constant) DJEL VEL ISO Unstandardized Standardized Coefficients Coefficients t B Std. Error Beta -56.189 31.878 -1.763 67.842 48.308 .071 1.404 1.380E-7 .000 .702 13.739 162.432 74.250 .115 2.188 Sig. .080 .162 .000 .030 Collinearity Statistics Tolerance VIF .943 .922 .872 1.060 1.084 1.146 a. Dependent Variable: QOR Source: Author Testing of the regression model indicated that 55% of the variance of the dependent variable (Adjusted R2=0.557) is explained by the variances of the independent variables. Coefficient of determination (Adjusted R2) refers on variables SIZE and ISO, which are statistical significant. In fact, from the table 3 is visible that the variable company industry (IND) have positive value but is not statistically significant (Sig.=0.162), which means that variable IND is not significant factor of influence on the dependent variable – the quantity of reported environmental information (QOR). Accordingly, H1 can't be accepted. The size of a company (SIZE) is measured by the value of total incomes. From the model is clear that the impact of this variable on the dependent variable is positive and statistically significant on the 5% level of signification (calculated Sig.=0.000), which means that the size of the company has direct influence on the quantity of reported information, whereby H2 is accepted. For the variable implementation of quality system (ISO) certified in accordance to norms of the series of ISO 14000ff is also confirmed significant influence on the dependent variable (Sig.=0.030), whereby H3 is accepted. 7. CONCLUSION The research determined that only 22% of the Zagreb Stock Exchange listed companies report environmental information. It is important to emphasize that only 3% of analysed companies reported separate social responsibility reports, the part of which is environmental information. Only 2% of companies report the results of measured social and environmental performance indicators in according to the GRI Guideline. The results of the research indicate that significant influence on the quantity of reported information has size of the company and implemented quality system certified according to norms of the series of ISO 14000ff, but not company industry. One of the constraints of the research is that it comprised only companies which are listed on the Zagreb Stock Exchange and the fact that was analysed only corporate data available 47 Journal of Accounting and Management on the Internet. For further researches suggestion is to comprise larger as possible number of companies, to determine which environmental performance indicators they measure and which information they report to internal and external users. REFERENCES 1. Cho, C. H., Roberts, R. W.: Environmental Reporting on the Internet by America's Toxic 100: Legitimacy and Self-presentation, International Journal of Accounting Information Systems, Vol.11, No. 1, 2007, p. 1-16 2. Cormier, D., Magnan, M., Van Velthoven, B.: Environmental Disclosure Quality in Large German Companies: Economic Incentives, Public Pressures or Institutional Conditions?, European Accounting Review, Vol. 14, No. 1, 2005 3. Cürük, T.: An analysis of the companies' compliance with the EU disclosure requirements and corporate characteristic influencing it: A case study of Turkey, Critical Perspective on Accounting, No. 20, 2009, p. 635-650 4. Deegan, C., Rankin, M.: The Environmental Reporting Expectations Gap: Australian Evidence, The British Accounting Review, No. 31, 1999, p. 313-346 5. Direktiva 2003/51/EC Europskog parlamenta i Vijeća EU (Directive 2003/51/EC of the European Parlament and of the Council) od 18. lipnja 2003. godine, Official Journal of the European Union, L178/16, dostupno na: http://eur-lex.europa.eu/ 6. Elsayed, M. O., Hoque, Z.: Perceived international environmental factors and corporate voluntary disclosure practices: An empirical study, The British Accounting Review, No. 42, 2010, p. 17-35 7. Finch, N.: Towards an understanding of cultural influence on the international practice of accounting, Journal of International Business and Cultural Studies, Vol. 2, No. 1, 2009, p. 1-6 8. Galani, D., Gravas, E., Stavropoulos, A.: The relation between firm size and environemntal disclosure, International Conference on Applied Economics – ICOAE 2011, p. 179-186 9. Gray, R.: Social and Environmental Accounting and Reporting: From Ridicule to Revolution? From Hope to Hubris? - A Personal Review of the Field, Issues in Social and Environmental Accounting, Vol. 2, No. 1, 2008, p. 3-18 10. Gray, R.: Taking a Long View on What We Now Know About Social and Environmental Accountability and Reporting, Issues in Social and Environmental Accounting, Vol. 1, No. 2, 2007, p. 169-198 11. Gray, R., Thirty years of social accounting, reporting and auditing: what (if anything) have we learnt?, Business Ethics: A European Review, Vol. 10, No. 1, 2001, p. 9-15 12. Gray, R., Kouhy, R., Lavers, S.: Corporate social and environmental reporting: a review of the literature and a longitudinal study of UK disclosure, Accounting, Auditing & Accountability Journal, Vol. 8, No. 2, 1995, p. 47-77 13. Hossain, M., Hammami, H.: Voluntary disclosure in the annual reports of an emerging country: The case of Qatar, Advances in Accounting, Incorporating Advances in International Accounting, No.25, 2009, p. 255-265 14. Ianniello, G.: The voluntary disclosure of the value added statement in annual reports of Italian listed companies, Agric. Econ. – Czech, No. 56, 2010, p. 368-378 48 Dubravka Krivačić: C ORPORATE ENVIRONMENTAL REPORTING – THE ANALISYS OF ZAGREB STOCK EXCHANGE LISTED COMPANIES 15. Ienciu, A., Muller, V., Matis, D.: Environmental reporting within the Romanian companies, International Journal of Energy and Environment, Vol. 5, No. 1, 2011, p. 123-131 16. Jorgensen, T. H., Holgaard, J. E.: Environmental reporting – experiences from Denmark, Division of Technology, Environment and Society, Department of Development and Planning Aalborg University, Aalborg Oest, 2004. 17. Kaya, U., Yayla, H. E.: Remembering Thirty-five Years of Social Accounting: A Review of the Literature and the Practice, MPRA Paper No. 3454, 2007., izlagano na The Balkan Countries 1st International Conference on Accounting and Auditing, 8-9 ožujka 2007, Edirne, Turska 18.KPMG: International Survey of Corporate Responsibility Reporting 2011., dostupno na www.kpmg.com 19. Ku Ismail, K. N. I., Ibrahim, A. H.: Social and Environmental Disclosure in the Annual Reports of Jordanian Companies, Issues in Social and Environmental Accounting, Vol.2, No. 2, 2008/2009, p.198-210 20. O'Connor, L.: Empirical Research in Social and Environmental Accounting: A Meta-review, 2006., dostupno na http://www.vuw.ac.nz/sacl/about/csear2006/papers/ oconnor,larry.pdf 21. Pervan, I.: Voluntary Financial Reporting on the Internet – Analysis of the Practise of Croatian and Slovene Listed Joint Stock Companies, Financijska teorija i praksa, Br. 1, 2006., str. 1-27 22. Preporuke Europske komisije 2001/453/EC (Commission recommendation on the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies 2001/453/EC) od 13. lipnja 2001. godine, Official Journal of the European Communities L156/33, dostupno na: http://eur-lex.europa.eu/ 23. Schaltegger, S., Bennett, M., Burrit, R.: Sustainability Accounting and Reporting, Springer, Dordrecht, Nizozemska, 2006. 24. Spada Ltd.: Environmental reporting: trends in FTSE 100 Sustainability Reports, Ujedinjeno Kraljevstvo, 2008., dostupno na www.spada.co.uk 25. Zakon o računovodstvu, Narodne novine br. 109/07. 49 Journal of Accounting and Management KORPORATIVNO IZVJEŠTAVANJE O ODGOVORNOSTI ZA OKOLIŠ – ANALIZA PODUZEĆA KOJA KOTIRAJU NA ZAGREBAČKOJ BURZI SAŽETAK Zbog potrebe udovoljavanja zahtjevima korisnika računovodstvenih informacija u novije se doba u znanstvenim i stručni krugovima intenzivirala rasprava o potrebi objavljivanja dodatnih informacija o poslovanju poduzeća. Skup računovodstvenih informacija, sadržanih u temeljnim financijskim izvještajima, proširuje se s informacijama o odgovornosti poduzeća za okoliš koje su "proizvod" korporativnog računovodstva okoliša. Ovaj rad usmjeren je na istraživanje izvještavanja o odgovornosti za okoliš poduzeća koja kotiraju na Zagrebačkoj burzi. Cilj je utvrditi u kolikoj mjeri poduzeća izvještavaju o svojoj odgovornosti za okoliš te doći do zaključaka postoji li povezanost između određenih obilježja poduzeća i količine informacija o odgovornosti za okoliš koje poduzeća objavljuju. Ključne riječi: odgovornost za okoliš, izvještavanje o okolišu, ekološka učinkovitost 50 Received: 18.04.2012. Accepted: 06.05.2012. Review article UDC 37/336.717.16 THE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT Tarek Mami1 ABSTRACT The study aims to determine the knowledge, experience and required skill from the accountant to perform her/his functions and duties, and to identify the appropriate teaching techniques and methods for qualifying accounting graduates to carry out such tasks. One of the most important results of this study is that curricula are the most influential and contribution elements of accounting education to raise the efficiency and development of students. Keywords: accounting education, curriculum, accounting profession, accounting research, Libya. 1.INTRODUCTION: Due to the increasing of challenges size in the world economy ,and trade that was imposed by globalization on various countries around the world, including Libya and what's the world undergone of severe economic crisis which hit all countries, in addition to consequences of all this on the domestic economic situation, and what's doing at all levels to reduce its exacerbating, so all of these increases responsibilities of those involved in the accounting profession in general as well as the academic and educational institutions in particular to carry out their duties in the preparation and graduation of professional competencies in the various financial areas those are capable to contribute to implementation of development plans and fulfillment the needs of the labor market of graduates in the field of accounting. 1 Tarek Mami, Faculty of economics, Zawia University, Zawia, Libya 51 Journal of Accounting and Management The comprehensive development is now suffering either from a sharp shortage and scarcity of accounting information for the development or lack of its availability in a timely manner and for appropriate purposes in accurate and correct form, overshadowing the ability of decision makers, whether in private or public sector to put strategies and appropriate plans to reach good decisions when making development decisions that live up to event and urgent challenges facing the economy of Libya such as reduction of oil prices and its impact on reduction of state revenues and influence of all on development projects, which casting a heavy responsibility on those bodies those are entrusted with production of appropriate and correct accounting information, such as departments of companies , departments of government agencies and different sectors, so this casting on the governmental supervisory and control bodies as the accounting bureau and ministries of trade and central banks, a big responsibility to make sure that these accounting information live up to the requirements of international accounting standards ,laws ,systems, regulations and decisions issued by these bodies and its various organs, particularly with regard to full disclosure , transparency and bases of the government. Accounting education occupies a big importance along with many other disciplines, this importance comes because of the specificity of accounting view and the continuous and permanent need of accounting work for business organizations and labor market in the scope of any society. So, accounting is art depends on using the self-capabilities of accountants in judging a lot of economic and financial events those are facing accounting work, also it is science under social sciences which is characterized by classified knowledge with scientific article that could be accessed by study and experience together through different stages of time, as well as it is a well-organized profession that is practiced in practical life according to privacy characterizing by it and making it prominent among other professions they are needed by the society in a permanent and continuous form. The responsibility for the preparation of qualified accountants with academic and professional skills is the duty of several sides, institutions of higher education come in the forefront through formulating, adopting and keeping up teaching methods based on proficiency in academic and professional preparation, namely those focus on providing the learner academic abilities and professional skills and which international organizations called for ,and most notably is the international union of accountants, necessity of moving towards it, whereas the traditional method currently used does not qualify the student as much as required to practice the profession competently, also this method does not take into account concept became widespread recently in the edu52 Tarek Mami : T HE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT cational communities, that is «transferable skills»2, in the sense that the skills those are being developed through various educational stages can be useful for the person when he/she is moving to the stage of employment, thus, this concept can help to know the required skills for working, then acting to integrate them into educational programs, in addition to these developed skills ,the employee could be moved it thereafter in practice at his/her moving between different work environments. It is worth to mention that the accounting education, which gives the knowledge, skills, values a nd ethics, is an education based mainly on the general education3, which is based on non-professional knowledge those are received in either in previous educational stages or at stage of accounting education itself, and examples of such knowledge are: history, human behavior, legal &political sciences, mathematics, language arts, literature, etc., where it can encourage education lifelong if it is studied extensively, and give the base that is built on it professional and accounting studies, so this base may consist of: • Understanding the flow of ideas and events through history, the different cultures of the world today, and international perspectives. • Basic knowledge of human behavior. • Having capacity on horizon of thinking about ideas, issues & different economies, and political & social forces in the world. • Experience in inquiring about quantitative data and evaluating it. • Ability to conduct consultative investigations, keep track of the logical thinking, and understand critical thinking. • Taste of art & literature and appreciate science. • Realization of social& personal values and awareness of inquiry and passing of professional judgment processes. • Experience in passing of professional judgments. Thus, public education is the basis of learning and the acquisition of most required skills for accounting work, like mental and technical skills, interpersonal skills with others and communicate with them, and skills of organization and management of business and others. Results of a study entitled "The future of accounting education in the Arab world" that dealt with curricula of accounting which are taught at 26 2 3 Stephen Fallows & Christine Steven, Integrating Key Skills in Higher Education, ( UK,Glays Ltd, 2000),p8. IFAC Education Committee, IES3: Professional Skills, (www.IFAC.org/store/category.tmpl?category=Education/, October,2003),page 21. 53 Journal of Accounting and Management university in various Arab countries (Libya outside the study sample); have shown that the percentage of coverage of non-accounting topics (general education) with respect to accounting topics reached 21% , while this percentage increases in programs of universities in developed countries to 50%4 ,and when calculating this percentage from the reality of both programs of accounting departments at faculties of economy , Benghazi and Tripoli universities, it was found that it is 31% approximately, and this is a good indication, but does the content of these subjects to the local environment to appropriate quality able to develop these skills? In order to meet the needs of the community of accounting , it had to take an interest in the process of accounting education in which they can prepare academic& professional cadres those are able to fulfill the needs of the growing demand for accounting that is arising from many developments that occur continuously, and to identify qualification and effectiveness of accounting education system in Libya and how to fulfill the required requirements in the light of numerous and rapid developments that occur in various areas of life and what require from study of accounting education reality and its evaluation and then the continuous search for areas of development in it as a matter of taking into account and thereby to maintain the role of accounting and contribute in achieving of the objectives of its educational system, hence the importance of research shows also by highlighting on Libya as one of developing countries that needs to continuous update for development prospects and try to take them, especially in the educational field. The paper organized as follows. Next section (theoretical) discusses accounting education. Section 3 briefly refers to accounting education in Libya. Section 4 process and analysis data. Finally, section 5 I provide results and conclusion. 2. ACCOUNTING EDUCATION: The interest in accounting education is an continuous need, and this interest can be achieved through the availability of correct scientific bases by which it may achieve the purpose of accounting education and accordingly it has to be considered the accounting education as an integrated system consists of a set of interrelated elements to achieve its objectives, the elements are: 1 - Inputs: those are represented in students who can prepare them to practice accounting work. the greatest attention is lying on students themselves in order to be their participation in development of society in general and the business commu4 E.J. Gress, "The Future of Accounting Education in the Arab World" Arab Certified Accountant, July 2003. available in: www. ascasociety .org 54 Tarek Mami : T HE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT nity in particular, thus the educational system focuses on the rehabilitation of students to satisfy the accounting requirements. 2 - Operational processes: those are represented in different education means of curricula, accounting laboratories, field applications as well as qualified scientific staff. A. Curriculum: represent general &comprehensive plan for scientific content, or materials that should be provided by university to the student to qualify his/her for graduation, in order to enter into a realm of life. B. University staff: is one of the most basic elements of the educational process, and the higher level of its efficiency increases the efficiency of the educational process. C. Educational Administration: requires advanced planning, continuous giving for arrangement and development in the educational process, effort for the implementation of collective human work, which seeks for providing appropriate environment to achieve educational goals ,so it is a set of interconnected processes those are integrated with each other to achieve the goal of educational institution. 3 - Outputs: those are represented in qualified graduates to practice accounting work academically and professionally. 4-Feedback: through monitoring, evaluation and developing of the previous elements, and try to correct any deviations. 3. ACCOUNTING EDUCATION IN LIBYA: We can take a brief look at the reality of accounting education at all educational levels as follows: First: accounting education in Libya exercises in secondary school (high school or secondary school), therefore their way to study of accounting isn't considered in most cases, may depends often on the advice of someone or because of inability to complete the study in other branches, or any other side factors ,as well as the number of study years at this stage is from three to four years where the student high school is given secondary school certificate in economic sciences which qualifies him/her for university. Second: high school graduates are accepted in the faculties of management and economics ,as well as the number of study years is four years then the student is given bachelor of accounting science which qualifies him/her for work in accounting. Third: There is no sufficient areas for higher studies within higher education institutions in Libya, where the number of universities that give higher 55 Journal of Accounting and Management diploma, master's and professional master's is limited, and generally Libyan universities don't give a doctorate degree (PhD) in any of disciplines in the field of economic and administrative sciences. 4. PROCESS DATA: The study sample included four main categories of close relationship with the accounting education, and these categories are: 1 – university staff. 2 - The educational curricula. 3 - The students. 4 - Educational administration. The study data has been collected by using questionnaire to find out the views of relevant groups about the reality of accounting education in Libya and prospects of its development. The following table No. (1) shows study population number of six universities those are distributed over parts of Libya, (Tripoli, Benghazi, Al-Markab, Misurata, Gharyan, and Zawia). Table No. (1) Classification Tripoli university Benghazi university Al-Markab university Misurata university Gharyan university Zawia university Total Faculty members 15 28 9 4 17 8 81 Students 700 176 15 117 70 55 1133 The following table No. (2) shows sample individuals number those are distributed over students and faculty members. Table No. (2) Class Students University staff total Sample 182 20 202 Community 1133 81 1214 Source: from registration faculty of economic in universities 56 Percentage 16% 24% Tarek Mami : T HE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT The questionnaire uses (41) paragraph concerning the four elements of education (university staff, curricula, educational administration and students). 5. ANALYSIS DATA: It was used multiple-linear falling equation to measure and analyze the relationship between the elements of accounting education ,to test whether there is a relationship between the efficiency of each of the university staff, and curricula, educational administration to performance of students. Y = b + aX1 + bX2 + cX3 Where y represents the efficiency X1 represents the university staff. X2 represents the educational curricula. X3 represents the educational administration. B represents the constant of falling. The following table No. (3) shows the linear relationship between the efficiency of the students and the efficiency of university staff, curricula and educational performance. Table No. (3) 1 2 3 The multiple Correlation between independent variables Explanatory power of the equation R (R secure) The constant of falling The university staff. The educational curricula. The educational administration B 17.13 0.032 0.29 0.20 Value of (t) 6.27 0.38 3.61 2.63 0.45 0.20 It was shown in Table (3) that B= 17.13 in the sense that any single school vocabulary will get a 17.13 of determined degree for testing the efficiency of the students. It is clear that the efficiency of the university staff doesn't have significance compared to the other elements. Y=17.13+0.032X1+0.29X2+0.29X3 It was done by using analysis of mono-variance to test whether there were significant differences between the performance of university staff and students in the elements of accounting education (university staff ,curricula, and 57 Journal of Accounting and Management educational administration). And Table No. (4) shows the analysis of variance for one dimension between elements of the study: Table No. (4) Source of criticism Between groups Within groups Between groups Curricula Within groups Between groups Students Within groups Between The educational groups administration Within groups The university staff Sum of squares Tabular Degree of Value of F freedom Variance Value of F 5% level of (DF) significance 441.6 2 220.8 197 88.3 2 6.55 197 64.2 2 20.52 7857.16 197 39.88 233.01 2 166.50 197 64.81 2.500 0.34 17398.7 13.11 0.10 0.34 12653.2 41.05 0.51 0.34 1.79 0.34 12768.14 The table shows the absence of statistical significant differences between study groups in their appreciation of variables efficiency, which means accordance of study sample in appreciation. It was used factor analysis to identify connection degree of accounting education components and which one contribute more than other in raising and the developing the accounting education. And Table No. (5) shows the degree of saturation for each of them. Table No. (5) Factors The university staff Curricula The educational administration Degree of influence (saturation) 0.752 0.824 0.707 The table shows that curricula is more influential elements of accounting education, followed by university staff and then the educational administration. 58 Tarek Mami : T HE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT 6.RESULTS: It was shown through the study and statistical analysis the following: 1)the existence of a strong relationship between the curricula of accounting education and developing accounting education in Libya. 2) the presence of a strong relationship between university staff of the accounting education and developing accounting education in Libya. 3) the absence of significant statistical differences between the elements of accounting education in their appreciation of variables efficiency in development of (university staff, curricula and educational administration) which means accordance of study sample for their appreciation. 4) It was shown that the curricula are more influential& contribute accounting education elements and for development of educational process of accounting in Libya. 5) No period of practical training in accounting education programs for the development of the educational process of accounting in Libya. 7.CONCLUSION: Through the above, it is noted that the system of accounting education in Libya would achieve the objectives more effective if it takes into account the set of scientific requirements, which could be clarified according to the following basis: 1) Necessity of attention to the formulation of accounting education curricula, and finding a balance between theoretical subjects and areas of application. 2) Necessity of attention to the continuous development of accounting education curricula, to be consistent with the subsequent and rapid developments worldwide. 3) Urging educational administration to the necessity of providing books, references, periodicals and messages continuously, to be able students to check out the latest scientific researches for helping them in preparation of scientific researches that deals with the problems of society. For example: - The modern sources in areas of various accounting research. - The possibility of printing and reproduction at college. - Modern means of communication such as Internet and e-mail service. - Encouraging participation in seminars and scientific conferences inside and outside of Libya. 4) Working to include accounting education program a period of time for practical training, whether it is concurrent with or after the theoretical study. 59 Journal of Accounting and Management REFERENCES: - Ahmad saleh, and Gao simon(2004),changes, problems and challenges of accounting education in Libya, journal of Accounting education, 13(3),pp365-390. - Bait El-Mal, M., Smith, C. and Taylor, M. (1973), The Development of Accounting in Libya, The International Journal of Accounting, Education and Research, vol. 8, No. 2, pp. 83-101. - E.J. 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[ in Arabic]. - Salem Bengharbia,1992, "accounting teaching and the challenges which confront" 15th Annual conference for European accounting, Spain. - Stephen Fallows & Christine Steven, Integrating Key Skills in Higher Education, ( UK, Glays Ltd, 2000),p8. - Khaled katnani, Khaled ouis,(2008), The appropriateness of accounting education in the curricula of universities Oman To the requirements of the labor market in light of The repercussions of the financial crisis. A QUESTIONNAIRE Paragraphs 1 2 3 4 5 60 University staff university staff have personal qualifications of the teaching profession university staff are interested in guiding hours for students university staff are interested in library- hours for students university staff depend on scientific lecture method university staff encourage students to engage in discussion and exchange of views and ideas during the lecture I agree very much I agree much I agree I agree slightly I disagree Tarek Mami : T HE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT Paragraphs 6 7 8 9 10 11 12 13 1 2 2 3 4 5 6 7 8 I agree very much I agree much I agree I agree slightly I disagree university staff use technical and clarification means in accounting education university staff have experience in the areas of professional fieldwork university staff interested in the scientific method , analysis, study cases and professional scientific problems university staff abide by teaching the subjects of their accurate specialization university staff use system of education portfolios, which includes homework and research activities university staff contribute in conferences and local & foreign seminars, university staff depend on the modern sources in the field of scientific specialization university staff are interested in publishing books and scientific researches Curricula Courses prepare for student an academic appropriate preparation Courses prepare for student an appropriate preparation for the profession Courses develop the accounting capabilities for students Courses raise logical thinking and critical analysis of students Curricula gives students the abstract knowledge and scientific skills Units of study are interrelated and consistent Specific standards are put and abiding by it when preparing courses Subjects courses suit the time limit Courses keep pace with developments in the accounting profession 61 Journal of Accounting and Management Paragraphs 9 10 1 2 3 4 5 6 7 8 9 10 11 62 Specialists and professionals participate in the preparation of curricula Researches of graduates are interested in scientific problems of profession Educational Administration Educational administration provides modern specialized books in the library in general. Educational administration provides periodicals, pamphlets and modern magazines in the library sufficiently Educational administration is interested in practical training programs for students Educational administration is interested in information relating to students (registration, documentation, results of exams, distinguished students) Educational administration makes, scientific and practical activities, conferences and public forums Educational administration provides requirements for appropriate teaching (classrooms, and illustration methods, computers, accounting programs) Educational administration provides information system related to graduates Educational administration benefits from distinguished graduates Educational administration cooperate with accounting department and working parties to conduct researches Educational administration provides financial assistance to needy students, especially the distinguished Educational administration provides university staff with sufficient number and good quality I agree very much I agree much I agree I agree slightly I disagree Tarek Mami : T HE REALITY OF ACCOUNTING EDUCATION IN LIBYA AND PROSPECTS OF ITS DEVELOPMENT Paragraphs 1 2 3 4 5 6 7 I agree very much I agree much I agree I agree slightly I disagree Students Students choose the accounting department to have a real desire for it Students abide with working hours continuously Students feel stability and peace of mind in their professional future Students feel in participation of community development for it relates to the external environment (community) Students are aware of their social, professional and future role Students have personal tendency for education and success Students devote themselves to study OBRAZOVANJE U PODRUČJU RAČUNOVODSTVA U LIBIJI I IZGLEDI ZA NJEGOV RAZVOJ SAŽETAK Cilj studije je odrediti razinu znanja, iskustvo i potrebne vještine računovođe, kako bi mogao pravilno poslovati i ispunjavati obveze, kao i definirati odgovarajuće tehnike i metode podučavanja budućih visoko obrazovanih računovođa, koji bi mogli odgovoriti takvim zadacima. Jedan od najvažnijih rezultata ove studije je činjenica da je curriculum jedan od najutjecajnijih i najvažniji element obrazovanja u području računovodstva, koji podiže razinu učinkovitosti i razvoja studenata. Ključne riječi:obrazovanje u području računovodstva, curriculum, profesionalni računovođa, istraživanje u području računovodstva, Libija. 63 Journal of Accounting and Management INSTRUCTIONS FOR AUTHORS All the papers dealing with the topics of accounting and management are welcome. All the submitted papers are considered for publication and have been blindly peer-reviewed by two independent reviewers. The papers are categorized in the scientific, professional and other papers: o Original scientific paper contains previously unpublished original results of scientific research; o Preliminary communication presents the primary findings of research in progress, which requires urgent publication, but without the level of deep and thorough study required for the original scientific paper; o Review article contains a detailed and comprehensive critical review of a certain problem area, but with no significant originality of the obtained results; o Professional paper contains the information and experience relevant for a certain profession, but without scientific characteristics. o Case study contains a description and detailed information about the particular subject or small group. The Editorial Board determines the category of the paper, based on the reviewers' proposals. The Journal of Accounting and Management is published in two issues a year. All the papers should be submitted by mail or email to the address of the Editorial Office. The authors are obliged to follow these instructions: 1. The manuscripts should be written in English. 2. The manuscript should be submitted in a MS Word format. 3. A cover page should be supplied, containing the title of the paper, name(s) and address(es) of the author(s), including the telephone number, e-mail address and the name and postal address of the author(s) home institution. 4. The full paper should not exceed 10 single-spaced pages of text (font: Times New Roman, size 12) including graphs, tables, endnotes and references. 5. The paper should begin with an abstract of not more than 900 characters and maximum 5 key words 6. The Editors reserve the right to make editorial changes in order to adjust the style of the paper to the Journal. 7. The manuscripts are not returned. 8. No payment is made for publication of the paper and the author receives one copy of the Journal. 65 Journal of Accounting and Management Lay-out & Print: EDiT – Zagreb Printed in 100 copies. Journal of Accounting and Management is published in two issues a year. Journal of Accounting and Management is a free periodical of the Croatian Accountant – Independent Association of Accountants, Tax Advisors and Finance Professionals. 66 Journal of Accounting and Management CROATIAN ACCOUNTANT 9 771848 137005 Vol.2 No. 2, 1-66, December 2012 I SSN 1 8 4 8 - 1 3 7X Journal of Accounting and Management UDC 316.3/336.2/336.7/347.7/37 Vol. 2 No. 2 1-66 ISSN 1848-137X Croatian Accountant December 2012