Selling-price estimates in revenue recognition and the usefulness of financial statements

Selling-price estimates in revenue recognition and the usefulness of financial statements Revenue is one of the largest and most value-relevant items in firms’ financial statements. Based on the “realizable” and the “earned” criteria of SFAC No. 5 (FASB in Concepts statement no. 5. Recognition and measurement in financial statements of business enterprises, 1984), revenues should reflect both selling price and timing of delivery. Of those two aspects, selling-price estimates are required for revenue recognition when standalone selling prices for products and services are not available. In this study, I examine the effects of selling-price estimates in revenue recognition on the contracting and informational roles of financial statements. Particularly, I examine the setting of SOP 97-2 (AICPA in Software revenue recognition. Statement of Position (SOP) 97-2, AICPA, New York, 1997) that removed software firms’ flexibility to recognize revenues using selling-price estimates. I find that SOP 97-2 implementation did not improve the contracting role of earnings. However its implementation partly shifted the informational role of financial statements from income-statement to balance-sheet components. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Selling-price estimates in revenue recognition and the usefulness of financial statements

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-013-9263-6
Publisher site
See Article on Publisher Site

Abstract

Revenue is one of the largest and most value-relevant items in firms’ financial statements. Based on the “realizable” and the “earned” criteria of SFAC No. 5 (FASB in Concepts statement no. 5. Recognition and measurement in financial statements of business enterprises, 1984), revenues should reflect both selling price and timing of delivery. Of those two aspects, selling-price estimates are required for revenue recognition when standalone selling prices for products and services are not available. In this study, I examine the effects of selling-price estimates in revenue recognition on the contracting and informational roles of financial statements. Particularly, I examine the setting of SOP 97-2 (AICPA in Software revenue recognition. Statement of Position (SOP) 97-2, AICPA, New York, 1997) that removed software firms’ flexibility to recognize revenues using selling-price estimates. I find that SOP 97-2 implementation did not improve the contracting role of earnings. However its implementation partly shifted the informational role of financial statements from income-statement to balance-sheet components.

Journal

Review of Accounting StudiesSpringer Journals

Published: Dec 19, 2013

References

  • Discretionary accruals and earnings management: An analysis of pseudo earnings targets
    Ayers, B. C.; Jiang, X.; Yeung, P. E.
  • An empirical evaluation of accounting income numbers
    Ball, R; Brown, P
  • Audited financial reporting and voluntary disclosure as complements: A test of the confirmation hypothesis
    Ball, R; Jayaraman, S; Shivakumar, L
  • The role of accruals in asymmetrically timely gain and loss recognition
    Ball, R; Shivakumar, L
  • Earnings management to avoid earnings declines across publicly and privately held banks
    Beatty, A; Ke, B; Petroni, K

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