Keywords

revenue recognition, managerial discretion, relevance, faithful representation, disclosure transparency

Abstract

Although the FASB and IASB conceptual frameworks identify relevance and faithful representation as the fundamental qualitative characteristics of useful information, prior research suggests that revenue recognition accounting standards that restrict managerial discretion resulted in improved faithful representation but reduced relevance. We use the adoption of Accounting Standards Update (ASU) 2009-13 and ASU 2009-14 to examine the effects of increased managerial discretion to accelerate revenue recognition in multiple-deliverable arrangements; that is, transactions where vendors sell multiple products or services that are delivered at different points in time. We find that increased discretion results in an increase in the relevance of reported revenues without reducing faithful representation. We further examine whether managers’ strategic motivations influence the transparency of ASU 2009-13 and ASU 2009-14 adoption disclosure. Although firms providing opaque adoption disclosure do not exhibit a decline in the faithful representation of revenues following the standards’ adoption, these firms are more likely than firms providing transparent adoption disclosure to accelerate revenue recognition opportunistically following adoption when incentives are high. These results provide important evidence for assessing whether standards that allow greater discretion in revenue recognition affect the usefulness of revenues and also provide evidence that strategic motivations to preserve flexibility in managing earnings influence the transparency of adoption disclosure.

Original Publication Citation

Myers, L. A., R. Schmardebeck, T. A. Seidel, and M. D. Stuart. 2022. The impact of managerial discretion in revenue recognition: A reexamination. Contemporary Accounting Research 39 (3): 2130-2174.

Document Type

Peer-Reviewed Article

Publication Date

2022

Publisher

Contemporary Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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