Strategic Revenue Recognition to Achieve Earnings Benchmarks
Marcus L. Caylor
Kennesaw State University
February 10, 2009
Journal of Accounting and Public Policy, Forthcoming
I examine whether managers use discretion in revenue recognition to avoid three earnings benchmarks. I find that managers use discretion in both accrued revenue (i.e., accounts receivable) and deferred revenue (i.e., advances from customers) to avoid negative earnings surprises, but find little evidence that discretion is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I find evidence that managers do not prefer to exercise discretion in either account. However, further tests show that managers preferred to use discretion in deferred revenue before the Sarbanes-Oxley Act of 2002 went into effect, consistent with them choosing to manage an account with the lowest real costs to the firm (i.e., future cash consequences). My results suggest that the Revenue Recognition joint project undertaken by the FASB and IASB to reduce managerial estimation in revenue recognition may have the unintended consequence of leading to greater real costs imposed on shareholders as firms are likely to use even greater discretion in accounts receivable.
Keywords: Revenue recognition, earnings surprises, earnings management, accounts receivable, deferred revenue, Sarbanes–Oxley Act
JEL Classification: M40, M41, M43, M49, G14, G38, G29Accepted Paper Series
Date posted: July 31, 2009
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