Abstract

http://ssrn.com/abstract=913363
 
 

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‘Deprival Value’ vs ‘Fair Value’ Measurement for Contract Liabilities: How to Resolve the ‘Revenue Recognition’ Conundrum?


Joanne Horton


University of Exeter Business School

Richard H. Macve


London School of Economics & Political Science (LSE) - Department of Accounting and Finance

George Serafeim


Harvard University - Harvard Business School

2011

Accounting and Business Research, 41, no. 5: 491–514.

Abstract:     
Revenue recognition and measurement principles can conflict with liability recognition and measurement principles. We explore here under different market conditions when the two measurement approaches coincide and when they conflict. We show that where entities expect to earn ‘super profits’ (residual income) the conceptual conflict is exacerbated by the adoption of ‘fair value’ (FV) as the measurement basis for assets and liabilities rather than the more theoretically grounded approach of ‘deprival value/relief value’ (DV/RV) which better reflects the impact of, and rational management response to, varying market conditions. However, while the problems of balance-sheet liability and revenue recognition, and the related problems of income statement presentation, can be resolved by the application of DV/RV reasoning, this is not sufficient fully to resolve issues of the appropriate timing of profit recognition. Performance measurement issues still need to be addressed directly. The standard setters’ current projects on ‘revenue recognition’, ‘insurance contracts’, and ‘measurement’ therefore need broadening to consider the pervasive issue of accounting for internally-generated intangibles.

Number of Pages in PDF File: 48

Keywords: Fair value, deprival value, contract liabilities, revenue recognition

JEL Classification: M41, M44

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Date posted: July 7, 2006 ; Last revised: July 19, 2013

Suggested Citation

Horton, Joanne and Macve, Richard H. and Serafeim, George, ‘Deprival Value’ vs ‘Fair Value’ Measurement for Contract Liabilities: How to Resolve the ‘Revenue Recognition’ Conundrum? (2011). Accounting and Business Research, 41, no. 5: 491–514.. Available at SSRN: http://ssrn.com/abstract=913363

Contact Information

Joanne Horton
University of Exeter Business School ( email )
Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom
Richard H. Macve (Contact Author)
London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )
Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6138 (Phone)
+44 20 7955 7420 (Fax)
George Serafeim
Harvard University - Harvard Business School ( email )
381 Morgan Hall
Boston, MA 02163
United States
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=15705
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