Download this Paper Open PDF in Browser

Selling-Price Estimates in Revenue Recognition and Earnings Informativeness

51 Pages Posted: 27 Dec 2007 Last revised: 19 Mar 2013

Anup Srivastava

Tuck School of Business at Dartmouth

Date Written: March 15, 2013


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 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 such selling-price estimates on the contracting and informational roles of financial statements. Particularly, I examine the setting of SOP 97-2 (AICPA 1997), which removed software firms’ flexibility to recognize revenues using selling-price estimates. I find that the extent to which firms use revenue accruals to manage earnings declined after SOP 97-2 was implemented. Yet, the overall frequency of earnings management did not decline, indicating that firms shift to alternative modes of earnings management when constrained from using revenue estimates to manage earnings. In addition, I find that the value relevant information contained in earnings declined post-SOP 97-2 implementation. Yet, this information was not entirely lost from financial statements, because the deferred-revenue accounts now contain more value-relevant information than before, and a firm’s topline performance is now better ascertained by analyzing both revenue and deferred-revenue accounts. This study shows 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.

Keywords: Revenue Recognition, Standards Setting, Relevance, Earnings Management, Accounting Rules, FASB, IFRS

JEL Classification: G14, G38, M41, M44, L86

Suggested Citation

Srivastava, Anup, Selling-Price Estimates in Revenue Recognition and Earnings Informativeness (March 15, 2013). Review of Accounting Studies, Forthcoming. Available at SSRN: or

Anup Srivastava (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

Paper statistics

Abstract Views