Revenue Recognition in a Multiperiod Agency Setting

44 Pages Posted: 25 Jul 2000

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Xiao-Jun Zhang

University of California, Berkeley; China Academy of Financial Research (CAFR)

Date Written: June 2000

Abstract

The principles that govern the recognition of revenues (and expenses) are the key determinants of the properties of accrual accounting information. This paper studies the revenue recognition question from a stewardship perspective. Our results show that it is optimal to carry products at their historical costs until revenues are realized. Revenues are considered realized when the amount of associated cash flows can be measured in an objective and verifiable fashion. In contrast, we demonstrate that mark-to-market accounting, although sensible from an equity valuation perspective, generally does not provide efficient aggregation of raw information to solve the stewardship problems. In particular, mark-to-market accounting based on anticipated performance of the manager does not necessarily induce the manager to actually deliver such performance. Our analysis also identifies situations where the realization principle needs to be modified with the asset valuation rule of lower-of-cost-or-market. Such results highlight that conservatism may be a desirable feature of accounting measurements for managerial performance evaluation purposes.

JEL Classification: M41, D82, J33

Suggested Citation

Dutta, Sunil and Zhang, Xiao-Jun, Revenue Recognition in a Multiperiod Agency Setting (June 2000). Available at SSRN: https://ssrn.com/abstract=231128 or http://dx.doi.org/10.2139/ssrn.231128

Sunil Dutta

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-643-1229 (Phone)
510-643-1412 (Fax)

Xiao-Jun Zhang (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
871
Abstract Views
4,852
rank
38,527
PlumX Metrics