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

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

48 Pages Posted: 7 Jul 2006 Last revised: 19 Jul 2013

See all articles by Joanne Horton

Joanne Horton

University of Warwick - Warwick Business School

Richard H. Macve

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

George Serafeim

Harvard Business School

Date Written: 2011

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.

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

JEL Classification: M41, M44

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: https://ssrn.com/abstract=913363

Joanne Horton

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
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 Business School ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=15705

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
975
Abstract Views
6,672
Rank
43,320
PlumX Metrics