‘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
Date Written: 2011
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: Suggested Citation
Response to the Financial Accounting Standards Board's and the International Accounting Standard Board's Joint Discussion Paper Entitled, 'Preliminary Views on Revenue Recognition in Contracts with Customers'