Increased Managerial Discretion in Revenue Recognition and the Value Relevance of Earnings

Abstract

Accounting Standards Update (ASU) 2009-13 and ASU 2009-14 were issued with the purpose of reporting revenues and earnings that more closely reflect the transfer of goods and services to customers. Although these standards allow managers greater discretion to accelerate the revenue recognition for multiple deliverable sales arrangements, we find no evidence that managers use this increased discretion to manage earnings or revenue to meet or just beat important benchmarks. Rather, we find that the increased discretion to accelerate revenue recognition afforded by ASU 2009-13 and 2009-14 results in higher quality accruals and increases the value relevance of earnings. These results should be of interest to researchers and other stakeholders interested in the impact of changes in accounting standards that allow managers more discretion and judgment in recognizing revenue. In addition, these results should be of interest to standard setters as they evaluate the potential impact of ASU 2014-09, which overhauls and converges U.S. and international revenue recognition standards and provides managers with greater discretion in revenue recognition.