Revenue Recognition Practices Research Articles

How did IFRS 15 affect the revenue recognition practices and financial statements of firms? Evidence from Australia and New Zealand

We provide evidence on how International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers, affected the revenue recognition practices and financial statements of firms in Australia and New Zealand. While firms used the modified retrospective method more than the full retrospective method, the usage varied by firm size. Although the majority of sample firms (63.38%) reported that the standard had either no impact or no material impact on their financial statements, the remaining 36.62% disclosed IFRS 15 impacts in notes to financial statements. The disclosure of impacts varied by sectors and firm size. The standard did not affect the accounting for standard retail sales transactions. However, it resulted in the deferral of revenue recognition for the majority of firms whose revenue recognition was impacted by the standard. For firms that disclosed IFRS 15 impacts on financial statements, revenue was the most affected item. Cost of goods sold, contract liabilities, and profit after tax were three other most affected financial statement items. Finally, the standard affected financial statements through multiple channels.

Discretion in revenue recognition timing and comparability: Evidence from the implementation of SOP 97-2

An objective of financial reporting regulation is to encourage the production of decision-useful information. This paper examines the association between the level of discretion allowed in accounting standards and comparability, a key characteristic of decision-useful reporting. To study this link, I investigate changes in comparability around regulation SOP 97-2, which decreased discretion in the timing of revenue recognition on software-related transactions. Using a difference-in-differences research design, I find a positive association between discretion and comparability for affected firms, relative to control firms. This result is attenuated for firms with low reporting quality prior to the rule change and those that experienced a larger direct impact on their revenue recognition practices. This paper furthers understanding of the linkage between reporting discretion and the decision-usefulness of accounting outputs. Additionally, the results highlight the complex interactions between various financial reporting attributes.

Revenue recognition practices in South Africa: An analysis of the decision usefulness of IFRS 15 disclosures

The paper analyses the first-time adoption of IFRS 15 and reports on the appropriateness, rigour and decision usefulness of revenue disclosure practices in South Africa. The decision usefulness is assessed by reviewing the nature, amount, timing and uncertainty of revenue recognition information. A disclosure checklist was used for the content analysis and interpretation of a selection of South African listed companies. In most instances, revenue disclosures appeared to be orderly, concise, coherent and appropriately cross-referenced, indicating that generally companies were able to deal appropriately with entity-specific information regarding the nature, amount and timing of revenue recognition. Specifically, the disaggregation of revenue, the accounting policies and the transitional requirements were applied appropriately. However, two main concerns were identified, which compromise the decision usefulness of revenue recognition. Firstly, misalignment between the IFRS 15 information in the annual financial statements and the interim financial statements was identified in the first year of the application of IFRS 15. The finding indicates that some entities need to start their process of adopting a new financial reporting standard earlier. Secondly, specific assumptions and judgments regarding revenue recognition, determining the transaction price and measuring obligations for returns, refunds and other similar obligations were not always disclosed. Insufficient disclosure specifically regarding the uncertainty of revenue recognition could compromise the decision usefulness of revenue information. The findings of this paper contribute to the understanding of the first-time adoption implications of new accounting standards, such as IFRS 15.

Corporate governance quality and premature revenue recognition: evidence from the UK

Purpose Since 2005, wide-ranging concerns have been raised about misleading revenue recognition practices, especially during and after the 2008–2009 global financial crisis. There is a lack of research into the relationship between corporate governance (CG) mechanisms and premature revenue recognition (PRR). The paper aims to discuss these issues. Design/methodology/approach This paper uses a generalised least squares regression analysis of a sample of 854 FTSE 350 firm–year observations. Stubben (2010) discretionary revenue (DR) model is used to measure PRR as it is considered less biased, better specified and more likely to reduce measurement error than accrual models. Findings The results suggest that the size of audit committees plays an effective role in constraining PRR. Moreover, PRR is more likely to be curbed in the presence of small boards comprising a higher proportion of non-executive directors. Additional tests reveal that the relationship between board size and PRR is non-linear. Research limitations/implications The findings address the concerns of corporate firms, capital providers, UK regulators and standard-setters regarding misleading revenue recognition practices and should be considered while setting new governance reform recommendations in response to changing economic conditions. Originality/value This is the first study that adopts the DR model of Stubben (2010) to capture PRR and examines its association with CG internal mechanisms. Moreover, the paper considers an important time period – from 2005 to 2013 – in which many significant developments took place.

Revenue Recognition (Topic 606) at Salesforce.Com, Inc

This case uses an array of carefully selected and excerpted revenue recognition related information contained in Salesforce.com's January 31, 2019, 10-K. Maria, the fictional protagonist, is seeking to understand those disclosures as part of her preparation for an upcoming job interview with the company. As such, she is relying on those disclosures to provide insights as to the company's main product/service lines, the events that signal when and how much revenue the company has earned (i.e., the essence of its business model), along with the related official generally accepted accounting principles (GAAP) criteria pertinent to the valuing and timing of recorded revenues. Excerpt UVA-C-2428 Rev. Jun. 5, 2020 Revenue Recognition (Topic 606) at Salesforce.com, Inc. After her previous review of the revenue recognition information provided by General Dynamics and Ford Motor Company (Ford) in their recent 10-K reports, Maria had become intrigued by the Financial Accounting Standards Board's (FASB's) latest revenue recognition and disclosure requirements. Prior to the FASB's issuance of its comprehensive new revenue recognition guidance and its follow-on official addendums and interpretations (all currently published as Accounting Standard Codification [ASC] 606, and often referred to simply as Topic 606), companies had to consider a myriad of revenue recognition rules, from various sources, with potentially contradictory and/or ambiguous requirements. Moreover, Maria had learned that many, if not most, of the known financial reporting frauds or misstatements in the recent past had pertained to companies' misreporting revenues. In general, those guilty companies had “pushed the envelope” in finding rationales for recording more revenues sooner than they should have. Topic 606 was largely intended to clarify what companies could do in reporting revenues for fiscal years beginning in 2018. One knowledgeable pundit summed up the arrival of Topic 606 onto the contemporary financial reporting scene in a particularly poignant way, stating, “The new accounting rules are considered by many to be the biggest change to accounting standards in the last 100 years. Noncompliance is a huge risk. Revenue recognition errors are the biggest reason for earnings restatements. Earnings restatements can lead to firings, fines, and even jail time.” The convergence of two desires were motivating Maria to take another look at some examples of the now-in-force revenue recognition practices. First of all, she was interested in companies that operated in the software-as-a-service (SaaS) industry sector. Second, she had an interview with Salesforce.com, Inc., next week, and she wanted to be well prepared. In particular, she had heard it expressed that the revenue recognition practices and related disclosures of a company were an informative window into a company's business model. She wanted to be well-versed on that for her interview. Before heading to San Francisco for her corporate interview, she assembled some important revenue-related information from the company's most recent 10-K, filed with the US Securities and Exchange Commission (SEC) (see Exhibits 1–3). Maria's Tasks . . .

Amalan Pengiktirafan Hasil Oleh Institusi Wakaf, Zakat, Dan Baitulmal Di Malaysia

This article presents a critical review of revenue recognition practices among the institutions administering waqf, zakah and baitulmal (WZB) in Malaysia. Through a content analysis of financial statements and focus group discussions with the accountants and management of the five WZB institutions, the findings show that different revenue recognition practices have been employed, particularly in recognizing revenues of waqf for specific purpose and in recognizing ‘faraid’ properties or portion of estates of a deceased person that belong to baitulmal. Furthermore, the review of practices of the sample institutions reveals different pointof recognition of ‘luqatah’ as revenue and diverse measurement basis were used in revenues recognition. The findings provide understanding on the current practices of recognition of the various types of revenues administered by the institutions of WZB. The findings can also be used as inputs in developing Islamic accounting standards that will harmonize the accounting and reporting practices among WZB institutions. Keywords: waqf, zakah, baitulmal, revenue recognition, Islamic accounting

Revenue Recognition at TSA, Inc.—A Roller Coaster Ride

ABSTRACT This case chronicles revenue recognition practices at TSA, Inc. from 1997 to 2002. As growth in TSA's revenue declined, the company's revenue recognition practices became more aggressive. In 2002, TSA's incoming auditors re-evaluated its revenue recognition policies and restated its financial statements for three prior years. The case provides a real-world situation with complex contracts through which students can improve their understanding of the five-step revenue recognition process under ASC 606, which became effective in fiscal year 2018 for most public entities. Further, it is a rich setting in which to illustrate the judgment and complexity involved in revenue recognition. The case provides students with an opportunity to approach revenue recognition from different perspectives—that of corporate accountant, manager, external auditor, and investor—and is designed for use in Intermediate Accounting as well as in capstone accounting courses at both the undergraduate and graduate levels.

Microstrategy Incorporated: PIPE

In mid-June 2000, MicroStrategy CEO Michael Saylor is considering an investment of $125 million of convertible preferred stock in his firm by a group of private investors including Citadel Investment Group LLC. The offer comes at a difficult time for the company, because only three months earlier, its stock had reached a record price of $300 per share. At that point, the company had registered a $1 billion seasoned equity offering. Shortly thereafter, the company was forced to restate its earnings after running afoul of the SEC for its revenue-recognition practices. Although the restatement did not change the company's cash-flow position, it did result in an SEC investigation and the cancellation of the stock offering. In order to meet Saylor's ambitious plans for MicroStrategy, additional funding must be obtained. With public-market funding sources shut off, students must evaluate what the best course of action is for the firm at this moment. Students are asked to evaluate a new form of venture financing called private investments in public enterprises (PIPE). PIPEs differ from conventional floating-rate convertibles in that the conversion price in most cases can only be adjusted downward. The case considers both the pros and cons of these investments.

Microstrategy Incorporated: Pipe

In mid-June 2000, MicroStrategy CEO Michael Saylor is considering an investment of $125 million of convertible preferred stock in his firm by a group of private investors including Citadel Investment Group LLC. The offer comes at a difficult time for the company, because only three months earlier, its stock had reached a record price of $300 per share. At that point, the company had registered a $1 billion seasoned equity offering. Shortly thereafter, the company was forced to restate its earnings after running afoul of the SEC for its revenue-recognition practices. Although the restatement did not change the company's cash-flow position, it did result in an SEC investigation and the cancellation of the stock offering. In order to meet Saylor's ambitious plans for MicroStrategy, additional funding must be obtained. With public-market funding sources shut off, students must evaluate what the best course of action is for the firm at this moment. Students are asked to evaluate a new form of venture financing called private investments in public enterprises (PIPE). PIPEs differ from conventional floating-rate convertibles in that the conversion price in most cases can only be adjusted downward. The case considers both the pros and cons of these investments. Excerpt UVA-F-1368 Rev. Dec. 20, 2010 MICROSTRATEGY INCORPORATED: PIPE I just hope I don't get up one day and have to look at myself in the mirror and say: “You had $ 15 billion and you blew it all. There's the guy who flushed $ 15 billion down the toilet.” —Michael Saylor in the New Yorker, April 2000 In the middle of June 2000, Michael Saylor sat in his office thinking about an investment proposal that his company—MicroStrategy—had just received from a private investment group. The group, made up of Citadel Investment Group, Promethean Asset Management LLC, and Angelo, Gordon & Co., had offered to invest $ 125 million in MicroStrategy in the form of a floating-rate convertible bond. This investment constituted a new type of venture investing called private investment in public enterprises (PIPE). While Saylor welcomed the offer, he was concerned that the terms of the deal might put downward pressure on MicroStrategy's stock at the expense of existing shareholders and himself, as owner of 57% of the outstanding shares. . . .

Audit Committee Effectiveness and Discretionary Revenues: Evidence from the UK after the 2008 Financial Crisis

The vast majority of prior research tackling the impact of audit committee effectiveness (ACE) on financial reporting quality (FRQ) has been conducted in the United States (US) where rules-based accounting standards exist, and before the 2008 global financial crisis. Targeting the United Kingdom (UK) principle-based context, we examine the impact of audit committee characteristics on FRQ after the 2008 financial crisis, using a sample of 662 FTSE 350 firms listed in the London Stock of Exchange. As surrogates for FRQ, we employ two measures expected to detect two substitute types of earnings management. Our first measure, which contributes to the uniqueness of this study, is discretionary revenues used to address UK regulators’ and standard setters’ widespread concerns for misleading revenue recognition practices during and after the financial crisis, and discretionary accruals, which is the most prevalent earnings management proxy over prior studies. Our results indicate that audit committees are associated with better FRQ only when the latter is proxied by discretionary revenues. Specifically, we find that audit committee independence and audit committee size are effective characteristics in curtailing revenue manipulations in the post-financial crisis period.

The Roles of Receivables and Deferred Revenues in Revenue Management

First, I propose a specific accruals model approach that utilizes the exact income statement and exact cash flow measures, which underlies the matching function of accruals. Second, using revenue manipulators identified by SEC enforcement actions and firms that manage to just meet or beat revenue benchmarks, this paper shows how researchers and regulators can detect aggressive revenue recognition not only by abnormal changes in accounts receivables, but also by abnormal changes in current and long-term deferred revenues. The most robust application is to technology, internet, and software companies, whose elusive revenue recognition practices are of concern to the SEC, FASB, and IASB (e.g., ASU 2014-09 (Topic 606) and IFRS 1).

Corporate Revenue Miscalculations & The Impact On Stakeholders

Corporate earnings restatements are regarded as one of the most significant issues in accounting today. While there are various factors that can influence profitability, revenue is the key contributor to a business net income. During the 2000s, a multitude of domestic and multinational corporations faced significant issues with their revenue recognition practices. Although the investing public might regard any revenue restatement as laden with possible fraud, this is not always the case. Multinational firms face dual accounting systems, such as U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Currently, similarities and differences between the accounting systems exist. However, key differences between GAAP and IFRS may cease to exist in upcoming years due to the Financial Accounting Standards Boards (FASBs) and the International Accounting Standards Boards (IASBs) joint effort to converge the two systems. Throughout this paper, examples of revenue miscalculations will be presented as well any penalties levied by the U.S. Securities & Exchange Commission against implicated corporations. Accordingly, the impact that revenue blunders have on shareholder wealth will be examined. Finally, the authors will present recommendations for mitigating revenue errors in the future.

Growing Pains at Groupon

ABSTRACTOn November 4, 2011, Groupon Inc. went public with an initial market capitalization of $13 billion. The business was formed a couple of years earlier as an offshoot of “The Point.” The business grew rapidly and increased its reported revenue from $14.5 million in 2009 to $1.6 billion in 2011. Soon after going public, prior to its announcement of its first-quarter results, the company's auditors required Groupon to disclose a material weakness in its internal controls over financial reporting that impacted its disclosures on revenue and its estimation of returns.This case uses Groupon to motivate discussion of financial reporting issues in e-commerce businesses. Specifically, the case focuses on (1) revenue recognition practices for “agency” type e-commerce businesses, (2) accounting for sales with a right of return for new products, and (3) use of alternative financial metrics to better convey the intrinsic value of a business. The case requires students to critically read, analyze, and apply authoritative accounting guidance, and to read and analyze communications between the Securities and Exchange Commission (SEC) and the registrant.

Enron/Off: A Morality Play In Three Acts

The Enron collapse has many facets. It is particularly rich in financial reporting and disclosure issues. This case addresses some of Enrons creative revenue recognition practices and the role Special Purpose Entities and derivatives played in Enrons reported success and ultimate failure. The role of Enrons board of directors and senior management is also covered. The case is designed for use in intermediate and advanced accounting and management courses. It includes some suggested instructional questions.

Valuation consequences of regulatory changes in revenue recognition: Evidence from advertising barter sales

Abstract This study compares the valuation of advertising barter sales recognized under APB Opinion No. 29, relative to transactions recorded under EITF Issue No. 99-17. EITF 99-17 was the FASB's response to the perception that Internet-related firms were overstating revenue. The results indicate an inverse relation between price-to-sales ratios and the amount of advertising barter recorded under APB 29 by e-tailing firms. In contrast, we find no evidence of a discount for similar transactions recognized under EITF 99-17. This change in value relevance is consistent with increased credibility of recorded revenue. These results have implications for revenue recognition practices and accounting regulation.

Restatements Due to Improper Revenue Recognition: A Neural Networks Perspective

ABSTRACT: The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SEC 1999) in an attempt to curb improper revenue recognition practices. Nonetheless, revenue restatements and the subsequent earnings restatements have continued unabated. Our goal is to contribute to the emerging technologies literature by applying the neural networks methodology to the study of revenue restatements. We also compare the results of the neural network classification with classifications obtained from multiple discriminant analysis (MDA) and logistic regression (Logit) models. Six financial and governance variables were used to train the neural network on a sample of 180 firms, and the model was validated using a holdout sample of 51 additional firms. The results show that the neural network model has superior predictive power for predicting revenue restatement firms when compared to the MDA and Logit models. However, the Logit and MDA models predict nonrevenue restatement firms better. Moreover, when misclassification costs are included, the neural network (NN) model performs the best with the lowest relative misclassification costs.

What Counts as Sales Revenue in B-to-B Transactions? The Regulatory and Marketing Management Issues

ABSTRACT The rules governing what qualifies as sales revenue are surprisingly complex. In fact, revenue recognition has become one of the hottest areas of investigation by the Securities and Exchange Commission. Based upon a review of literature from the fields of accounting, finance, marketing and management, this article explains the common practices and motivators that trigger improper sales revenue recognition in B-to-B marketing transactions. A model of marketing actions and financial performance is developed that emphasizes the need for expanding firm performance criteria for formulating and implementing marketing strategy tactics, in an effort to control the improper revenue recognition practices. A classification scheme is also developed that broadly categorizes the motivators into four main groups, including those that are primarily triggered by (1) the firm's desire to obtain some favorable resource or response from an external third party, (2) some aspect of the firm's marketing strategy failure and (3) the employee's personal enrichment goals, and (4) the lack of knowledge of the GAAP guidelines. All four groups of the motivators result in misleading the firm's sales revenues, hence are fraudulent in nature. We provide guidelines for curbing the revenue recognition lapses through sales-force training, with an emphasis on ethical rules of conduct for corporate behavior, and the design of marketing strategy formulation and its implementation. We also identify several areas and directions for future research.

The Effects of Accelerated Revenue Recognition on Earnings Management and Earnings Informativeness: Evidence from SEC Staff Accounting Bulletin No. 101

The SEC issued Staff Accounting Bulletin (SAB) No. 101 to address its concern that firms were masking true performance by managing earnings using accelerated revenue recognition. Critics of this Accounting Bulletin stated that it would eliminate industry-accepted revenue recognition practices and reduce the quality of reported earnings. The FASB's revenue recognition discussions echo these concerns stating that revenues recorded prior to the completion of the earnings process contain value-relevant information about future performance. This paper investigates these two hypotheses using a sample of firms that accelerated revenue recognition prior to SAB No. 101 adoption (SAB 101 firms) and a matched set of firms that were unaffected by this regulation (unaffected firms). Our earnings distribution tests indicate that SAB 101 firms are more likely to meet earnings benchmarks. Specifically, we find that, in the pre-adoption period, SAB 101 firms report fewer small negative and more small positive earnings than they do in the post-adoption period and than do unaffected firms in the pre-adoption period; SAB 101 firms report fewer small negative and more small positive earnings changes in the pre-adoption period compared to the post-adoption period. We also document that SAB 101 firms are more likely to have weaker corporate governance and more likely to have financial covenants, providing them with greater incentives to manage earnings. However, we find that the association between earnings and future cash flows and between unexpected earnings and earnings announcement period returns were higher for SAB 101 firms than for unaffected firms in the preadoption period, indicating higher earnings informativeness for SAB 101 firms. These associations declined for SAB 101 firms in the post-adoption period, suggesting that SAB No. 101 caused a decline in earnings informativeness. Overall, our results suggest that, although the revenue recognition practices targeted by SAB No. 101 have been used by some firms to manage earnings, the regulation's prohibition of revenue recognition prior to completion of the earnings process, on average, results in less informative earnings since these unearned revenues provide value-relevant information.

The Case of MicroStrategy, Inc.: SAB 101, Revenue Recognition, and Stock Valuation

In this article, the authors use the MicroStrategy case to demonstrate how firms sometimes adopt an aggressive revenue recognition strategy in their eagerness to show improved firm performance. Though such a strategy may provide a higher short-run market valuation for the firm, it often has negative consequences in the longer term. MicroStrategy's regulatory problems stemmed from the new Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB 101), issued in December 1999. The Bulletin was meant to provide guidance for accounting professionals to improve their financial reporting. Adherence to SAB 101 guidelines should result in more conservative revenue recognition practices and will provide investors with a more accurate picture of company performance.

Motives for Early Revenue Recognition: Evidence from SEC Staff Accounting Bulletin (SAB) 101

The adoption of SAB 101, a regulation affecting revenue recognition, was controversial. The SEC argued that firms were using their revenue recognition practices to manage earnings, while opponents asserted that eliminating accepted revenue recognition practices would decrease the quality of reported earnings. This paper investigates these two competing hypotheses. We find evidence that some firms affected by SAB 101 had been using the targeted revenue recognition practices to manage earnings to meet important benchmarks and reduce their contracting costs, and that the correlation between earnings and cash flows was lower for these firms. However, we also find a decline in the correlation between earnings and cash flows after the implementation of SAB 101 for all firms affected by this regulation. These results raise questions about the effectiveness of this regulation.