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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Accounting and Public Policy, Volume 29, Issue 1, January–February 2010, Pages 82–95
I examine whether managers use discretion in revenue recognition to avoid three earnings benchmarks. I find that managers use discretion in both accrued revenue (i.e., accounts receivable) and deferred revenue (i.e., advances from customers) to avoid negative earnings surprises, but find little evidence that discretion is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I find evidence that managers do not prefer to exercise discretion in either account. However, further tests show that managers preferred to use discretion in deferred revenue before the Sarbanes–Oxley Act of 2002 went into effect, consistent with them choosing to manage an account with the lowest real costs to the firm (i.e., future cash consequences). My results suggest that the revenue recognition joint project undertaken by the FASB and IASB to reduce managerial estimation in revenue recognition may have the unintended consequence of leading to greater real costs imposed on shareholders as firms are likely to use even greater discretion in accounts receivable.
Revenue recognition is a timely issue as evidenced by the revenue recognition joint project currently undertaken by The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).1 Depending on the nature of a firm’s business, there is an accrual and a deferral that relates to the amount of revenue recognized in an accounting period: accounts receivable and deferred revenue, respectively.2 I examine both accounts to see if discretion in revenue recognition is used to achieve three earnings benchmarks common in the literature: avoidance of losses, avoidance of earnings decreases, and avoidance of negative earnings surprises. Accrued revenue (i.e., accounts receivable) and deferred revenue (i.e., advances from customers) present a unique opportunity to examine how managers choose between two different types of earnings management. I test whether firms with both accounts available to them exhibit a preference for discretion in the accrual or deferral account. I provide an intuitive explanation for why discretion in the deferral (i.e., deferred revenue) would be preferred. First, gross accounts receivable is managed primarily through real business activities, such as easing credit policies. Management of deferred revenue, on the other hand, represents a situation where cash has already been received. Thus, management of deferred revenue relates to manipulation of accounting estimates. Managing gross accounts receivable is more costly to firms as it relates to accelerating sales where cash has not yet been collected. Thus, it has future cash consequences whereas deferred revenue does not. I construct a model for the normal change in short-term deferred revenue to determine abnormal changes in short-term deferred revenue.3 I derive a similar model for the normal change in gross accounts receivable to determine abnormal changes in gross accounts receivable. I use gross accounts receivable in lieu of net accounts receivable because abnormal changes in net accounts receivable could reflect changes in the allowance for bad debt and I am solely interested in discretion in revenue recognition (i.e., the revenue account).4 I estimate pre-managed earnings by removing the discretionary component related to the account in question (Dhaliwal et al., 2004 and Frank and Rego, 2006), and then test whether abnormal changes in each of these revenue accounts are greater than expected for firms with pre-managed earnings that just miss an earnings benchmark. Next, I examine firms with both accounts to see if managers prefer one account as a means for discretion in revenue recognition. My results indicate that both deferred revenue and accounts receivable are managed in an attempt to avoid negative earnings surprises. I find little evidence that either are managed to avoid losses or earnings decreases. In addition, I provide evidence that firms preferred to exercise discretion in deferred revenue relative to accounts receivable to avoid negative earnings surprises but that the Sarbanes–Oxley Act of 2002 mitigated this preference. My study makes several contributions to the literature. First, I provide the first descriptive evidence on deferred revenue, showing that many high technology industries have it on their balance sheets. Second, I provide the first comprehensive analysis of revenue manipulation in relation to all three earnings benchmarks and show that discretion is used to avoid negative earnings surprises but find little evidence for the other two benchmarks. My results provide empirical support for the comprehensive revenue recognition project undertaken by the FASB and the IASB. My results suggest that the current earnings process model for revenue recognition is subject to managerial discretion. Third, my study is the first to examine a common sample of firms with revenue deferrals and accruals used to increase revenue and see whether managers exhibit a preference regarding management of these accounts. I provide evidence that deferred revenue is the preferred earnings management account prior to the Sarbanes–Oxley Act of 2002, indicating managers prefer to minimize real costs to the firm. My results suggest that no such preference exists following the Sarbanes–Oxley Act of 2002. My finding of no preference following the Sarbanes–Oxley Act of 2002 suggests that if the FASB and IASB’s proposed asset and liability model for revenue recognition is successful in reducing discretion in deferred revenue, it could lead to significantly more discretionary revenue recognition through gross accounts receivable. This would impose more real costs on the firm. Fourth, I derive a discretionary model of deferred revenue. The remainder of my paper is organized as follows. Section 2 reviews the relevant literature and develops hypotheses. Section 3 introduces the research design. Section 4 provides results of my study, and Section 5 contains implications of my study.
نتیجه گیری انگلیسی
I examine whether managers use accounting discretion in two accounts related to revenue recognition, short-term deferred revenue and gross accounts receivable, to avoid missing three common earnings benchmarks. My evidence suggests that managers accelerate the recognition of revenue using both accounts when pre-managed earnings miss the analyst benchmark by a small amount. Using a common sample, I find that managers preferred to exercise discretion in deferred revenue as opposed to accounts receivable to avoid negative earnings surprises prior to the passage of SOX. I offer an explanation why deferred revenue would be the preferred account. Managing deferred revenue has lower real costs relative to accounts receivable. However, if managers do not have a choice they will choose a mechanism that does have negative future consequences in order to avoid negative surprises in the current period. Finally, I introduce a discretionary model for deferred revenue that future researchers can use when studying deferrals. My results have implications for policy makers and auditors. First, although not the focus of my study, my results suggest that significant discretion in revenue recognition remains post-SAB 101. This finding provides empirical support for the comprehensive revenue recognition project currently in progress at the FASB and the IASB.33 The project proposes the adoption of an asset and liability model for recognizing revenue. The asset and liability model would replace the current earnings process model that is often subject to managerial estimation error. Under the current earnings process model, estimates have to be made by managers as to when revenue has been recognized and changes to assets and liabilities are residuals of this revenue. In contrast, the asset and liability model recognizes revenue based on changes in the underlying assets and liabilities and the recognized revenue is the residual. This model takes a contract-based view, which considers when revenue should be recognized based on a customer perspective, not based on a manager’s perspective. Standards setters should also examine my evidence regarding whether a preference exists for discretion in revenue recognition. While a common allegation is that managers are near-sighted at the expense of long-term value creation, my results suggest that managers expressed a preference for the revenue recognition mechanism that had the least long-term consequences before the passage of SOX. Results in this study suggest that future policy should consider trade-offs between alternate revenue recognition mechanisms and consider that some managerial discretion can be more harmful in the long-term than others. While the asset and liability model to revenue recognition may represent the solution to reducing discretion in deferred revenue, it could also have the undesirable effect of leading to significantly more discretionary revenue recognition through gross accounts receivable. My results suggest that firms had a preference for deferred revenue in the pre-Sarbanes–Oxley period. However, this preference no longer exists in a post-Sarbanes–Oxley period. Thus, such a shift to an asset and liability model could ultimately result in more real costs being imposed on shareholders. Finally, my results provide evidence suggesting that auditors and financial statement users should be cognizant of discretion in deferred revenue.