Selling-price estimates in revenue recognition and the usefulness of financial statements
Review of Accounting Studies
Login to get access
Revenue is one of the largest and most value-relevant items in firms’ financial statements. Based on the “realizable” and the “earned” criteria of SFAC No. 5 (FASB in Concepts statement no. 5. Recognition and measurement in financial statements of business enterprises, 1984
), revenues should reflect both selling price
and timing of delivery
. Of those two aspects, selling-price estimates are required for revenue recognition when standalone selling prices for products and services are not available. In this study, I examine the effects of selling-price estimates in revenue recognition on the contracting and informational roles of financial statements. Particularly, I examine the setting of SOP 97-2 (AICPA in Software revenue recognition. Statement of Position (SOP) 97-2, AICPA, New York, 1997
) that removed software firms’ flexibility to recognize revenues using selling-price estimates. I find that SOP 97-2 implementation did not improve the contracting role of earnings. However its implementation partly shifted the informational role of financial statements from income-statement to balance-sheet components.