I investigated whether implementing SOP 97-2, the revenue-recognition standard
for the software industry, reduces earnings informativeness. This standard is particularly
important for two reasons: First, its provisions coincide with provisions of SAB 101, the
current general revenue-recognition standard. Second, the software industry provides a
laboratory setting for examining multiple-element firms, whose revenue-recognition
challenges keep mounting as more and more firms bundle multiple products and
services. I found that implementing SOP 97-2 leads to additional revenue deferrals and a
decline in earnings informativeness. However, the market prices these deferrals as
revenues, as if these amounts had not been deferred. Moreover, the proforma earnings,
which I calculated by undoing the revenue deferrals, more strongly correspond with
market returns than do the reported earnings. My findings indicate that the accounting
numbers calculated using the pre-SOP 97-2 revenue-recognition rules more strongly
correspond with market returns than do those calculated using SOP 97-2. My findings
should interest FASB in its project on developing a new revenue-recognition standard.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/85892 |
| Date | 10 October 2008 |
| Creators | Srivastava, Anup |
| Contributors | Swanson, Edward P. |
| Publisher | Texas A&M University |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation, text |
| Format | electronic, born digital |
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