Examining discretion in revenue recognition under ASC 606
New research by SUNY Polytechnic Institute (SUNY Poly) assistant professor of accounting Dr. Angelica Castro examines how changes to accounting standards have affected the way companies report revenue and the discretion managers have when making financial reporting decisions.
A recent study by SUNY Polytechnic Institute assistant professor Dr. Angelica Castro and her colleagues explores the impact of the new revenue recognition accounting standard ASC 606, published in Accounting Forum. The research, titled "Discretion in Revenue Recognition After ASC 606," examines how the flexibility granted by the standard has affected companies' financial reporting decisions and performance.
The study found that companies most affected by the implementation of ASC 606, which provides managers greater discretion when accounting for complex transactions, reported higher revenue growth and smaller changes in unearned revenue. Additionally, the earnings of these companies provided investors with more useful information about the company's performance.
However, the research also highlights that increased flexibility may create opportunities for managers to strategically use their judgment. In situations where companies faced pressure to meet analysts' expectations, those most affected by ASC 606 were more likely to meet or exceed earnings and revenue forecasts. This indicates that increased discretion in financial reporting can both improve reporting accuracy and enable strategic judgment when managers are under pressure to achieve certain financial results.
Overall, the study emphasizes the trade-off between allowing financial statements to accurately reflect the economic realities of complex transactions and the potential for increased discretion to be used strategically under certain circumstances.
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