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The Impact of Increased Managerial Discretion and of Adoption Disclosure Transparency on the Usefulness of Reported Revenues: Evidence from Accounting Standard Updates for Multiple-Deliverable Sales Arrangements

Although conceptual frameworks of the Financial Accounting Standards Board and the International Accounting Standards Board identify relevance and faithful representation as the fundamental qualitative characteristics of useful information, prior research suggests that revenue recognition accounting standards which restrict management discretion resulted in improved faithful representation but reduced relevance of reported revenues. We use the adoption of Accounting Standards Update (ASU) 2009-13 and ASU 2009-14 to examine the effects of increased management discretion to accelerate revenue recognition in multiple-deliverable arrangements. We find that increased discretion in revenue recognition results in an increase in the relevance of reported revenues without reducing faithful representation. We further examine whether managers’ strategic motivations influence the transparency of ASU 2009-13 and ASU 2009-14 adoption disclosure. Despite no evidence of a decline in faithful representation following the standards’ adoption, firms providing less transparent adoption disclosure are more likely than other firms with multiple-deliverable arrangements to opportunistically accelerate revenue recognition in the years after adoption when incentives are high. These results provide important evidence in assessing whether standards that allow greater discretion in revenue recognition affect the usefulness of revenues, and also provide evidence that strategic motivations to preserve flexibility in managing earnings influence the transparency of adoption disclosure.