Dr. Castro examines discretion in revenue recognition under ACS 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.

The study, “Discretion in Revenue Recognition After ASC 606,” was co-authored by Castro with Sedat Erdogan, Ph.D., Assistant Professor of Accounting at The University of Texas Rio Grande Valley, and David Folsom, Ph.D., Assistant Professor of Accounting at The University of Texas at El Paso. Recently published in Accounting Forum, the research focuses on ASC 606, a revenue recognition standard that gives managers greater flexibility when accounting for complex transactions that require professional judgment.

The researchers found that companies most affected by ASC 606 reported higher revenue growth and smaller changes in unearned revenue after the standard was implemented. Their reported earnings also appeared to provide investors with more useful information about company performance.

At the same time, the study found that increased flexibility may create opportunities for managers to use their judgment strategically. Companies most affected by ASC 606 were more likely to meet or exceed earnings and revenue forecasts when facing pressure to meet analysts’ expectations.

The findings highlight an important trade-off in accounting standards. Greater discretion can allow financial statements to more accurately reflect the economic realities of complex transactions, while also creating opportunities for that discretion to be used strategically when managers face pressure to achieve certain financial results.