Economic Consequences of Adopting a Uniform and Principle-Based Revenue Recognition Standard: Early Evidence from ASC 606 Adoption

• In Event: Forecasting

Abstract

This study examines whether adopting the principle-based revenue recognition standard (ASC 606) that replaces existing rule-based revenue recognition standards affects the usefulness of reported revenues of firms that are materially affected by the new standard. Using a difference-in-differences research design, we compare the changes in value relevance and analyst forecast revisions of firms materially impacted by the adoption of ASC 606 to those that are not materially affected. We find that the increase in the value relevance of reported revenues is more pronounced for firms that are materially impacted by the new standard than for firms that are immaterially impacted. The results also suggest that relative to firms not materially impacted by the new standard, analysts consider revenue surprises of firms materially impacted under the new revenue recognition standards more informative than those under the old standards in forecasting future revenues. We also provide evidence on the determinants of the transition method choice (full versus modified).

Authors

• Hyungshin Park, Kennesaw State University

• Siqi Li, Santa Clara University

• Amanda Badger, Santa Clara University