lities, (f) shifting current revenue to a later period, and (g) shifting future expenses to the current period. Practices (a) through (e) have the effect of inflating current period income, while practices (f) and (g) have the effect of reducing current period income.
Examples of the Misapplication of Revenue and Expense Recognition Requirements
In 1987, profits at Stone & Webster Engineering Corp. were $3.28 per share. Over the following three years, however, profits deteriorated to the point where they reached a low of $0.50 per share in 1990. In 1991, however, a turnaround appeared to take place. Revenues increased to $273.2 million in 1991 from $262 million in 1990, and earnings per share increased from 1990's $0.50 to $1.08 in 1991. In the first quarter of 1992, the rebound appeared to continue, when earning per share in the first quarter of 1992 were $0.22 compared to $0.10 in the first quarter of 1991, and first quarter revenues in 1992 were $66.9 million compared to just $65.3 million in the first quarter of 1991.
All of the apparent good new was not, however, what it appeared to be. In the context of operations, Stone & Webster, instead of posting and earnings per share increase of $0.52 in 1991 ($1.08 in 1991 compared to $0.50 in 1990), actually posted a one cent per share loss from $0.50 in 1990 to $0.49 in 1991. That result left a $0.53 per share gain to be explain.
The explanation was that the $0.53 per share earnings gain was entirely the result of an accounting change. The accounting change was related to the company's funding of employee pension benefits. In 1991, Stone & Webster Engineering Corp. began recognizing income on investments dedicated to the funding of employee retirement benefits. This investment income accounted for 52 percent of the company's 1991 earnings per share, and more than 100 percent of the company's reported gain in earnings per share.
This misrecognition of revenue did ...