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REVENUE RECOGNITION
Introduction
The FASB (Fin |
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The FASB (Financial Accounting Standards Board), in Statement of Financial Accounting Standards No. 16 issued in June 1977, stated that, with exceptions for prior interim periods of a current year, "all items of profit and loss recognized during a period, including accruals of estimated losses from loss contingencies, shall be included in the determination of net income for that period." That requirement appears to be straightforward and not subject to misinterpretation. In fact, however, the requirement is frequently violated, although the reason for such action is more likely to be purposeful manipulation of income and expenses, as opposed to a misinterpretation of the FASB requirement. This research examines the intent of revenue and expense recognition requirements, and considers some examples is the misapplication of these requirements. Revenue and Expense Recognition Requirements and Their Intent In the mid 1970s, the American Institute of Certified Public Accountants (AICPA) Committee on SEC Regulations requested that the FASB consider the criteria for prior period adjustments, as those criteria were stated in APB Opinion No. 9 (Reporting the Results of Operations), and to provide further guidelines for the application of such criteria. APB Opinion No. 9 stated, among other things, that prior period adjustments were limited to "those material adjustments which (a) can be specifically identified with and directly related to th
hile 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 t
Category: Economics - R
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