Let me tell you a little bit more about the website. First, as described on the website,

The rankings are based on the research paper, “Accounting Program Research Rankings By Topic and Methodology,” forthcoming in Issues In Accounting Education . These rankings are based on classifications of peer reviewed articles in 11 accounting journals since 1990.

Note also that the accounting research program rankings are based on the faculty who are currently at a particularly university. So, for example, if a researcher moves from university X to university Y, all of her publications will be included in the ranking calculation for university Y on this site. So, the underlying assumption about accounting program research is that the strength is portable—it travels with faculty members.

Well, I’ll not spend any more time telling you about the website or the paper. Instead, I encourage you to visit the Accounting Program Research Rankings by BYU website, and decide what you think. As with any research, there are important limitations and you are likely to have questions and concerns. But even with those limitations and concerns that you are bound to note, there is a tremendous amount of knowledge (we might even call it transparency, if we knew how to define that) conveyed in this data and the insightful way the authors have tabulated it.

Speaking of transparency and in the interest of full disclosure, all of the researchers who wrote the article and created the website have ties to BYU, where I am a faculty member. I am proud of the work my colleagues have done on this website, and I apologize if I haven’t been skeptical or balanced enough in this post. My goal here is simply to point you to the site and let you draw your own conclusions. Enjoy, and start your timers now…

The recent Financial Reporting Issues Conference clarified a number of normative questions that still need to be answered:

• What is the appropriate scope of the revenue recognition standard?  If certain commercial transactions or industries (like insurance or leasing) should be excluded from the scope of revenue recognition, on what basis?
• What are the best ways to distinguish ‘performance obligations’ from other liabilities?  The performance obligation is an obligation to the customer that, when satisfied, results in the recognition of revenue.   Must one identify obligations to customers without reference to management intent or the firm’s business model — and if so, how can that be done?
• How does one distinguish between the sale of a product and the delivery of a service?  This question is closely related to the boundary between the revenue recognition project and the leasing project.
• What is the best operational definition of ‘control’ — a critical issue, since a transfer of control satisfies the performance obligation and results in revenue?

These are just a few of the questions that occur to me, and I am sure other attendees are puzzling over many more.  We are looking for academics (individuals and teams) who are interested in identifying researchable positive questions that will help provide a basis for answering these normative questions.   (See here for my view on positive and normative research.)

Join us at 11am ET on Wednesday, December 09, as we discuss some takeaways from the conference and start a conversation about research directions for revenue recognition.

p.s.  A similar call for research on leasing will be issued soon.

RESEARCH DIRECTIONS
The FASB and IASB have issued Preliminary Views on Revenue Recognition in Contracts with Customers, and expect to publish an exposure draft in 2010.   The revenue recognition model proposed in the document differs from current practice in several ways:  by applying a different model for recognizing and measuring revenue; by applying that model across all industries, rather than providing industry-specific models; and by relying on general principles, rather than detailed rules.  These differences provide opportunities on both the substance of revenue recognition models, and on the guidance for implementation that would need to be provided along with general principles-based standards.

Research on Revenue Recognition Models
A 2003 report by FASB Staff identified four ‘conventions’ appearing in revenue recognition guidance, each basing revenue recognition and measurement on different events:  changes in fair values of assets and liabilities; proportionate performance of production or service; sale and delivery of assets; and collection of proceeds from customers after performance has occurred.   The Preliminary Views propose a model relying heavily on the sale and delivery of assets to customers as part of an enforceable contract.  The proposed model could substantially delay revenue recognition in long-term construction (which can currently recognize revenue for proportionate performance).

Research could examine the decision-usefulness of the proposed model relative to existing practice, especially in industries that are most affected by the proposed changes.  Such research might include:

• Experiments assessing financial statement users’ judgments and decisions
• Surveys examining how expert assessments of appropriate accounting vary across circumstances that are presumed to create the current variation in practice across industries (such as the reliability of fair value estimates, and the timing and certainty of cash inflows and outflows before and after transfer).
• Archival studies examining the variations in the predictive power and value relevance of reported revenue across industries, countries and/or time periods.

All of these studies are likely to be most useful if independent variables can be clearly related to the variables underlying the four revenue recognition conventions (such as market prices, production, cash expenditures and cash collections), as well as variables that play key roles in the proposed model (such as the presence of an enforceable contract and factors indicating a transfer of control).   Such studies might help the FASB determine whether the scope of the general revenue recognition model must be narrowed to exclude certain types of business and transactions.

Research on Implementation Guidance
The FASB also faces challenges in determining what type of implementation guidance to provide as part of any update to revenue recognition standards.  Currently, practitioners can find extensive guidance on revenue recognition in the Accounting Standards Codification (originally developed in Statements of Financial Accounting Standards, FASB Staff Positions, FASB Technical Bulletins, FASB Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position, and in AICPA and AcSEC Practice Bulletins).  As it prepares to base revenue recognition on a broad model that spans all industries, and replace rules with principles, the FASB could benefit from better understanding how existing guidance is being used, and how new and existing guidance would be used after the passage of a principles-based standard. Research might include:

• Experiments examining how new and existing guidance would be used in different circumstances
• Surveys examining how existing guidance is currently used in different countries and industries
• Archival studies examining the factors that lead to the generation of implementation guidance and rules that clarify principles-based standards

APPLICATION PROCESS
Applicants should submit a letter of interest, along with a CV, to Jeffrey Wilks (FASRI Revenue Recognition Research Coordinator), Robert Bloomfield (FASRI Director) or Jeffrey Hales (FASB Research Fellow) no later than January 4th, 2010.  The letter should demonstrate that the applicant, individually or as part of a team, possesses the research expertise needed to conduct and oversee research of sufficient quality to warrant publication in a peer-reviewed academic outlet, and is willing and able to work with FASRI staff to revise and refine their questions as necessary, as issues under deliberation are clarified.  Evidence of progress on particular research questions on revenue recognition (as described above) is helpful, but not necessary.  The letter should be no more than two pages in length.  Letters will be reviewed by Wilks, Bloomfield, and Hales, with input from the FASRI Editorial Board and FASB staff members from the standard setting project(s) being targeted in the proposal.  The Editorial Board consists of Professors Robert Bloomfield, Jeffrey Hales, Lisa Koonce, Robert Lipe, Ray Pfeiffer and Jeff Wilks.

Researchers are welcome to apply as research teams or as individuals.  At least one member of each team must be employed as a faculty member at an institution accredited by the AACSB or an international equivalent.  Successful applicants will be expected to travel to FASB offices in Norwalk, CT as appropriate.  However, there is no expectation that consulting duties will impinge on time devoted to their current institution any more than other ambitious research projects.

MORE INFORMATION
Potential applicants can find more information from the FASRI website, and from FASRI Round Tables focusing on the targeted FASB projects described above.  Featured speakers have and will include FASB project managers, FASB and IASB constituents, and leading academic researchers. Applicants are strongly encouraged to participate in Round Table discussions on the topic prior to submitting a letter of interest.  These discussions will help in identifying key issues of interest to current standard setting deliberations, and clarifying both the opportunities and the challenges of conducting research in concert with the FASB.  Researchers seeking more information should contact FASRI Director, Professor Robert Bloomfield, Cornell University (rjb9 at cornell.edu) and/or the FASB Research Fellow, Professor Jeffrey Hales, Georgia Institute of Technology (jwhales at fasb.org).

TERMS AND CONDITIONS
At the conclusion of the project, research consultants will submit a report informing the Board about the nature and outcome of the research.  Researchers and research teams will also be strongly encouraged to write their own independent articles for submission to peer-reviewed academic outlets.  We anticipate that researchers will retain complete intellectual property rights over the output of any research they conduct in the capacity of a research consultant, including survey or experimental stimuli created for experiments or surveys, data collected, or other documents.  However, consultants are not permitted to disclose any documents or communications received from FASB employees, unless those are already in the public record, or the researcher has obtained explicit consent allowing disclosure.

“[D]isaggregation by nature provides the most relevant information for financial decision-making. As the DP itself recognizes, disaggregation by nature better reflects the economic drivers and provides information investors need to evaluate risks and trends and to better assess the amounts, timing, and riskiness of a company’s future cash flows.”

Preparers argue that providing such information would be prohibitively expensive, because internal bookkeeping and reporting systems are not typically devised to provide this information.  A comment letter from the Institute of Management Accountants goes even further, arguing that the high cost of changing systems also proves that the information would not be useful to users.  From the letter:

“It is important to note that management is generally not generating or utilizing direct cash flow data to run their businesses. They rely primarily on operating earnings metrics, supplemented by balance sheet metrics and cash flow data generated through the use of indirect-method processes. Companies have spent millions of dollars designing and installing financial systems to gather this data. If management felt additional cash flow granularity was an important information component for understanding and running the business, they would have already made choices to invest in this or similar capabilities. Therefore, we question the necessity of this detail and the value it would provide for outside investors.”

I have heard many times that FASB staff and Board members are skeptical of preparers’ views of what users do or should find useful.  After all, users are in a much better position to judge their own information needs.  However, this argument seems to have more merit, as it isn’t simply cheap talk – preparers are putting their money where their mouths are.  But is the interpretation so simple?  Some observations:

• The foundation of principal-agent theory is that managers’ objectives differ from the objectives of those that hire them (the stockholders).  So clearly the IMA argument is not the end of the story.
• On the other hand, the existence of some moral hazard doesn’t completely kill the argument — stockholders implement incentive schemes to align managers’ and shareholders’ objectives (albeit imperfectly).  To the extent that reporting serves a stewardship function (influencing managers’ actions) rather than purely a capital allocation function, I think the argument is reasonably persuasive unless we believe that moral hazard problems are very severe.
• However, if we ignore the stewardship function of reporting, there might be a completely different counterargument. Even if there were no moral hazard issues, and managers and investors’ interests were perfectly aligned, it might still be that the information useful in running a business is simply different from the information useful in valuing a business.

There must be some literature on this topic … any insights would be greatly appreciated!

Rob

“[D]isaggregation by nature provides the most relevant information for financial decision-making. As the DP itself recognizes, disaggregation by nature better reflects the economic drivers and provides information investors need to evaluate risks and trends and to better assess the amounts, timing, and riskiness of a company’s future cash flows.”

Preparers argue that providing such information would be prohibitively expensive, because internal bookkeeping and reporting systems are not typically devised to provide this information.  A comment letter from the Institute of Management Accountants goes even further, arguing that the high cost of changing systems also proves that the information would not be useful to users.  From the letter:

“It is important to note that management is generally not generating or utilizing direct cash flow data to run their businesses. They rely primarily on operating earnings metrics, supplemented by balance sheet metrics and cash flow data generated through the use of indirect-method processes. Companies have spent millions of dollars designing and installing financial systems to gather this data. If management felt additional cash flow granularity was an important information component for understanding and running the business, they would have already made choices to invest in this or similar capabilities. Therefore, we question the necessity of this detail and the value it would provide for outside investors.”

I have heard many times that FASB staff and Board members are skeptical of preparers’ views of what users do or should find useful.  After all, users are in a much better position to judge their own information needs.  However, this argument seems to have more merit, as it isn’t simply cheap talk – preparers are putting their money where their mouths are.  But is the interpretation so simple?  Some observations:

• The foundation of principal-agent theory is that managers’ objectives differ from the objectives of those that hire them (the stockholders).  So clearly the IMA argument is not the end of the story.
• On the other hand, the existence of some moral hazard doesn’t completely kill the argument — stockholders implement incentive schemes to align managers’ and shareholders’ objectives (albeit imperfectly).  To the extent that reporting serves a stewardship function (influencing managers’ actions) rather than purely a capital allocation function, I think the argument is reasonably persuasive unless we believe that moral hazard problems are very severe.
• However, if we ignore the stewardship function of reporting, there might be a completely different counterargument. Even if there were no moral hazard issues, and managers and investors’ interests were perfectly aligned, it might still be that the information useful in running a business is simply different from the information useful in valuing a business.

There must be some literature on this topic … any insights would be greatly appreciated!

Rob