Research


WORKING PAPERS


From Regulation to Standard-Setting: The Questionable Evolution of Revenue Commitment Disclosures


Using a rare quasi-natural experiment, I evaluate two recent disclosure reforms on the reporting of revenue commitments: the FASB's introduction of remaining performance obligations (RPO) under ASC 606 and the SEC's 2020 coincidental removal of the longstanding backlog disclosure mandate under Regulation S-K. Both agencies questioned the usefulness of backlog, with the FASB asserting the superiority of RPO without a transparent cost-benefit analysis. Following the SEC's amendments, 12% of firms that consistently disclosed backlog ceased doing so, despite no decline in its predictive value. Contrary to the FASB's stated concerns, firms, on average, use consistent measurement practices when reporting backlog to the Census Bureau and the SEC. In contrast, under the principles-based measurement regime, RPO disclosures exhibit significantly greater firm-specific variation, consistent with greater managerial discretion. My primary analysis shows that backlog significantly outperforms RPO in predicting future revenue. Moreover, RPO's predictive ability stems largely from the common information it shares with backlog, whereas backlog’s idiosyncratic component has substantial incremental predictive power. These results are unaffected by any structural shifts during COVID-19. After controlling for endogeneity, RPO has no predictive value when firms adopt the FASB's practical expedient and limit disclosures to long-term contracts, creating a real loss of information. In contrast, voluntary disclosures accompanying backlog enhance its informativeness. Finally, analyst forecast revisions are only associated with backlog. Collectively, these findings illustrate how paternalistic regulation (i.e., rules based on regulators’ beliefs and imposed without robust cost–benefit analysis) can unintentionally degrade the capital market information environment.



Re-examining the Timing Role of Accrual Accounting

with Petrus Ferreira, Brian Rountree, and Konduru Sivaramakrishnan

Revise & Resubmit at The Accounting Review


Prior research documents that the negative contemporaneous relation between total accruals and cash flows from operations (CFO) has weakened over time and interprets this pattern as evidence that the timing role of accruals has become less prominent. We reexamine this interpretation by distinguishing between cash income, which introduces measurement error in estimating the timing role, and non-income cash flows, which represent the relevant construct for accrual-related cash flows. We show that the cross-sectional variation of cash income has increased over time, whereas the variation of non-income cash flows has remained stable. Once cash income is removed from CFO, the negative relation between accruals and timing-relevant cash flows is stable. Our findings indicate that the documented decline in the standard accrual--cash flow relation primarily reflects increasing measurement error in CFO and help reconcile conflicting inferences from cross-sectional and firm-specific time-series estimations related to the timing role.



A Conceptual Framework for Income and CFO Reconciliation: Informational and Standard-Setting Implications of a Structured Approach

with Petrus Ferreira


Net income and cash flow from operations (CFO) differ systematically in both the activities they include and the timing of recognition and cash realization. These distinctions are obscured in the indirect statement of cash flows, which reconciles net income to CFO through aggregated adjustments with limited interpretability. We develop a structured reconciliation that disaggregates net income into three components: non-CFO income, accrual income, and CFO included in income—the portion of current-period income contemporaneously realized in cash. These components differ in volatility, persistence, and predictive ability. CFO included in income is the most persistent component and provides incremental predictive ability for future income beyond established performance measures. Firms with a higher share of CFO included in income exhibit greater analyst forecast accuracy and more positive forecast revisions. Portfolio tests show that hedge returns based on this share are concentrated in the months after portfolio formation. Together, the forecast-revision and return results are consistent with the share of CFO included in income reflecting a public signal whose implications are not fully incorporated immediately into analyst expectations and prices. Overall, our findings suggest that an SCF-based reconciliation reveals a more informative structure of current-period income, with implications for financial analysis and SCF presentation.

* Indicates the presentation was delivered by a coauthor