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 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, earnings calls continue to focus on backlog, even among firms that report RPO. 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.


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

with Petrus Ferreira

Revise & Resubmit at Journal of Accounting Research


Net income and cash flow from operations (CFO) differ systematically in both the activities they represent and the timing of recognition and realization. These distinctions are obscured in the indirect format of the statement of cash flows (SCF), which presents a reconciliation based on aggregated adjustments with limited interpretability. We develop a structured reconciliation, grounded in core accounting principles, that disaggregates net income into three distinct components: non-CFO income, accrual income, and CFO included in income. These components exhibit distinct properties, differing in volatility, persistence, and predictive ability. We find that firms with a higher share of CFO included in income exhibit greater analyst forecast accuracy and significantly higher abnormal returns. Moreover, their relative composition varies across the firm life cycle, with CFO included in income representing the largest and most persistent component. Our findings suggest that this activity- and timing-based reconciliation improves the informativeness of the SCF and offers practical insights for ongoing standard-setting efforts.


Re-examining the Timing Role of Accrual Accounting

with Petrus Ferreira, Brian Rountree, and Konduru Sivaramakrishnan

Revise & Resubmit at The Accounting Review


Dechow and Dichev (2002) shows that accruals, which play a timing role, must bear a contemporaneous negative relation with the component of cash flows not included in income (CF). Despite the widespread use of this relationship in research on accruals quality, all empirical implementations use cash flows from operations (CFO) as a proxy for CF. We posit that CFO includes cash income that poses no timing issues and, therefore, introduces measurement error when assessing accruals quality using the accrual-cash flow relation. We show that this measurement error has increased systematically over time and is the primary driver of the intertemporal shift in the accrual-cash flow relation documented in Bushman et al. (2016). Correcting for this measurement error restores a stable accrual-cash flow relation over time, suggesting that the timing role of accruals remains unchanged. While other studies propose alternate explanations for the intertemporal shift in the accrual-cash flow relation, our study contributes by addressing the root cause of this shift.

* Indicates the presentation was delivered by a coauthor