Revenue Recognition in the Construction Industry: An Experimental Study

There have been suggestions that loan officers do not consider there is a problem in the availability of alternative revenue recognition methods, provided that sufficient disclosure of recognition procedures is made to enable adjustment of financial statements. On the other hand, the accounting literature on‘functional fixity’ suggests such adjustments are not made. The functional fixity literature has relied exclusively on testing for an accounting method effect on user predictions and decisions. As a result, the evidence can be interpreted as users being fixated on earnings and ignoring information about accounting methods or alternatively they may have given attention to that information and attempted a transformation although the extent of the adjustment was‘inadequate’. This paper suggests that the previous evidence on functional fixity is inconclusive about lenders’ suggestions that they adjust financial statements and that different actions may be required by lending institutions depending on which interpretation of the functional fixity literature is made. This study uses the joint methodologies of analysis of variance and protocol analysis to focus on both whether adjustments are made as well as whether alternative methods of recognizing profit from longterm contracts affect the judgements of experienced lenders. The results show that the majority of subjects did not attempt to adjust for alternative methods of recognizing revenues.