Income measurement is essentially about timing and since firms have some discretion over the recognition of revenues and costs, to an extent, they can choose when income is recognised. We have already had most of the discussion we need of cost recognition in Chapters 11 and 12, where we saw that GAAP now polices provisioning and cost capitalisation quite closely. In this chapter we focus on GAAP’s approach to revenue recognition. We also discuss how the outsider can detect aggressive income recognition practices by firms.

How the income statement is presented can be as important as how income is measured. We have seen that the income statement does not report the comprehensive income of the firm; some gains and losses are taken directly to reserves in the balance sheet. In addition, firms may emphasise some components of income while classifying others as exceptional or transitory. In recent years some firms have taken this further by producing a ‘pro-forma’ version of key numbers alongside the GAAP numbers.