Accrual Duration

42 Pages Posted: 29 Sep 2017 Last revised: 27 Nov 2018

See all articles by Ilia D. Dichev

Ilia D. Dichev

Emory University - Department of Accounting

Edward Owens

University of Utah - David Eccles School of Business

Date Written: November 28, 2018

Abstract

We define accrual duration as the length of time between an accrual and its associated cash flow. We argue that accrual duration and accrual discretion are inextricably linked by the fundamentals of the accrual process. Accruals generally work in opening/closing pairs, where by design one side of the pair shifts the recognition of an associated cash flow away from the period in which it occurs by recording an accrual with the same magnitude but the opposite sign in that same period. Such “zero-duration” accruals are non-discretionary, because the timing and magnitude of the associated cash flow pin down the timing and the magnitude of the concurrent accrual. The other side of the accrual pair shifts the recognition of the associated cash flow into some other time period(s), which involves using forward-looking estimates over some positive duration. Since estimates are unavoidably less precise over longer horizons, there is more discretion in longer-horizon accruals. We offer suggestions for the empirical implementation of the accrual duration approach, and provide an example of empirically estimating the zero- and positive-duration components of working capital accruals. Finally, we discuss how the duration approach can shed light on several ongoing issues in accounting research.

Keywords: Accruals, Discretion in Accruals, Quality of Accruals

JEL Classification: M41

Suggested Citation

Dichev, Ilia D. and Owens, Edward, Accrual Duration (November 28, 2018). Available at SSRN: https://ssrn.com/abstract=3043973 or http://dx.doi.org/10.2139/ssrn.3043973

Ilia D. Dichev (Contact Author)

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Edward Owens

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
8015815732 (Phone)

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