42 Pages Posted: 29 Sep 2017 Last revised: 27 Nov 2018
Date Written: November 28, 2018
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: Suggested Citation