“Accrual Duration” by Professor Ilia Dichev
Professor Ilia Dichev
Goizueta Chair and Professor of Accounting Goizueta Business School
Accrual duration can be defined as the length of time between an accrual and its associated cash flow. This paper argues that accrual duration is a key factor in understanding the discretion in accruals. The function of accruals is to shift the recognition of associated cash flows across time, usually working in pairs of opening/closing accruals. By design, one side of the accrual pair shifts the recognition of the associated cash flow away from the period in which it occurs by recording an accrual with the same magnitude but the opposite sign in the same period. Thus, 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 the duration of the accrual, and therefore some discretion. In addition, accruals that have longer duration are more discretionary because longer horizons of estimation allow more discretion with respect to their timing and magnitude. Summarizing, accrual duration and accrual discretion are inextricably linked by the fundamentals of the accrual process. The study concludes with some thoughts on how to practically use accrual duration as a measure of accrual discretion.