Accrual Duration

Abstract

We define accrual duration as the length of time between an accrual and its associated cash flow. Accrual duration and accrual discretion are inextricably linked by the fundamentals of the accrual process because one side of an accrual pair is pinned down by the sign and magnitude of its associated concurrent cash flow (so, has no scope for discretion), while the other side is recorded based on forward-looking estimates that are unavoidably less precise over longer horizons, and therefore more discretionary. We develop an accrual-duration approach that provides powerful estimates of discretionary total accruals. In addition, we show that the accrual duration approach can be incorporated as a second stage to sharpen the discretionary accruals estimated from existing models like Jones (1991) and Dechow and Dichev (2002). Finally, we discuss how the accrual duration approach can shed light on several ongoing issues in accounting research.