Discretionary Accrual

DISCRETIONARY ACCRUAL

DISCRETIONARY DISCRETIONARY ACCRUAL is a non-mandatory expense/asset that t hat is recorded ithin the acco!ntin" system that has yet to #e rea$i%ed& An examp$e o' this o!$d #e mana"ement #on!s& In acco!ntin"( the term )accr!a$) re'ers to a *o!rna$ entry here a re+en!e or expense item is recorded in the a#sence o' an act!a$ cash transaction& it means that a company may or may not choose to reco"ni%e a '!t!re expense #y ma,in" an accr!a$ 'or it ri"ht no& !nder AA. r!$es( i' a '!t!re $ia#i$itys 01 timin"( and 21 amo!nt are ,non today( an accr!a$ a ccr!a$ sho!$d #e made to re3ect that $ia#i$ity& $ia#i$ity& so discretionary accr!a$s means that the company !ses its on discretion in decidin" hether or not to ma,e the accr!a$ or not& I'  not( they dont sho the $ia#i$ity on their 4nancia$ statements& in cash-#ased acco!ntin"( 'or examp$e( they o!$dnt ma,e an accr!a$ no 'or a '!t!re $ia#i$ity& $ia#i$ity& they on$y record expenses hen they are act!a$$y paid 'or and there is an act!a$ o!t3o o' cash& A ma*or strand o' the earnin"s mana"ement $iterat!re $iterat! re examines mana"ers5 !se o' discretionary accr!a$s to shi't reported income amon" 4sca$ periods& S!ch an examination entai$s speci4cation o'  a mode$ to estimate discretionary accr!a$s& The mode$s ran"e 'rom the simp$e( in hich tota$ accr!a$s are !sed as a meas!re o' discretionary accr!a$s to the re$ati+e$y sophisticated 6re"ression1( hich decompose accr!a$s into discretionary and nondiscretionary components

Non-discretionary accrual

An o#$i"atory expense that has yet to #e rea$i%ed #!t is a$ready recorded in the acco!nt #oo,s& Examp$es o' non-discretionary accr!a$s are any !pcomin" #i$$s or next months sa$ary& or A non a+oida#$e expense that has #een recorded in the acco!nt statements( #!t has yet to #e '!$4$$ed& 7or examp$e( next months e$ectricity #i$$( An examp$e o' this o!$d #e payro$$ taxes&  The Ind!stry 8ode$ The Ind!stry 8ode$ a$so re$axes the ass!mption that nondiscretionary accr!a$s are constant o+er time& Instead o' attemptin" to mode$ the determinants o' nondiscretionary accr!a$s direct$y( the Ind!stry 8ode$ ass!mes that the +ariation in the determinants o' nondiscretionary accr!a$s are common across 4rms in the same ind!stry  The ma*or 4ndin" is that the error ind!ced #y !sin" a #a$ance sheet estimation approach contaminates comp!tations o' soca$$ed discretionary or a#norma$ accr!a$s( and can $ead to erroneo!s$y conc$!din" that earnin"s mana"ement exists hen no s!ch opport!nistic acti+ity is present& 9e demonstrate that #a$ance sheet accr!a$s estimates are predicta#$y #iased in st!dies here the partitionin" e+ent is corre$ated ith either mer"ers and ac:!isitions or discontin!ed operations& To i$$!strate ho this #ias can $ead to !narranted in'erences( e rep$icate sections o' to prior st!dies that test 'or earnin"s mana"ement !sin" a #a$ance sheet approach&