Anatomy of timing uncertainties in accruals

Abstract

We propose that timing uncertainties in accruals are heterogeneous, related to differences between expected and realized cash flows, and to differences between estimates and actual economic changes. In a single framework, through theoretical reasoning and with intuitive algebra, we articulate accruals in two temporal dimensions, in their role of anticipating or deferring economic impacts of cash flows, and in their effect of opening and closing balance sheet amounts. We demonstrate that both emerging deviations and errors are distinct in nature and affect the quality of accruals differently, as they relate to different kinds of accruals. We expect to contribute by demonstrating how timing uncertainties in accruals articulate regarding their heterogeneity. That may lead to new insights on discretion in accruals, also intending to reach potential interests of empirical research on the quality of accounting information and earnings management. Preliminary empirical results indicate that there is a positive relationship between timing uncertainties in accruals and the unpredictability of earnings, showing that greater uncertainties are associated with lower earnings persistence. Additionally, the consistent positive difference for the means of unpredictability of earnings between the top extreme and the bottom extreme of the uncertainty in accruals reflects that lack of earnings predictability is related to timing uncertainties in accruals. Therefore, understanding timing uncertainties in accruals, for accountants, is a matter of being aware of the implications of accounting choices, that relates closely to the accounting procedures as input.