Modelling the accruals process and assessing unexpected accruals*

If cash flow recognition in income is accelerated and/or delayed, the resulting proportions will
change from their underlying proportions. For instance, if more accrued income (i.e., the
difference between accrued revenue and accrued expenses) is initiated than the underlying
accrued income, the proportion of the initiated accrued component embedded in income will be
t
different from the underlying proportion (if at 1 is not equal to one). Hence, these four
parameters can be seen as indirectly capturing the timing-recognition of accrued and deferred
components.
Expression (5) indicates that normal accruals consist of accrued (in the first line) and deferred
components (in the second line). In particular, the accrued component is shown to be a function
of growth in income and changes in accrual policy. It will be higher if there is more growth in
income, holding the accrual policy constant. Even if there is no growth in income, firms can end
up with more accrued component of accruals if there is a change in accrual policy to grant more
credit sales to debtors or to decrease the proportion of outstanding expenses. 9 If income and the
accrual policy are both constant, the accrued component of accruals will be zero as the reversed
and initiated components will offset one another.
In contrast, the deferred component of accruals is driven by forward income growth and changes
in the deferral policy. Holding deferral policy constant, higher forward income growth will lead
to a higher deferred component of accruals. When income growth is zero, firms can end up with
more deferred component of accruals if there is a change in deferral policy to pre-pay more
9 Provided that the parameter a is positive, i.e. accrued revenue is greater than accrued expenses.
16