Modelling the accruals process and assessing unexpected accruals*

The portion of underlying income in current periods that is shifted to previous periods is
measured by
t
m . If I aggregate the proportions of underlying income beyond period t shifted to
period t and the proportions of underlying income shifted from period t to periods before t,
measures the deviation between these two aggregated portions which is zero under steady-state
conditions. Finally,
49
t
dm
t
gm captures the interaction between the portion of income shifted to the
current period and future growth in income. It can be seen as an adjustment term for accruals that
take more than one period to reverse. They are zero when (a) there is no growth in future income,
or (b) no portion of income is shifted from future underlying income to the current period, or (c)
when T (the number of periods that it takes for accruals to reverse) is one. The main implication
from the above expression is that the difference between reported and underlying income (i.e.,
the accounting distortion in reported income) is attributed to three parts that respectively capture
short-term growth, temporary accounting distortions, and long-term growth.
The expression (26) can be generalized to operating income and financing income. For a given
earnings component (EC) like CNI, OI, or NFE, the following is true
where
T
t t, t h
EC EC
s1
m m
u, t u, t t u, t1 u, t t u, t1 t u, t1
EC EC m EC EC dm EC gm EC (27)
,
T T
t t, tsth, t
dmEC mEC mEC
s1 h1
11 s1 k1
T s1
t t, ts k
, gmEC mEC gEC
Combining expression (25) and expression (27), one yields the following accruals model:
AC a EC da ga EC
t t u, t t t u, t 1
AC AC AC
d EC dd gd EC
t u, t1 t t u, t1
AC AC AC
t u, t1 t t u, t1 u, t
mACEC dmAC gmAC EC CFCt CFC
where AC is a particular accruals component, and EC and CFC are the income and cash flow
components from the associated clean-surplus relation in Table 1. This accruals model can be
generalised to different categories of accruals with their associated clean-surplus flow
components and parameters as shown in table 3.
(28)