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The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition

Journal of accounting research, 2006-05, Vol.44 (2), p.207-242 [Peer Reviewed Journal]

Copyright 2006 The Institute of Professional Accounting, University of Chicago ;University of Chicago on behalf of the Institute of Professional Accounting, 2006 ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/j.1475-679X.2006.00198.x ;CODEN: JACRBR

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  • Title:
    The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition
  • Author: BALL, RAY ; SHIVAKUMAR, LAKSHMANAN
  • Subjects: Accounting ; Cash flow ; Conservatism ; Earnings ; Economic models ; Economics ; Income taxes ; Linear regression ; Loss ; Loss recognition ; Management ; Nonlinearity ; Proxy reporting ; Proxy statements ; Regression coefficients ; Time
  • Is Part Of: Journal of accounting research, 2006-05, Vol.44 (2), p.207-242
  • Description: We investigate the role of accrual accounting in the asymmetrically timely recognition (incorporation in reported earnings) of gains and losses. Timely recognition requires accruals when it precedes complete realization of the gains and losses in cash. We show that nonlinear accruals models incorporating the asymmetry in gain and loss recognition (timelier loss recognition, or conditional conservatism) offer a substantial specification improvement, explaining substantially more variation in accruals than equivalent linear specifications. Conversely, conventional linear accruals models, by omitting the loss recognition asymmetry, exhibit substantial attenuation bias and offer a comparatively poor specification of the accounting accrual process. Linear specifications also understate the ability of current earnings to predict future cash flows. These findings have implications for our understanding of accrual accounting and conservatism, as well as for researchers estimating discretionary accruals, earnings management, and earnings quality.
  • Publisher: Malden, USA: Blackwell Publishing Inc
  • Language: English
  • Identifier: ISSN: 0021-8456
    EISSN: 1475-679X
    DOI: 10.1111/j.1475-679X.2006.00198.x
    CODEN: JACRBR
  • Source: Alma/SFX Local Collection
    RePEc
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