The Fundamental Tradeoff between the Timing Benefits and Timing Costs of Accrual Accounting

Since all accruals reverse, their effect on the recognition of income is, by definition, temporary and temporal. Exploring the implications of this key property, this paper argues that both the benefits and the costs of accrual accounting largely lie in the temporal domain and that they are inextricably linked by the nature of the accrual process. For example, it is impossible to have the benefit of early accruals for long-term obligations, such as pensions, without the noise in income introduced by the deviation of long-term pension estimates from their corresponding realizations. Thus, the fundamental tradeoff of timing benefits and timing costs lies at the heart of accrual accounting and critically shapes its characteristics and function. Although some of these core properties of accrual accounting have been long known, this paper argues that they are not fully appreciated and discusses a number of possible implications for standard setting and academic research.