DISCRETIONARY ACCRUAL

DISCRETIONARY ACCRUAL is a non-mandatory expense/asset that

is recorded within the accounting system that has yet to be
realized. An example of this would be management bonus.
In accounting, the term "accrual" refers to a journal entry where a
revenue or expense item is recorded in the absence of an actual
cash transaction.
it means that a company may or may not choose to recognize a
future expense by making an accrual for it right now. under GAAP
rules, if a future liability's 1) timing, and 2) amount are known
today, an accrual should be made to reflect that liability.
so discretionary accruals means that the company uses its own
discretion in deciding whether or not to make the accrual or not. If
not, they don't show the liability on their financial statements.
in cash-based accounting, for example, they wouldn't make an
accrual now for a future liability. they only record expenses when
they are actually paid for and there is an actual outflow of cash.
A major strand of the earnings management literature examines
managers use of discretionary accruals to shift reported income
among fiscal periods. Such an examination entails specification of
a model to estimate discretionary accruals. The models range
from the simple, in which total accruals are used as a measure of
discretionary accruals to the relatively sophisticated (regression),
which decompose accruals into discretionary and
nondiscretionary components

Non-discretionary accrual

An obligatory expense that has yet to be realized but is already

recorded in the account books. Examples of non-discretionary
accruals are any upcoming bills or next month's salary.
or
A non avoidable expense that has been recorded in the account
statements, but has yet to be fulfilled. For example, next month's
electricity bill, An example of this would be payroll taxes.
The Industry Model The Industry Model also relaxes the
assumption that nondiscretionary accruals are constant over time.
Instead of attempting to model the determinants of
nondiscretionary accruals directly, the Industry Model assumes
that the variation in the determinants of nondiscretionary accruals
are common across firms in the same industry
The major finding is that the error induced by using a balance
sheet estimation approach contaminates computations of socalled discretionary or abnormal accruals, and can lead to
erroneously concluding that earnings management exists when
no such opportunistic activity is present. We demonstrate that
balance sheet accruals estimates are predictably biased in studies
where the partitioning event is correlated with either mergers and
acquisitions or discontinued operations. To illustrate how this bias
can lead to unwarranted inferences, we replicate sections of two
prior studies that test for earnings management using a balance
sheet approach.