Accrual basis of accounting

Accrual Basis of Accounting.

The point of time in which an expense or an income will be recognized (booked) does not necessarily coincide with the point of time in which related cash in- or outflow happens.

This sentence in the IFRS Conceptual Framework defines the principle:

“Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.”

Why this principle might be challenging for companies?

Naturally, we think in “money” or “cash” terms. Empirically, you have earned your salary at the point of time when your bank account looks more supple, even though you worked for a whole month, day by day for that income. On expense side, cash or bank payment for your monthly train ticket will not coincide with times of your commute.

For companies the accrual principle of accounting might pose practical challenges such as:

Time and cost tracking of consumption of inputs (e.g. work hours, materials) on expense side. On revenue side, the pattern of delivery of a performance obligation to a customer will determine revenue to be recognized regardless of payment terms.

Exercise of (sometimes complex) judgement and estimates if settlement amount varies. A classical example are lawsuit costs in accordance with IAS 37.

Time value of money for balance sheet positions. Pension benefits (IAS 19) increase steadily by each hour worked and must be expensed as service costs. Payout dates are years or even decades away. Resulting obligation must be discounted to its present value to reflect the time value of money.

📍 When analyzing and posting accruals: consider materiality + costs vs. benefits.