Ball and Shivakumar (2005) augment existing models of expected accruals to incorporate conditional conservatism. They document a robust asymmetry in the relation between accruals and economic losses and gains, and demonstrate that accruals models that incorporate this asymmetry have increased explanatory power. This discussion of Ball and Shivakumar (2005) makes five main points: 1) incorporating asymmetry in gain and loss recognition is an important contribution to empirical models of expected accruals; 2) the economic underpinnings of asymmetry in loss and gain recognition remain open to considerable debate; 3) the extent to which accruals recognize gains in a timely manner remains an interesting but unanswered question; 4) non-working capital accruals are important to both the earnings process and accounting conservatism, yet modeling of nonworking capital accruals has received little attention in the literature; and 5) incorporating asymmetry into the accruals process has important implications for estimating discretionary accruals and for future research in this area.
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