Analysing the Role of Accruals in Measuring Performance and Accounting Quality based on Nikolaev Model

Performance information should be collected in a way which has the least estimation error. Accrual basis is currently used to provide performance reports, but no accrual model has yet been presented to demonstrate the role of accruals in measuring performance and provide a structure for separating accounting error in performance and expressing accounting quality. Therefore, the purpose of this study is to explain Nikolaev model in order to analyze the role of accruals in measuring performance and accounting quality.

The population of study is companies listed in the Tehran Stock Exchange and the sample includes 104 companies (1664 firm-year) in the period from 2002 to 2017. In estimating parameters of Nikolaev model, moment conditions based on variance and covariance of accounting error, operating cash flow and accruals time series were used, and in order to test the research hypotheses, statistical comparison of two samples and multiple regression analysis for cross-sectional and combined data were used.

The standard deviation average of accrual performance component is statistically significant and greater than standard deviation average of accounting error. The relationship between economic performance component and accruals performance with accounting error is statistically significant and common variance between components is small. By controlling operational volatility, direction of relationship between Dechow and Dichev (2002) accruals quality criteria and firm value were changed, but no significant change was made in the Nikolaev (2018) model.

Accruals have achieved their primary goals of facilitating performance measurement. Low common variance between Nikolaev model components indicates that accounting error is increased by the increases in the diagnostic validity of this model and as operational volatility. Also Dechow and Dichev accruals quality model is not able to explain firm value accurately, however, Nikolaev accruals quality model could explain firm value due to the ability of separating accounting error and operational volatility.