Accruals are accounting adjustments that allocate income and expenses to the period in which they are earned or incurred, regardless of when cash is actually received or paid. They are the cornerstone of the accrual basis of accounting under IFRS and Swiss GAAP, ensuring that financial statements reflect economic reality rather than cash flows. In financial due diligence, accrual patterns are examined closely: overstated accruals can inflate liabilities and reduce apparent profitability, while under-accrued liabilities represent hidden risks that affect the transaction price.

Example: in the due diligence of a Swiss services company, the analyst identifies CHF 340,000 of under-accrued holiday pay and bonus obligations not reflected in the accounts. This creates a normalisation adjustment reducing EBITDA by CHF 340,000 and leads to a corresponding reduction in the acquisition price via the completion accounts mechanism.

At Hectelion, the analysis of accrual quality is a systematic component of our earnings quality reviews.