Accrual Logic
This article explains how accrual logic works inside the timing engine.
You will learn:
How Model Reef decides when revenue and costs hit the P&L.
How schedules and frequencies convert assumptions into accruals.
How accruals link to receivables, payables and working capital.
Accrual logic is about when performance is recognised, not when cash moves.
Accruals follow occurrence rules
Each variable has an occurrence pattern defined by:
Start date
End date
Frequency or schedule
Any embedded formula or driver behaviour
The timing engine uses these to generate a time series of accrual amounts. These are what appear in the P&L.
Examples:
A monthly subscription revenue variable accrues every month between its start and end date.
A quarterly tax variable accrues tax in specific periods.
An asset variable accrues depreciation each period according to its method and useful life.
Every variable has an accrual series, even if the corresponding cash movements are delayed.
Accruals by variable type
Accruals behave consistently across variable types:
Revenue
Accrued when goods or services are delivered or access is provided.
Hits revenue lines in P&L.
COGS
Accrued when the cost of delivering revenue is incurred.
Reduces gross profit in P&L.
Opex and Staff
Accrued when operations consume resources, regardless of payment date.
Reduce EBITDA.
Tax
Accrued as a function of earnings before tax (EBT) and effective tax rate.
Assets
Accrued as non cash depreciation based on asset value and useful life.
Liabilities
Accrued as interest expense on opening loan balances.
Equity and Dividends
Equity injections are not accrued as P&L items.
Dividends are distributions, not expenses, so they bypass the P&L.
These rules keep the P&L focused on operational and financial performance.
Accruals vs working capital
The difference between accrual timing and cash timing creates working capital balances:
If you record revenue now and collect later, you increase Accounts Receivable.
If you record COGS or Opex now and pay later, you increase Accounts Payable.
If you record tax or interest now and pay later, you increase Tax Payable or Interest Payable.
The timing engine tracks these automatically based on the variable's delay and payment settings. You do not enter AR or AP directly; they are derived from accruals and cash movements.
Accruals and valuation
Accruals feed valuation in two ways:
They determine earnings measures such as EBITDA, EBIT and NPAT.
They influence working capital movements, which change free cashflow to the firm and free cashflow to equity.
The valuation engine uses cashflow, not accruals, but accrual logic is the starting point for both P&L and working capital.
When to adjust accrual logic
You may want to review and adjust accrual logic when:
Moving a cost or revenue stream from one variable type to another (for example COGS to Opex).
Changing how a variable should be recognised over time (for example one off vs recurring).
Adjusting asset lives or depreciation methods.
Changing the structure of tax calculations.
In all cases, the accrual logic change will automatically propagate to statements and cashflows via the timing engine.
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