Final answer:
Nondiscretionary accruals are not controlled by management but are required by changes in business conditions or regulations, correctly characterized by option A. They are used in financial statements based on objective data, as opposed to discretionary accruals, which involve management's judgment and may indicate managed earnings.
Step-by-step explanation:
Nondiscretionary accruals refer to adjustments in financial reporting that are not influenced by the discretion of management but are instead dictated by changes in underlying business conditions or regulatory requirements. They are considered outside the control of management estimates and are based on objective criteria. Here, the correct option about the nature of nondiscretionary accruals is A. outside the control of management estimates.
Nondiscretionary accruals can be distinguished from discretionary accruals, which are influenced by management's judgment and can be used for purposes such as income smoothing to present the company's financial performance more favourably. Discretionary accruals may be a sign of managed earnings, but nondiscretionary accruals are not typically associated with this kind of financial manipulation since they arise from the actual economic activities of the company or are required by accounting standards.
To illustrate, a nondiscretionary accrual could be a depreciation expense calculated based on the historical cost and estimated useful life of an asset, as mandated by generally accepted accounting principles (GAAP). Conversely, a discretionary accrual would be an adjustment to allowances for doubtful accounts based on expected future losses, which involves management's estimation.