Accounting cushion

An accounting cushion is the recognition of an excessively large expense reserve in the current period. Doing so has two positive effects for the reporting entity, which are:

  • Taxable income is reduced in the current period, thereby deferring a certain amount of income tax liability; and

  • When the actual liability is incurred in a later period, the extra reserve can be used to offset some of the liability.

An accounting cushion is used to smooth out earnings, so that excessively high earnings in one period are pushed down, and excessively low earnings in another period are bolstered. The resulting consistent earnings level is attractive to investors, who do not like earnings surprises. They then bid up the price of the company's stock.

An accounting cushion represents incorrect accounting practice, since it misleads the readers of a company's financial statements.

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