The intuitive appeal of the Jones Model is that it measures how management subjectively controls accounting for discretional accruals that affect the magnitude and timing of earnings taking into effect the macroeconomic environment.
NDAt = α1 (1/At -1) + α2 (ΔREVt) + α3 (PPEt) (1)
Where NDAt = nondiscretionary accruals in year t
ΔREVt = revenue in year t less revenue in year t - 1 scaled by total asset at t -1; PPEt = gross property plant and equipment in year t scaled by total asset at t -1; At-1 = total assets at t-1; and α1, α2, α3 = firm-specific parameters.
Estimates of the firm-specific parameters, a_1, a_2, and a_3 are generated using the following model in the estimation period:
TAt = a1 (1/At-1) + a2 (ΔREVt) + a3 (PPEt) + Vt (2) Where: a1, a2, a3 denote the OLS estimates of α1, α2, α3 and TA is total accruals scaled by lagged total assets. Vt is the error term. This results in the measurement of discretionary accruals (DAit) of firm i at time t as: DAit = TAit – NDAit
It gives an indication of how one can identify discretionary accrual from total accrual accruals and hence be in a position to 'approximately' know the bias infused in earnings reporting