Financial Reporting Quality: Aggregate Accruals
Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.
Balance-Sheet-Based Accruals Ratio
Activision Blizzard Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 27,383) | 25,056) | 23,109) | 19,845) | 17,835) | |
| Less: Cash and cash equivalents | 7,060) | 10,423) | 8,647) | 5,794) | 4,225) | |
| Less: Held-to-maturity investments | 4,932) | —) | —) | —) | —) | |
| Operating assets | 15,391) | 14,633) | 14,462) | 14,051) | 13,610) | |
| Operating Liabilities | ||||||
| Total liabilities | 8,140) | 7,457) | 8,072) | 7,040) | 6,478) | |
| Less: Long-term debt, net | 3,611) | 3,608) | 3,605) | 2,675) | 2,671) | |
| Operating liabilities | 4,529) | 3,849) | 4,467) | 4,365) | 3,807) | |
| Net operating assets1 | 10,862) | 10,784) | 9,995) | 9,686) | 9,803) | |
| Balance-sheet-based aggregate accruals2 | 78) | 789) | 309) | (117) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 0.72% | 7.59% | 3.14% | -1.20% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | 21.43% | — | — | — | — | |
| Comcast Corp. | -6.76% | — | — | — | — | |
| Meta Platforms Inc. | 20.95% | — | — | — | — | |
| Netflix Inc. | 14.21% | — | — | — | — | |
| Walt Disney Co. | 3.09% | 1.73% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 7.77% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | -3.77% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 15,391 – 4,529 = 10,862
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 10,862 – 10,784 = 78
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 78 ÷ [(10,862 + 10,784) ÷ 2] = 0.72%
4 Click competitor name to see calculations.
An evaluation of financial reporting quality between 2019 and 2022 reveals a fluctuating trend in aggregate accruals relative to net operating assets. While net operating assets demonstrated consistent growth, increasing from $9,686 million in 2019 to $10,862 million in 2022, the balance-sheet-based accruals ratio exhibited significant volatility, peaking in 2021 before contracting sharply in 2022.
- Net Operating Assets Growth
- A steady upward trajectory is observed in net operating assets over the four-year period. The growth was most pronounced between 2020 and 2021, with the asset base expanding by approximately 8.8% during that interval, eventually stabilizing at $10,862 million by the end of 2022.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals shifted from a negative position of -$117 million in 2019 to a peak of $789 million in 2021. This represents a substantial increase in non-cash components of earnings. However, this trend reversed abruptly in 2022, as aggregate accruals fell to $78 million.
- Accruals Ratio Interpretation
- The accruals ratio moved from -1.20% in 2019 to a high of 7.59% in 2021, suggesting a period where earnings were less supported by cash flows. The subsequent decline to 0.72% in 2022 indicates a significant normalization, suggesting that reported earnings for the final period are more closely aligned with actual cash movements and reflecting a higher quality of financial reporting for that specific year.
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Cash-Flow-Statement-Based Accruals Ratio
Activision Blizzard Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income | 1,513) | 2,699) | 2,197) | 1,503) | 1,813) | |
| Less: Net cash provided by operating activities | 2,220) | 2,414) | 2,252) | 1,831) | 1,790) | |
| Less: Net cash used in investing activities | (4,994) | (59) | (178) | (22) | (230) | |
| Cash-flow-statement-based aggregate accruals | 4,287) | 344) | 123) | (306) | 253) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 39.61% | 3.31% | 1.25% | -3.14% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | -7.90% | — | — | — | — | |
| Comcast Corp. | -3.88% | — | — | — | — | |
| Meta Platforms Inc. | 1.96% | — | — | — | — | |
| Netflix Inc. | 16.73% | — | — | — | — | |
| Walt Disney Co. | 1.50% | -0.29% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | -1.69% | 4.79% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | -1.31% | 12.91% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 4,287 ÷ [(10,862 + 10,784) ÷ 2] = 39.61%
2 Click competitor name to see calculations.
An analysis of financial reporting quality from 2019 to 2022 reveals a stable progression in net operating assets contrasted by a significant and accelerating increase in cash-flow-statement-based aggregate accruals. While the first three years of the period exhibited relative stability, the final year shows a substantial divergence between accrual-based accounting and cash flow.
- Net Operating Assets
- A consistent upward trend is observed, with values increasing from US$ 9,686 million in 2019 to US$ 10,862 million by 2022. This indicates a steady expansion of the asset base supporting the entity's operations over the four-year period.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals transitioned from a negative value of US$ -306 million in 2019 to a positive US$ 4,287 million in 2022. The most notable shift occurred between 2021 and 2022, where accruals increased by over 1,100%, reflecting a sharp rise in the components of earnings not backed by immediate cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The ratio remained relatively low and stable between -3.14% in 2019 and 3.31% in 2021. However, in 2022, the ratio spiked to 39.61%. This dramatic increase suggests a significant divergence between reported earnings and operating cash flows, which is typically interpreted as a decrease in the quality of earnings and may indicate aggressive accounting treatments or substantial non-cash gains in the final year of the observed period.
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