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
Automatic Data Processing Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | Jun 30, 2017 | Jun 30, 2016 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 48,772,500) | 39,165,500) | 41,887,700) | 37,088,700) | 37,180,000) | 43,670,000) | |
| Less: Cash and cash equivalents | 2,575,200) | 1,908,500) | 1,949,200) | 2,170,000) | 2,780,400) | 3,191,100) | |
| Less: Funds held for clients | 34,905,800) | 26,708,100) | 29,434,200) | 27,137,800) | 27,291,500) | 33,841,200) | |
| Operating assets | 11,291,500) | 10,548,900) | 10,504,300) | 7,780,900) | 7,108,100) | 6,637,700) | |
| Operating Liabilities | |||||||
| Total liabilities | 43,102,400) | 33,413,300) | 36,487,800) | 33,629,100) | 33,203,000) | 39,188,400) | |
| Less: Obligations under reverse repurchase agreements | 23,500) | 13,600) | 262,000) | —) | —) | —) | |
| Less: Short-term debt | —) | 1,001,800) | —) | —) | —) | —) | |
| Less: Long-term debt | 2,985,000) | 1,002,800) | 2,002,200) | 2,002,400) | 2,002,400) | 2,007,700) | |
| Operating liabilities | 40,093,900) | 31,395,100) | 34,223,600) | 31,626,700) | 31,200,600) | 37,180,700) | |
| Net operating assets1 | (28,802,400) | (20,846,200) | (23,719,300) | (23,845,800) | (24,092,500) | (30,543,000) | |
| Balance-sheet-based aggregate accruals2 | (7,956,200) | 2,873,100) | 126,500) | 246,700) | 6,450,500) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | — | — | — | — | — | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | — | — | — | — | — | — | |
| Adobe Inc. | 14.14% | — | — | — | — | — | |
| AppLovin Corp. | — | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | — | |
| Datadog Inc. | — | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | — | |
| Synopsys Inc. | 0.36% | — | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 200.00% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 200.00% | — | — | — | — | — | |
Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 11,291,500 – 40,093,900 = -28,802,400
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= -28,802,400 – -20,846,200 = -7,956,200
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -7,956,200 ÷ [(-28,802,400 + -20,846,200) ÷ 2] = —
4 Click competitor name to see calculations.
An analysis of the financial reporting quality reveals a distinct relationship between net operating assets and aggregate accruals from 2017 through 2021. The company maintains a structural position characterized by consistently negative net operating assets, indicating that operating liabilities exceed operating assets throughout the observed period.
- Net Operating Assets Trends
- Net operating assets remained negative over the five-year horizon, fluctuating between -20.8 billion USD and -28.8 billion USD. A period of moderate contraction in the negative balance occurred between June 30, 2017, and June 30, 2020, where the balance moved from -24.1 billion USD to -20.8 billion USD. However, this trend reversed sharply in 2021, with net operating assets declining to -28.8 billion USD.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant volatility. Following a peak of 6.45 billion USD in 2017, accruals dropped precipitously to 246.7 million USD in 2018 and 126.5 million USD in 2019. A temporary increase to 2.87 billion USD was observed in 2020, which was followed by a substantial shift into negative territory, reaching -7.96 billion USD by June 30, 2021.
- Financial Reporting Quality Insights
- The shift in aggregate accruals suggests a changing relationship between reported accounting earnings and cash flow. The positive accruals observed between 2017 and 2020 indicate periods where earnings were higher than cash flow from operations. Conversely, the transition to a large negative accrual in 2021 signifies a reversal, where cash flow exceeded accounting earnings. This divergence, coupled with the expansion of negative net operating assets in 2021, points to a significant realignment of the balance sheet and potential improvements in earnings quality relative to cash generation in the final year of the analysis.
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Cash-Flow-Statement-Based Accruals Ratio
Automatic Data Processing Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | Jun 30, 2017 | Jun 30, 2016 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 2,598,500) | 2,466,500) | 2,292,800) | 1,620,800) | 1,733,400) | 1,492,500) | |
| Less: Net cash flows provided by operating activities | 3,093,300) | 3,026,200) | 2,688,300) | 2,515,200) | 2,125,900) | 1,859,900) | |
| Less: Net cash flows (used in) provided by investing activities | (3,515,000) | 3,156,300) | (2,197,700) | (2,504,600) | 5,730,400) | (9,087,200) | |
| Cash-flow-statement-based aggregate accruals | 3,020,200) | (3,716,000) | 1,802,200) | 1,610,200) | (6,122,900) | 8,719,800) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | — | — | — | — | — | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | — | — | — | — | — | — | |
| Adobe Inc. | 9.21% | — | — | — | — | — | |
| AppLovin Corp. | — | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | — | |
| Datadog Inc. | — | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | — | |
| Synopsys Inc. | -4.88% | — | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 21.87% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 15.65% | — | — | — | — | — | |
Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,020,200 ÷ [(-28,802,400 + -20,846,200) ÷ 2] = —
2 Click competitor name to see calculations.
An analysis of the financial reporting quality reveals a persistent negative balance in net operating assets and significant volatility in aggregate accruals over the five-year period ending June 30, 2021. The negative positioning of net operating assets suggests an operating structure where liabilities consistently exceed operating assets, which serves as the denominator for the accruals ratio calculation.
- Net Operating Assets Trend
- Net operating assets remained consistently negative throughout the period. A slight upward trend toward zero was observed between 2017 and 2020, moving from -24.09 billion USD to -20.85 billion USD. However, a sharp reversal occurred in 2021, with the balance dropping to -28.80 billion USD, indicating a substantial increase in operating liabilities or a decrease in operating assets during the final year of the series.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited a non-linear and volatile pattern. The figures shifted from a significant negative position of -6.12 billion USD in 2017 to positive values in 2018 and 2019. This trend reversed again in 2020 with a negative accrual of -3.72 billion USD, before returning to a positive 3.02 billion USD in 2021. These fluctuations suggest periodic variances between reported earnings and net cash flows from operating activities.
- Accruals Ratio Interpretation
- The interaction between the consistently negative net operating assets and the fluctuating aggregate accruals results in a ratio that alternates in sign. In 2017 and 2020, the negative accruals combined with negative net operating assets produced positive ratios (approximately 25.4% and 17.8%, respectively). Conversely, in 2018, 2019, and 2021, the positive accruals relative to the negative asset base resulted in negative ratios, with the 2021 ratio reaching approximately -10.5%. This pattern indicates that the quality of earnings, as measured by the accruals ratio, is subject to high variability tied to the timing of cash flows relative to revenue and expense recognition.
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