Microsoft Excel LibreOffice Calc

Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

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

Biogen Inc., balance sheet computation of aggregate accruals

USD $ in thousands

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Operating Assets
Total assets 25,288,900  23,652,600  22,876,800  19,504,800  14,316,559 
Less: Cash and cash equivalents 1,224,600  1,573,800  2,326,500  1,308,000  1,204,924 
Less: Marketable securities 2,313,400  2,115,200  2,568,600  2,120,500  640,460 
Operating assets 21,750,900  19,963,600  17,981,700  16,076,300  12,471,175 
Operating Liabilities
Total liabilities 12,257,300  11,054,500  10,748,200  10,129,900  3,502,519 
Less: Current portion of notes payable –  3,200  4,700  4,800  3,136 
Less: Notes payable, excluding current portion 5,936,500  5,935,000  6,512,700  6,521,500  582,061 
Operating liabilities 6,320,800  5,116,300  4,230,800  3,603,600  2,917,322 
Net operating assets1 15,430,100  14,847,300  13,750,900  12,472,700  9,553,853 
Balance-sheet-based aggregate accruals2 582,800  1,096,400  1,278,200  2,918,847 
Ratio
Balance-sheet-based accruals ratio3 3.85% 7.67% 9.75% 26.50%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Abbott Laboratories 69.42% -1.06% -3.34% 5.31%
AbbVie Inc. -7.02% 25.20% 105.82% -10.63%
Allergan PLC -11.32% 1.78% -21.00% 92.17%
Amgen Inc. -9.88% -33.04% -6.85% -4.19%
Bristol-Myers Squibb Co. -24.97% -0.82% 9.08% -21.32%
Celgene Corp. -18.63% -5.27% 79.80% 22.98%
Eli Lilly & Co. -10.27% -5.99% 1.26% -2.72%
Gilead Sciences Inc. -16.94% 23.56% 38.29% 10.44%
Johnson & Johnson -8.03% 31.51% 5.55% -5.16%
Merck & Co. Inc. -0.65% -12.97% 6.02% -9.49%
Pfizer Inc. 12.36% 4.12% 11.13% -11.14%
Regeneron Pharmaceuticals Inc. 20.14% 33.15% 26.37% 34.77%
Balance-Sheet-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology 0.00% 8.00% -1.83% 29.02%
Balance-Sheet-Based Accruals Ratio, Industry
Health Care 0.00% 7.94% 0.81% 35.33%

Based on: 10-K (filing date: 2019-02-06), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-02), 10-K (filing date: 2016-02-03), 10-K (filing date: 2015-02-04).

2018 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 21,750,9006,320,800 = 15,430,100

2 Balance-sheet-based aggregate accruals = Net operating assets 2018 – Net operating assets 2017
= 15,430,10014,847,300 = 582,800

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 582,800 ÷ [(15,430,100 + 14,847,300) ÷ 2] = 3.85%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, Biogen Inc. improved earnings quality from 2017 to 2018.

Cash-Flow-Statement-Based Accruals Ratio

Biogen Inc., cash flow statement computation of aggregate accruals

USD $ in thousands

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income attributable to Biogen Inc. 4,430,700  2,539,100  3,702,800  3,547,000  2,934,784 
Less: Net cash flows provided by operating activities 6,187,700  4,551,000  4,522,400  3,716,100  2,942,115 
Less: Net cash flows used in investing activities (2,046,300) (2,963,100) (2,484,800) (4,553,600) (1,542,976)
Cash-flow-statement-based aggregate accruals 289,300  951,200  1,665,200  4,384,500  1,535,645 
Ratio
Cash-flow-statement-based accruals ratio1 1.91% 6.65% 12.70% 39.81%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Abbott Laboratories 12.34% -6.46% 4.27% -4.88%
AbbVie Inc. -12.92% 16.02% 59.26% -9.59%
Allergan PLC -15.00% -9.44% -10.08% 45.11%
Amgen Inc. -95.70% -22.85% 22.06% 11.81%
Bristol-Myers Squibb Co. -28.29% 0.76% 8.10% -13.71%
Celgene Corp. 4.95% -7.35% 55.24% 12.04%
Eli Lilly & Co. -25.54% -11.43% 5.63% -2.13%
Gilead Sciences Inc. 28.23% 29.15% 45.78% 6.43%
Johnson & Johnson -5.08% -7.40% 4.68% 7.15%
Merck & Co. Inc. -13.29% -5.97% -5.73% 7.75%
Pfizer Inc. 10.69% -1.06% -5.98% -2.74%
Regeneron Pharmaceuticals Inc. 28.32% 19.22% 13.64% 8.37%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology 0.00% -2.28% 1.73% 16.40%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Health Care 0.00% -0.19% 2.89% 18.47%

Based on: 10-K (filing date: 2019-02-06), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-02), 10-K (filing date: 2016-02-03), 10-K (filing date: 2015-02-04).

2018 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 289,300 ÷ [(15,430,100 + 14,847,300) ÷ 2] = 1.91%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, Biogen Inc. improved earnings quality from 2017 to 2018.