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

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Operating Assets
Total assets 23,652,600  22,876,800  19,504,800  14,316,559  11,863,335 
Less: Cash and cash equivalents 1,573,800  2,326,500  1,308,000  1,204,924  602,562 
Less: Marketable securities 2,115,200  2,568,600  2,120,500  640,460  620,167 
Operating assets 19,963,600  17,981,700  16,076,300  12,471,175  10,640,606 
Operating Liabilities
Total liabilities 11,054,500  10,748,200  10,129,900  3,502,519  3,242,497 
Less: Current portion of notes payable and other financing arrangements 3,200  4,700  4,800  3,136  3,494 
Less: Notes payable and other financing arrangements, excluding current portion 5,935,000  6,512,700  6,521,500  582,061  592,433 
Operating liabilities 5,116,300  4,230,800  3,603,600  2,917,322  2,646,570 
Net operating assets1 14,847,300  13,750,900  12,472,700  9,553,853  7,994,036 
Balance-sheet-based aggregate accruals2 1,096,400  1,278,200  2,918,847  1,559,817 
Ratio
Balance-sheet-based accruals ratio3 7.67% 9.75% 26.50% 17.78%
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 1.78% -21.00% 92.17% 81.99%
Amgen Inc. -33.04% -6.85% -4.19% -16.66%
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. -5.99% 1.26% -2.72% 6.44%
Gilead Sciences Inc. -16.94% 23.56% 38.29% 10.44%
Johnson & Johnson 31.51% 5.55% -5.16% -12.84%
Merck & Co. Inc. -0.65% -12.97% 6.02% -9.49%
Pfizer Inc. 12.36% 4.12% 11.13% -11.14%
Regeneron Pharmaceuticals Inc. 33.15% 26.37% 34.77% 17.45%
Balance-Sheet-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology 8.00% -1.83% 29.02% 0.34%
Balance-Sheet-Based Accruals Ratio, Industry
Health Care 8.04% 0.62% 33.18% 2.24%

Based on: 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), 10-K (filing date: 2014-02-06).

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 19,963,6005,116,300 = 14,847,300

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 14,847,30013,750,900 = 1,096,400

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,096,400 ÷ [(14,847,300 + 13,750,900) ÷ 2] = 7.67%

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 2016 to 2017.

Cash-Flow-Statement-Based Accruals Ratio

Biogen Inc., cash flow statement computation of aggregate accruals

USD $ in thousands

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net income attributable to Biogen Inc. 2,539,100  3,702,800  3,547,000  2,934,784  1,862,341 
Less: Net cash flows provided by operating activities 4,551,000  4,522,400  3,716,100  2,942,115  2,345,078 
Less: Net cash flows used in investing activities (2,963,100) (2,484,800) (4,553,600) (1,542,976) (1,604,668)
Cash-flow-statement-based aggregate accruals 951,200  1,665,200  4,384,500  1,535,645  1,121,931 
Ratio
Cash-flow-statement-based accruals ratio1 6.65% 12.70% 39.81% 17.50%
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 -9.44% -10.08% 45.11% 4.84%
Amgen Inc. -22.85% 22.06% 11.81% 7.33%
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. -11.43% 5.63% -2.13% 10.71%
Gilead Sciences Inc. 28.23% 29.15% 45.78% 6.43%
Johnson & Johnson -7.40% 4.68% 7.15% 17.15%
Merck & Co. Inc. -13.29% -5.97% -5.73% 7.75%
Pfizer Inc. 10.69% -1.06% -5.98% -2.74%
Regeneron Pharmaceuticals Inc. 19.22% 13.64% 8.37% 1.33%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology -2.28% 1.73% 16.40% 4.81%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Health Care 0.21% 2.60% 17.17% 5.84%

Based on: 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), 10-K (filing date: 2014-02-06).

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 951,200 ÷ [(14,847,300 + 13,750,900) ÷ 2] = 6.65%

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 2016 to 2017.