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.
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Biogen Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Solvency Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Enterprise Value (EV)
- Present Value of Free Cash Flow to Equity (FCFE)
- Operating Profit Margin since 2005
- Current Ratio since 2005
- Total Asset Turnover since 2005
- Price to Operating Profit (P/OP) since 2005
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Balance-Sheet-Based Accruals Ratio
Biogen Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Marketable securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of notes payable | ||||||
| Less: Notes payable, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
The data reveals fluctuations in the net operating assets of the company over the four-year period. Starting at approximately $15.43 billion in 2018, net operating assets slightly decreased to $14.82 billion in 2019. There was a marginal recovery in 2020, with net operating assets rising to about $15.50 billion, followed by a decline again to $14.43 billion in 2021. This indicates variability in the company's asset base, with no clear upward or downward trend over the period.
Balance-sheet-based aggregate accruals displayed notable volatility throughout the timeframe analyzed. In 2018, the accruals were positive at $582.8 million, switched to a negative balance of $612.1 million in 2019, returned to positive $684.2 million in 2020, and again became negative at $1.072 billion in 2021. These alternating positive and negative values suggest inconsistent accrual accounting outcomes, possibly reflecting changes in earnings management or operational adjustments.
The balance-sheet-based accruals ratio, which measures the proportion of accruals relative to net operating assets, also fluctuated substantially. The ratio began at 3.85% in 2018, turned negative to -4.05% in 2019, rose back to 4.51% in 2020, and declined to -7.16% in 2021. The negative ratios in 2019 and 2021 highlight periods where accruals reduced net operating assets, while the positive ratios in 2018 and 2020 indicate periods of accrual increments. The magnitude of the ratio in 2021 being the highest (in absolute terms) suggests a more pronounced impact of accruals on financial statements during that year.
Overall, the data indicates inconsistent patterns in both net operating assets and balance-sheet-based accruals, which may reflect changing operational dynamics or financial reporting quality. The alternating signs and varying magnitudes of the accrual measures warrant further examination to understand underlying drivers and implications for the company's earnings quality.
Cash-Flow-Statement-Based Accruals Ratio
Biogen Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Biogen Inc. | ||||||
| Less: Net cash flow provided by operating activities | ||||||
| Less: Net cash flow (used in) provided by investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
The data reflects the trends in net operating assets and cash-flow-statement-based aggregate accruals for the periods ending December 31 from 2018 to 2021. The analysis focuses on the patterns observed in these financial measures and their implications for financial reporting quality over time.
- Net Operating Assets
- Net operating assets exhibit a fluctuating pattern throughout the observed periods. The value decreased from approximately $15.43 billion in 2018 to about $14.82 billion in 2019, showing a slight contraction. This was followed by a recovery to roughly $15.50 billion in 2020 before declining again to about $14.43 billion in 2021. This cyclical movement indicates alternating phases of investment and divestment or asset revaluation within the company's operations.
- Cash-flow-statement-based Aggregate Accruals (in thousands of US$)
- The aggregate accruals exhibit significant volatility with positive and negative values alternating over the years. In 2018, accruals were positive at $289.3 million, suggesting cash inflows exceeding the change in net operating assets. However, in 2019, this shifted dramatically to a negative $1.66 billion, indicating substantial non-cash adjustments or timing differences affecting cash flow. In 2020, the amount reverted sharply to a positive $379.4 million, then again plunged to negative $1.52 billion in 2021. These swings underline variability in accrual accounting effects related to operational cash flows, which may reflect changes in working capital, revenue recognition, or expense timing.
- Cash-flow-statement-based Accruals Ratio (%)
- The accruals ratio follows the same oscillating trend as the aggregate accruals but framed as a percentage. The ratio was modestly positive at 1.91% in 2018, turned markedly negative to -10.98% in 2019, then rose to 2.5% in 2020 before declining again to -10.16% in 2021. Such large absolute fluctuations in the accruals ratio suggest variability in the quality and consistency of reported earnings relative to cash flows, with larger negative values potentially indicating lower earnings quality due to higher accrual components.
Overall, the data exhibits considerable fluctuations in operating asset sizes and accrual accounting measures across the four years. The alternating positive and negative accrual figures and ratios may imply inconsistent earnings quality and cash flow alignment, possibly arising from operational changes, accounting policy shifts, or economic conditions impacting the company’s financial reporting patterns.