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
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 | 23,877,300) | 24,618,900) | 27,234,300) | 25,288,900) | 23,652,600) | |
| Less: Cash and cash equivalents | 2,261,400) | 1,331,200) | 2,913,700) | 1,224,600) | 1,573,800) | |
| Less: Marketable securities | 1,541,100) | 1,278,900) | 1,562,200) | 2,313,400) | 2,115,200) | |
| Operating assets | 20,074,800) | 22,008,800) | 22,758,400) | 21,750,900) | 19,963,600) | |
| Operating Liabilities | ||||||
| Total liabilities | 12,917,600) | 13,932,800) | 13,895,200) | 12,257,300) | 11,054,500) | |
| Less: Current portion of notes payable | 999,100) | —) | 1,495,800) | —) | 3,200) | |
| Less: Notes payable, excluding current portion | 6,274,000) | 7,426,200) | 4,459,000) | 5,936,500) | 5,935,000) | |
| Operating liabilities | 5,644,500) | 6,506,600) | 7,940,400) | 6,320,800) | 5,116,300) | |
| Net operating assets1 | 14,430,300) | 15,502,200) | 14,818,000) | 15,430,100) | 14,847,300) | |
| Balance-sheet-based aggregate accruals2 | (1,071,900) | 684,200) | (612,100) | 582,800) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -7.16% | 4.51% | -4.05% | 3.85% | — | |
| 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 | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 200.00% | — | — | — | — | |
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
= 20,074,800 – 5,644,500 = 14,430,300
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 14,430,300 – 15,502,200 = -1,071,900
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,071,900 ÷ [(14,430,300 + 15,502,200) ÷ 2] = -7.16%
4 Click competitor name to see calculations.
The financial reporting quality metrics from 2018 through 2021 exhibit a pattern of significant volatility in aggregate accruals, contrasting with a relatively stable base of net operating assets.
- Net Operating Assets Trend
- Net operating assets remained consistently within a range of approximately $14.4 billion to $15.5 billion. A peak was observed on December 31, 2020, at $15.50 billion, followed by a decrease to $14.43 billion by the end of 2021. This indicates that the scale of the operating asset base did not undergo drastic structural changes during the analyzed period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrated a cyclical and alternating pattern, switching between positive and negative values annually. The figures transitioned from $582.8 million in 2018 to -$612.1 million in 2019, returned to a positive $684.2 million in 2020, and culminated in a significant negative value of -$1.07 billion in 2021. This instability suggests frequent shifts in the relationship between reported earnings and actual cash flow movements.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio mirrored the volatility of the aggregate accruals, oscillating from 3.85% in 2018 to -4.05% in 2019, rising to 4.51% in 2020, and falling sharply to -7.16% in 2021. The increasing magnitude of these fluctuations, particularly the shift to -7.16% in the final year, reflects a growing divergence between accrual-based accounting and cash flows, with the negative ratio in 2021 suggesting that cash flows from operations exceeded reported accrual earnings.
Overall, the alternating signs of the accruals ratio indicate a lack of consistency in reporting quality or working capital trends over the four-year period. The transition to a deeply negative ratio by the end of 2021 may point toward more conservative accounting treatments or a significant realization of previous accruals into cash.
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Cash-Flow-Statement-Based Accruals Ratio
Biogen Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Biogen Inc. | 1,556,100) | 4,000,600) | 5,888,500) | 4,430,700) | 2,539,100) | |
| Less: Net cash flow provided by operating activities | 3,639,900) | 4,229,800) | 7,078,600) | 6,187,700) | 4,551,000) | |
| Less: Net cash flow (used in) provided by investing activities | (563,700) | (608,600) | 470,500) | (2,046,300) | (2,963,100) | |
| Cash-flow-statement-based aggregate accruals | (1,520,100) | 379,400) | (1,660,600) | 289,300) | 951,200) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -10.16% | 2.50% | -10.98% | 1.91% | — | |
| 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 | 15.89% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 14.62% | — | — | — | — | |
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 × -1,520,100 ÷ [(14,430,300 + 15,502,200) ÷ 2] = -10.16%
2 Click competitor name to see calculations.
The financial data reveals a pattern of high volatility in reporting quality metrics between 2018 and 2021. While the base of net operating assets remained relatively stable, the aggregate accruals and the corresponding accruals ratio exhibited sharp, alternating fluctuations, switching between positive and negative values every fiscal year.
- Net Operating Assets Trend
- Net operating assets demonstrated moderate fluctuations, starting at 15,430,100 thousand US dollars in 2018, dipping to 14,818,000 thousand in 2019, peaking at 15,502,200 thousand in 2020, and ending at 14,430,300 thousand in 2021. This indicates a consistent operational asset base with no long-term growth or contraction trend over the analyzed period.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed extreme variance and a cyclical nature. Positive accruals were recorded in 2018 (289,300 thousand US dollars) and 2020 (379,400 thousand US dollars). Conversely, significant negative accruals occurred in 2019 (-1,660,600 thousand US dollars) and 2021 (-1,520,100 thousand US dollars). The magnitude of the negative accruals in odd-numbered years substantially outweighs the positive accruals in even-numbered years.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals, alternating between positive and negative territory. The ratio shifted from 1.91% in 2018 to -10.98% in 2019, recovered to 2.50% in 2020, and dropped again to -10.16% in 2021. The recurring shift toward significant negative ratios in 2019 and 2021 suggests periods where cash flows from operations significantly exceeded accrual-based earnings, contrasting with the lower positive ratios observed in 2018 and 2020.
The consistent oscillation of the accruals ratio suggests an inconsistent relationship between reported earnings and cash flow over the four-year period. The significant negative ratios in 2019 and 2021 may indicate a conservative accounting posture or the impact of non-recurring cash adjustments during those specific years.
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