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
Charter Communications Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 147,193) | 144,523) | 142,491) | 144,206) | 148,188) | |
| Less: Cash and cash equivalents | 709) | 645) | 601) | 998) | 3,483) | |
| Operating assets | 146,484) | 143,878) | 141,890) | 143,208) | 144,705) | |
| Operating Liabilities | ||||||
| Total liabilities | 132,475) | 131,974) | 124,335) | 113,925) | 109,377) | |
| Less: Current portion of long-term debt | 2,000) | 1,510) | 2,997) | 1,008) | 3,500) | |
| Less: Long-term debt, less current portion | 95,777) | 96,093) | 88,564) | 81,744) | 75,578) | |
| Operating liabilities | 34,698) | 34,371) | 32,774) | 31,173) | 30,299) | |
| Net operating assets1 | 111,786) | 109,507) | 109,116) | 112,035) | 114,406) | |
| Balance-sheet-based aggregate accruals2 | 2,279) | 391) | (2,919) | (2,371) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 2.06% | 0.36% | -2.64% | -2.09% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | 17.24% | 21.43% | 22.86% | — | — | |
| Comcast Corp. | 1.29% | -6.76% | -0.48% | — | — | |
| Meta Platforms Inc. | 11.12% | 20.95% | 14.69% | — | — | |
| Netflix Inc. | -3.78% | 14.21% | 27.24% | — | — | |
| Take-Two Interactive Software Inc. | 169.30% | 174.36% | 268.82% | — | — | |
| Walt Disney Co. | 0.08% | 3.09% | 1.73% | -4.26% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 8.32% | 7.91% | 8.32% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | 5.03% | -3.70% | 10.24% | 200.00% | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 146,484 – 34,698 = 111,786
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 111,786 – 109,507 = 2,279
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,279 ÷ [(111,786 + 109,507) ÷ 2] = 2.06%
4 Click competitor name to see calculations.
The financial data for the periods ending December 31, 2020, through December 31, 2023, reveals notable trends in net operating assets and accrual measures.
- Net Operating Assets
- The net operating assets remained relatively stable over the four-year period, fluctuating narrowly between approximately 109 billion and 112 billion US dollars. There was a slight decline from about 112 billion in 2020 to approximately 109 billion in 2021, followed by a marginal increase to 111.8 billion by the end of 2023. Overall, this indicates consistent asset levels with minor variations but no significant growth or decline.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibited a significant transformation over the observed periods. Initially, negative accruals of around -2.37 billion US dollars in 2020 increased in magnitude to -2.92 billion in 2021, suggesting an increasing level of adjustments reducing operating earnings relative to cash flow. However, a dramatic reversal occurred thereafter, with aggregate accruals turning positive to 391 million in 2022 and substantially rising to 2.28 billion in 2023. This shift from negative to positive accruals reflects a pronounced change in the accounting adjustments impacting reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrors the pattern seen in aggregate accruals. The ratio was negative at -2.09% in 2020, further decreasing to -2.64% in 2021, indicating that accruals reduced reported earnings relative to the asset base during these years. In 2022, the ratio turned positive, registering at 0.36%, and increased further to 2.06% in 2023. This trend suggests an increasing proportion of accruals contributing positively to earnings relative to net operating assets toward the end of the period.
In summary, the data indicates stability in net operating assets over time, but a significant reversal in the nature and extent of accrued adjustments affecting earnings. The transition from negative to positive accruals and accrual ratios suggests a changing financial reporting dynamic that could impact earnings quality or comparability across the periods reviewed.
Cash-Flow-Statement-Based Accruals Ratio
Charter Communications Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Charter shareholders | 4,557) | 5,055) | 4,654) | 3,222) | 1,668) | |
| Less: Net cash flows from operating activities | 14,433) | 14,925) | 16,239) | 14,562) | 11,748) | |
| Less: Net cash flows from investing activities | (11,127) | (9,114) | (7,754) | (8,157) | (7,331) | |
| Cash-flow-statement-based aggregate accruals | 1,251) | (756) | (3,831) | (3,183) | (2,749) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.13% | -0.69% | -3.46% | -2.81% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | -0.52% | -7.90% | 17.48% | — | — | |
| Comcast Corp. | -3.44% | -3.88% | -0.83% | — | — | |
| Meta Platforms Inc. | -7.43% | 1.96% | -14.89% | — | — | |
| Netflix Inc. | -8.44% | 16.73% | 27.32% | — | — | |
| Take-Two Interactive Software Inc. | 29.93% | 4.34% | 1,842.27% | — | — | |
| Walt Disney Co. | -1.97% | 1.50% | -0.29% | -4.68% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | -2.86% | -1.68% | 2.58% | 7.89% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | -2.32% | -1.31% | 6.83% | -1.39% | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,251 ÷ [(111,786 + 109,507) ÷ 2] = 1.13%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets exhibited a relatively stable trend over the four-year period. Beginning at approximately 112 billion US dollars at the end of 2020, the figure showed a slight decline in 2021 to around 109 billion, remaining nearly flat through 2022 and 2023, with a minor increase to about 111.8 billion by the end of 2023. This stability suggests consistent investment in operating assets without significant expansion or contraction.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals based on the cash flow statement transitioned markedly over the period. Initially, the accruals were negative and increasing in magnitude, moving from -3.18 billion US dollars in 2020 to -3.83 billion in 2021, indicating higher levels of accruals that reduce reported earnings relative to cash flows. This trend reversed sharply in 2022, with a substantial decrease in negative accruals to -0.76 billion, culminating in a positive accrual of 1.25 billion in 2023. The shift from negative to positive values over the period suggests a change in accrual accounting practices or operational performance impacting earnings quality.
- Cash-flow-statement-based accruals ratio
- The accruals ratio, representing aggregate accruals as a percentage relative to an underlying basis (likely cash flows), mirrors the changes observed in the aggregate accruals. The ratio declined from -2.81% at the end of 2020 to -3.46% in 2021, reflecting an increase in negative accruals relative to the base. In 2022, it moved closer to zero at -0.69%, and by the end of 2023, it crossed into positive territory at 1.13%. This progression denotes an improving trend in accrual quality, with the positive ratio in 2023 potentially indicating accruals contributing positively to reported earnings compared with cash flows, which may warrant further investigation to assess the sustainability and quality of earnings.