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
Diamondback Energy Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 22,898) | 17,619) | 23,531) | 21,596) | 7,771) | |
| Less: Cash and cash equivalents | 654) | 104) | 123) | 215) | 112) | |
| Less: Restricted cash | 18) | 4) | 5) | —) | —) | |
| Operating assets | 22,226) | 17,511) | 23,403) | 21,381) | 7,659) | |
| Operating Liabilities | ||||||
| Total liabilities | 9,653) | 7,815) | 8,625) | 7,429) | 2,189) | |
| Less: Current maturities of long-term debt | 45) | 191) | —) | —) | —) | |
| Less: Long-term debt, excluding current maturities | 6,642) | 5,624) | 5,371) | 4,464) | 1,477) | |
| Operating liabilities | 2,966) | 2,000) | 3,254) | 2,965) | 712) | |
| Net operating assets1 | 19,260) | 15,511) | 20,149) | 18,416) | 6,947) | |
| Balance-sheet-based aggregate accruals2 | 3,749) | (4,638) | 1,733) | 11,469) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 21.56% | -26.01% | 8.99% | 90.44% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings Corp. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | 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
= 22,226 – 2,966 = 19,260
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 19,260 – 15,511 = 3,749
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,749 ÷ [(19,260 + 15,511) ÷ 2] = 21.56%
4 Click competitor name to see calculations.
The financial reporting quality, as evidenced by balance-sheet-based accruals, exhibits significant volatility between 2018 and 2021. The relationship between net operating assets and aggregate accruals shifted dramatically, indicating substantial changes in the composition of earnings and asset management over the four-year period.
- Net Operating Assets
- Net operating assets followed a fluctuating trajectory, increasing from 18,416 million US dollars in 2018 to 20,149 million US dollars in 2019. A notable contraction occurred in 2020, where assets declined to 15,511 million US dollars, followed by a recovery to 19,260 million US dollars by the end of 2021.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals demonstrated extreme variance, beginning at 11,469 million US dollars in 2018 and dropping sharply to 1,733 million US dollars in 2019. This decline intensified in 2020, resulting in a negative balance of -4,638 million US dollars, before rebounding to 3,749 million US dollars in 2021.
- Balance-sheet-based Accruals Ratio
- The accruals ratio underwent a precipitous decline from 90.44% in 2018 to 8.99% in 2019, indicating a rapid shift away from accrual-heavy earnings. The ratio reached a minimum of -26.01% in 2020, a state where cash flows exceeded accrual-based accounting income. A subsequent increase to 21.56% in 2021 marks a return to positive accruals relative to net operating assets, although the level remains significantly lower than the 2018 peak.
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Cash-Flow-Statement-Based Accruals Ratio
Diamondback Energy Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Diamondback Energy, Inc. | 2,182) | (4,517) | 240) | 846) | 482) | |
| Less: Net cash provided by operating activities | 3,944) | 2,118) | 2,734) | 1,565) | 889) | |
| Less: Net cash used in investing activities | (1,539) | (2,101) | (3,888) | (3,503) | (3,132) | |
| Cash-flow-statement-based aggregate accruals | (223) | (4,534) | 1,394) | 2,784) | 2,726) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.28% | -25.43% | 7.23% | 21.96% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings Corp. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -10.40% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | -10.60% | — | — | — | — | |
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 × -223 ÷ [(19,260 + 15,511) ÷ 2] = -1.28%
2 Click competitor name to see calculations.
The financial reporting quality, as measured by cash-flow-statement-based accruals, exhibited substantial volatility between 2018 and 2021. A marked transition is observed from high positive accruals in the early part of the period to a sharp negative spike in 2020, followed by a return toward stabilization in 2021.
- Cash-flow-statement-based Accruals Ratio
- A significant downward trend is observed in the accruals ratio, which declined from 21.96% in 2018 to 7.23% in 2019, before falling sharply to -25.43% in 2020. This indicates a shift where reported earnings initially exceeded cash flows from operations, but by 2020, cash flow generation substantially exceeded reported earnings. The ratio then normalized to -1.28% in 2021, suggesting a closer convergence between accrual-based accounting and cash flow.
- Aggregate Accruals and Net Operating Assets
- Aggregate accruals transitioned from a positive value of US$ 2,784 million in 2018 to a substantial negative value of US$ -4,534 million in 2020. This volatility coincided with fluctuations in net operating assets, which rose to US$ 20,149 million in 2019 before contracting to US$ 15,511 million in 2020. By 2021, net operating assets recovered to US$ 19,260 million, while aggregate accruals moved closer to a neutral position at US$ -223 million.
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