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
Fiserv 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 | 76,249) | 74,619) | 77,539) | 11,262) | 10,289) | |
| Less: Cash and cash equivalents | 835) | 906) | 893) | 415) | 325) | |
| Operating assets | 75,414) | 73,713) | 76,646) | 10,847) | 9,964) | |
| Operating Liabilities | ||||||
| Total liabilities | 44,299) | 41,290) | 42,682) | 8,969) | 7,558) | |
| Less: Short-term and current maturities of long-term debt | 508) | 384) | 287) | 4) | 3) | |
| Less: Long-term debt, excluding current maturities | 20,729) | 20,300) | 21,612) | 5,955) | 4,897) | |
| Operating liabilities | 23,062) | 20,606) | 20,783) | 3,010) | 2,658) | |
| Net operating assets1 | 52,352) | 53,107) | 55,863) | 7,837) | 7,306) | |
| Balance-sheet-based aggregate accruals2 | (755) | (2,756) | 48,026) | 531) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -1.43% | -5.06% | 150.79% | 7.01% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | — | — | — | — | — | |
| Adobe Inc. | 14.14% | — | — | — | — | |
| AppLovin Corp. | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | |
| Datadog Inc. | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | |
| Synopsys Inc. | 0.36% | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 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
= 75,414 – 23,062 = 52,352
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 52,352 – 53,107 = -755
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -755 ÷ [(52,352 + 53,107) ÷ 2] = -1.43%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals from 2018 to 2021 reveals a period of extreme volatility, characterized by a massive surge in 2019 followed by a sharp reversal and stabilization in negative territory through 2021.
- Net Operating Assets Trend
- A substantial increase in net operating assets is observed between December 31, 2018, and December 31, 2019, with values rising from US$ 7,837 million to US$ 55,863 million. This rapid expansion was followed by a period of modest contraction, with assets declining to US$ 53,107 million in 2020 and further to US$ 52,352 million by the end of 2021.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals experienced a dramatic spike in 2019, reaching US$ 48,026 million from a 2018 baseline of US$ 531 million. This trend reversed sharply in 2020, as accruals shifted to a negative value of US$ -2,756 million, before moderating to US$ -755 million in 2021.
- Accruals Ratio and Earnings Quality
- The balance-sheet-based accruals ratio exhibited an anomalous peak of 150.79% in 2019, compared to 7.01% in 2018. Such a high positive ratio typically indicates that a significant portion of the reported earnings is comprised of non-cash accruals rather than cash flows. However, the ratio transitioned to -5.06% in 2020 and -1.43% in 2021. The shift to negative values suggests that cash flows from operations exceeded reported accounting earnings during the latter two years, which is generally interpreted as an indicator of higher earnings quality and more conservative financial reporting.
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Cash-Flow-Statement-Based Accruals Ratio
Fiserv 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 attributable to Fiserv, Inc. | 1,334) | 958) | 893) | 1,187) | 1,246) | |
| Less: Net cash provided by operating activities | 4,034) | 4,147) | 2,795) | 1,552) | 1,483) | |
| Less: Net cash used in investing activities | (1,630) | (341) | (16,602) | (663) | (657) | |
| Cash-flow-statement-based aggregate accruals | (1,070) | (2,848) | 14,700) | 298) | 420) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -2.03% | -5.23% | 46.15% | 3.94% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | — | — | — | — | — | |
| Adobe Inc. | 9.21% | — | — | — | — | |
| AppLovin Corp. | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | |
| Datadog Inc. | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | |
| Synopsys Inc. | -4.88% | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 21.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 15.65% | — | — | — | — | |
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 × -1,070 ÷ [(52,352 + 53,107) ÷ 2] = -2.03%
2 Click competitor name to see calculations.
The analysis of cash-flow-statement-based accruals reveals significant volatility between 2018 and 2021, characterized by a substantial divergence between reported earnings and operating cash flows, particularly during the 2019 fiscal year.
- Net Operating Assets Trend
- A sharp expansion in net operating assets occurred in 2019, increasing from 7,837 million US$ to 55,863 million US$. Following this rapid growth, the asset base entered a period of slight contraction, ending at 52,352 million US$ by December 31, 2021.
- Aggregate Accruals Movement
- Cash-flow-statement-based aggregate accruals experienced an extreme spike in 2019, rising to 14,700 million US$ from a baseline of 298 million US$ in 2018. This trend reversed abruptly in 2020 and 2021, with values shifting to -2,848 million US$ and -1,070 million US$, respectively. The transition to negative aggregate accruals indicates that cash flows from operations exceeded accrual-based accounting income during the final two years of the period.
- Accruals Ratio Interpretation
- The accruals ratio demonstrates a high degree of fluctuation, peaking at 46.15% in 2019 compared to 3.94% in 2018. Such a high positive ratio typically suggests a lower quality of earnings, as a significant portion of reported income was not backed by cash. However, the ratio shifted to negative territory in 2020 (-5.23%) and 2021 (-2.03%), reflecting a transition toward a more conservative reporting profile where cash realizations outperformed accrual-based earnings.
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