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
Kraft Heinz Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 28, 2019 | Dec 29, 2018 | Dec 30, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 101,450) | 103,461) | 120,232) | 120,480) | 122,973) | |
| Less: Cash and cash equivalents | 2,279) | 1,130) | 1,629) | 4,204) | 4,837) | |
| Operating assets | 99,171) | 102,331) | 118,603) | 116,276) | 118,136) | |
| Operating Liabilities | ||||||
| Total liabilities | 49,701) | 51,683) | 53,985) | 62,906) | 56,737) | |
| Less: Commercial paper and other short-term debt | 6) | 21) | 460) | 645) | 4) | |
| Less: Current portion of long-term debt | 1,022) | 377) | 2,743) | 2,046) | 79) | |
| Less: Long-term debt, excluding current portion | 28,216) | 30,770) | 28,333) | 29,713) | 25,151) | |
| Operating liabilities | 20,457) | 20,515) | 22,449) | 30,502) | 31,503) | |
| Net operating assets1 | 78,714) | 81,816) | 96,154) | 85,774) | 86,633) | |
| Balance-sheet-based aggregate accruals2 | (3,102) | (14,338) | 10,380) | (859) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -3.86% | -16.11% | 11.41% | -1.00% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 99,171 – 20,457 = 78,714
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 78,714 – 81,816 = -3,102
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -3,102 ÷ [(78,714 + 81,816) ÷ 2] = -3.86%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals indicates significant volatility in financial reporting quality from 2016 through 2019. The metrics reflect substantial fluctuations in the relationship between reported earnings and cash flows relative to the asset base.
- Net Operating Assets Trend
- Net operating assets experienced an initial increase from 85,774 million US$ in 2016 to a peak of 96,154 million US$ in 2017. This was followed by a contraction over the subsequent two years, declining to 81,816 million US$ in 2018 and further to 78,714 million US$ by 2019.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited extreme variance. After starting at -859 million US$ in 2016, there was a sharp increase to 10,380 million US$ in 2017. This positive spike was immediately followed by a severe reversal to -14,338 million US$ in 2018, before moderating to -3,102 million US$ in 2019.
- Accruals Ratio Analysis
- The accruals ratio transitioned from a near-neutral -1.00% in 2016 to a high of 11.41% in 2017, indicating a period where reported earnings significantly exceeded cash flows relative to assets. The subsequent plunge to -16.11% in 2018 suggests a major shift toward negative accruals, often associated with substantial non-cash charges or asset impairments. By 2019, the ratio returned toward a more stable, albeit negative, position of -3.86%.
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Cash-Flow-Statement-Based Accruals Ratio
Kraft Heinz Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 28, 2019 | Dec 29, 2018 | Dec 30, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Kraft Heinz | 1,935) | (10,192) | 10,999) | 3,632) | 634) | |
| Less: Net cash provided by operating activities | 3,552) | 2,574) | 527) | 5,238) | 2,467) | |
| Less: Net cash (used for) provided by investing activities | 1,511) | 288) | 1,156) | (1,113) | (9,704) | |
| Cash-flow-statement-based aggregate accruals | (3,128) | (13,054) | 9,316) | (493) | 7,871) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -3.90% | -14.67% | 10.24% | -0.57% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -3,128 ÷ [(78,714 + 81,816) ÷ 2] = -3.90%
2 Click competitor name to see calculations.
The financial data reveals significant volatility in the cash-flow-statement-based accruals and the corresponding accruals ratio over the four-year period ending December 31, 2019. While net operating assets experienced a peak in 2017 followed by a steady decline, the aggregate accruals shifted dramatically between positive and negative values, indicating substantial fluctuations in the relationship between reported earnings and cash flow.
- Net Operating Assets Trend
- Net operating assets increased from 85,774 million USD in 2016 to a peak of 96,154 million USD in 2017. This was followed by a contraction to 81,816 million USD in 2018 and a further decrease to 78,714 million USD by 2019, representing a consistent reduction in the operating asset base following the 2017 peak.
- Aggregate Accruals Volatility
- Aggregate accruals exhibited extreme variance across the period. A nominal negative value of -493 million USD in 2016 shifted to a significant positive accrual of 9,316 million USD in 2017. This trend reversed sharply in 2018, with accruals falling to -13,054 million USD, before moderating to -3,128 million USD in 2019. These swings suggest inconsistent alignment between accrual-based accounting and cash generation.
- Accruals Ratio Analysis
- The accruals ratio mirrored the volatility of the aggregate accruals, moving from -0.57% in 2016 to a peak of 10.24% in 2017. The ratio then plummeted to -14.67% in 2018, marking the most significant deviation in the observed period, before ending at -3.90% in 2019. The sharp increase in 2017 indicates a period where reported earnings were substantially higher than cash flows, whereas the negative ratios in 2018 and 2019 indicate that cash flows exceeded reported accrual-based earnings.
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