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
Marriott International Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 25,051) | 23,696) | 23,948) | 24,140) | 6,082) | |
| Less: Cash and equivalents | 225) | 316) | 383) | 858) | 96) | |
| Operating assets | 24,826) | 23,380) | 23,565) | 23,282) | 5,986) | |
| Operating Liabilities | ||||||
| Total liabilities | 24,348) | 21,471) | 20,217) | 18,783) | 9,672) | |
| Less: Current portion of long-term debt | 977) | 833) | 398) | 309) | 300) | |
| Less: Long-term debt, excluding current portion | 9,963) | 8,514) | 7,840) | 8,197) | 3,807) | |
| Operating liabilities | 13,408) | 12,124) | 11,979) | 10,277) | 5,565) | |
| Net operating assets1 | 11,418) | 11,256) | 11,586) | 13,005) | 421) | |
| Balance-sheet-based aggregate accruals2 | 162) | (330) | (1,419) | 12,584) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 1.43% | -2.89% | -11.54% | 187.46% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Airbnb Inc. | — | — | — | — | — | |
| Booking Holdings Inc. | — | — | — | — | — | |
| Chipotle Mexican Grill Inc. | — | — | — | — | — | |
| McDonald’s Corp. | — | — | — | — | — | |
| Starbucks Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 24,826 – 13,408 = 11,418
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 11,418 – 11,256 = 162
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 162 ÷ [(11,418 + 11,256) ÷ 2] = 1.43%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a declining trend from 2016 to 2018, decreasing from 13,005 million US dollars to 11,256 million US dollars, followed by a slight increase to 11,418 million US dollars in 2019. This indicates a reduction in the net investment in operating assets over the period, with a minor recovery in the final year observed.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals experienced a significant shift over the four-year span. In 2016, the accruals were notably high and positive at 12,584 million US dollars, which drastically dropped to a negative value of -1,419 million US dollars in 2017. Thereafter, aggregate accruals remained in negative territory but increased to -330 million US dollars in 2018 and switched back to a small positive value of 162 million US dollars in 2019. This pattern suggests considerable volatility in accruals, with a marked reversal occurring between 2016 and 2017.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio aligns with the volatility observed in aggregate accruals. It was extremely high at 187.46% in 2016, reflecting substantial accruals relative to net operating assets at that time. This ratio then plunged to -11.54% in 2017, indicating a large negative accrual relative to operating assets. Subsequently, the ratio stayed relatively low, showing negative 2.89% in 2018 and slightly positive 1.43% in 2019, which points to stabilization at levels closer to zero and reduced distortion from accruals in the financial reporting.
- Overall Analysis
- The data presents a notable reduction in both net operating assets and accruals magnitude from 2016 onwards. The sharp decline and reversal in accrual figures between 2016 and 2017 suggest a possible shift in accounting policies or operational conditions affecting earnings quality. The reduction in the accruals ratio to near-zero values in 2018 and 2019 indicates a move toward more conservative or normalized financial reporting with less reliance on accrual-based adjustments. The slight increase in net operating assets in 2019 may imply cautious asset re-investment or stabilization after prior reductions. These trends collectively suggest improved financial reporting quality and more stable recognition of operating assets and earnings components in the latter years of the period.
Cash-Flow-Statement-Based Accruals Ratio
Marriott International Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income | 1,273) | 1,907) | 1,372) | 780) | 859) | |
| Less: Net cash provided by operating activities | 1,685) | 2,357) | 2,436) | 1,582) | 1,430) | |
| Less: Net cash (used in) provided by investing activities | (284) | (52) | 1,020) | (2,409) | 367) | |
| Cash-flow-statement-based aggregate accruals | (128) | (398) | (2,084) | 1,607) | (938) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.13% | -3.48% | -16.95% | 23.94% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Airbnb Inc. | — | — | — | — | — | |
| Booking Holdings Inc. | — | — | — | — | — | |
| Chipotle Mexican Grill Inc. | — | — | — | — | — | |
| McDonald’s Corp. | — | — | — | — | — | |
| Starbucks Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 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 × -128 ÷ [(11,418 + 11,256) ÷ 2] = -1.13%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrate a decreasing trend from 2016 through 2018, declining from 13,005 million US dollars to 11,256 million US dollars. In 2019, there is a slight increase to 11,418 million US dollars, suggesting a potential stabilization or modest recovery in asset levels after a period of reduction.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals show considerable fluctuations over the periods. In 2016, the figure is positive at 1,607 million US dollars, indicating accruals contributing positively to net income relative to cash flow. However, there is a significant reversal to a negative value of -2,084 million US dollars in 2017, suggesting an increase in cash-based income components or a reduction in accrual-based income. This negative trend continues but less dramatically in 2018 and 2019, with values of -398 million and -128 million US dollars respectively, indicating a move toward lower accruals impacting the income statement.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio aligns with the aggregate accruals trend, showing a pronounced positive ratio (23.94%) in 2016, shifting sharply to a strongly negative ratio (-16.95%) in 2017. This large negative ratio signifies a substantial divergence between accrual earnings and cash flow. In subsequent years, the ratio moves closer to zero, recording -3.48% in 2018 and -1.13% in 2019, indicating decreasing accruals' influence relative to cash flow, thereby potentially reflecting improved earnings quality or reduced earnings manipulation through accrual adjustments.