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. | — | — | — | — | — | |
| DoorDash, 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.
Between 2016 and 2019, the balance-sheet-based accruals metrics exhibit a period of significant volatility followed by a trend toward stabilization. The most notable shift occurred between 2016 and 2017, characterized by a sharp reversal in both the absolute value of aggregate accruals and the resulting accruals ratio.
- Net Operating Assets
- Net operating assets experienced a general decline from 13,005 million US dollars in 2016 to 11,256 million US dollars in 2018. This downward trajectory concluded in 2019 with a slight increase to 11,418 million US dollars, indicating a period of relative stabilization in the asset base.
- Balance-Sheet-Based Aggregate Accruals
- A substantial contraction in aggregate accruals is observed between 2016 and 2017, where values moved from 12,584 million US dollars to -1,419 million US dollars. This negative position narrowed to -330 million US dollars in 2018 and returned to a positive value of 162 million US dollars by the end of 2019.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio shows a drastic correction from an exceptional high of 187.46% in 2016 to -11.54% in 2017. Following this correction, the ratio trended steadily toward a neutral position, recording -2.89% in 2018 and 1.43% in 2019. This convergence toward zero suggests a significant improvement in the alignment between reported earnings and cash-based operating assets, indicating higher financial reporting quality in the latter years of the period.
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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. | — | — | — | — | — | |
| DoorDash, 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.
The financial reporting quality, as analyzed through the cash-flow-statement-based accruals ratio, exhibits a significant transition between 2016 and 2019. The period is characterized by a sharp reversal in accrual levels followed by a stabilization phase moving toward a neutral position.
- Net Operating Assets Trend
- Net operating assets decreased from 13,005 million US$ in 2016 to a low of 11,256 million US$ in 2018, before seeing a marginal recovery to 11,418 million US$ in 2019. This indicates a general contraction in the operational asset base over the majority of the observed period.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals transitioned from a positive 1,607 million US$ in 2016 to a substantial negative 2,084 million US$ in 2017. This volatility moderated in subsequent years, with values moving to -398 million US$ in 2018 and -128 million US$ in 2019, signaling a reduction in the variance between accrual-based reporting and actual cash movements.
- Accruals Ratio and Reporting Quality
- The accruals ratio experienced a sharp decline from 23.94% in 2016 to -16.95% in 2017. A high positive ratio in 2016 suggests that a significant portion of earnings was derived from non-cash accruals. The shift to negative values in 2017, 2018, and 2019 indicates that cash flows began to exceed accrual-based earnings. The subsequent convergence toward zero, ending at -1.13% in 2019, suggests an increasing alignment between reported net income and operational cash flow, which is generally interpreted as an improvement in earnings quality.
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