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
NXP Semiconductors N.V., 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 | 20,864) | 19,847) | 20,016) | 21,530) | 24,049) | |
| Less: Cash and cash equivalents | 2,830) | 2,275) | 1,045) | 2,789) | 3,547) | |
| Operating assets | 18,034) | 17,572) | 18,971) | 18,741) | 20,502) | |
| Operating Liabilities | ||||||
| Total liabilities | 14,094) | 10,696) | 10,361) | 10,840) | 10,333) | |
| Less: Short-term debt | —) | —) | —) | 1,107) | 751) | |
| Less: Long-term debt | 10,572) | 7,609) | 7,365) | 6,247) | 5,814) | |
| Operating liabilities | 3,522) | 3,087) | 2,996) | 3,486) | 3,768) | |
| Net operating assets1 | 14,512) | 14,485) | 15,975) | 15,255) | 16,734) | |
| Balance-sheet-based aggregate accruals2 | 27) | (1,490) | 720) | (1,479) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 0.19% | -9.78% | 4.61% | -9.25% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | — | — | — | — | — | |
| Analog Devices Inc. | 90.70% | — | — | — | — | |
| Applied Materials Inc. | 17.33% | — | — | — | — | |
| Broadcom Inc. | -8.72% | — | — | — | — | |
| Intel Corp. | — | — | — | — | — | |
| KLA Corp. | — | — | — | — | — | |
| Lam Research Corp. | — | — | — | — | — | |
| Marvell Technology Inc. | — | — | — | — | — | |
| Micron Technology Inc. | — | — | — | — | — | |
| NVIDIA Corp. | — | — | — | — | — | |
| Qualcomm Inc. | 22.56% | — | — | — | — | |
| Texas Instruments Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 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), 20-F (reporting date: 2018-12-31), 20-F (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 18,034 – 3,522 = 14,512
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 14,512 – 14,485 = 27
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 27 ÷ [(14,512 + 14,485) ÷ 2] = 0.19%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals from 2018 to 2021 reveals a pattern of significant volatility in the relationship between accrual-based earnings and cash flows. The fluctuations in the accruals ratio indicate alternating periods of conservative reporting and periods where accrual earnings exceeded cash flow.
- Net Operating Assets Trend
- Net operating assets remained relatively stable over the observed period, with a peak of 15,975 million USD in 2019. A contraction occurred in 2020, with values decreasing to 14,485 million USD, followed by a marginal increase to 14,512 million USD in 2021. This stability in the asset base suggests that the volatility in the accruals ratio is driven by changes in the aggregate accruals rather than significant shifts in the scale of operations.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibited erratic movement, shifting between negative and positive values. Substantial negative accruals were recorded in 2018 (-1,479 million USD) and 2020 (-1,490 million USD). Conversely, 2019 showed positive accruals of 720 million USD, and 2021 saw a near-neutral position of 27 million USD. These swings indicate inconsistent timing differences between the recognition of revenue and expenses relative to the actual movement of cash.
- Accruals Ratio Interpretation
- The accruals ratio mirrored the volatility of the aggregate accruals, fluctuating from a low of -9.78% in 2020 to a high of 4.61% in 2019. The negative ratios in 2018 (-9.25%) and 2020 (-9.78%) suggest that cash flows from operations were higher than the reported accrual earnings during those years, often viewed as a sign of high earnings quality or conservative accounting. The positive ratio in 2019 indicates a reversal where accrual earnings led cash flow. By 2021, the ratio converged toward zero (0.19%), representing a high degree of alignment between reported earnings and cash generation.
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Cash-Flow-Statement-Based Accruals Ratio
NXP Semiconductors N.V., 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 stockholders | 1,871) | 52) | 243) | 2,208) | 2,215) | |
| Less: Net cash provided by operating activities | 3,077) | 2,482) | 2,373) | 4,369) | 2,447) | |
| Less: Net cash (used for) provided by investing activities | (934) | (418) | (2,284) | (522) | 2,072) | |
| Cash-flow-statement-based aggregate accruals | (272) | (2,012) | 154) | (1,639) | (2,304) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.88% | -13.21% | 0.99% | -10.25% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | — | — | — | — | — | |
| Analog Devices Inc. | -11.85% | — | — | — | — | |
| Applied Materials Inc. | 14.75% | — | — | — | — | |
| Broadcom Inc. | -12.34% | — | — | — | — | |
| Intel Corp. | — | — | — | — | — | |
| KLA Corp. | — | — | — | — | — | |
| Lam Research Corp. | — | — | — | — | — | |
| Marvell Technology Inc. | — | — | — | — | — | |
| Micron Technology Inc. | — | — | — | — | — | |
| NVIDIA Corp. | — | — | — | — | — | |
| Qualcomm Inc. | 15.61% | — | — | — | — | |
| Texas Instruments Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 21.27% | — | — | — | — | |
| 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), 20-F (reporting date: 2018-12-31), 20-F (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 × -272 ÷ [(14,512 + 14,485) ÷ 2] = -1.88%
2 Click competitor name to see calculations.
The analysis of financial reporting quality between 2018 and 2021 reveals significant volatility in the relationship between accrual-based earnings and actual cash flows. The reporting period is characterized by alternating cycles of substantial negative accruals and periods of relative alignment between cash and accounting profits.
- Net Operating Assets Trend
- Net operating assets demonstrated relative stability, fluctuating within a range of approximately 1.5 billion US dollars. A peak was observed in 2019 at 15,975 million US dollars, followed by a contraction to 14,485 million US dollars in 2020 and remaining nearly flat at 14,512 million US dollars in 2021.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited sharp fluctuations. Substantial negative values were recorded in 2018 (-1,639 million US dollars) and 2020 (-2,012 million US dollars). These figures were contrasted by a positive value of 154 million US dollars in 2019 and a narrower negative value of -272 million US dollars in 2021.
- Accruals Ratio Interpretation
- The accruals ratio mirrors the volatility of the aggregate accruals, showing significant negative spikes in 2018 (-10.25%) and 2020 (-13.21%). Such negative ratios typically suggest that cash flows from operations exceeded accrual-based earnings, often indicating high earnings quality or the impact of non-cash charges. The ratio shifted toward neutrality in 2019 (0.99%) and 2021 (-1.88%), indicating a closer synchronization between reported earnings and cash generation during those fiscal years.
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