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
Paramount Global, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 58,393) | 58,620) | 52,663) | 49,519) | 21,859) | |
| Less: Cash and cash equivalents | 2,885) | 6,267) | 2,984) | 632) | 322) | |
| Operating assets | 55,508) | 52,353) | 49,679) | 48,887) | 21,537) | |
| Operating Liabilities | ||||||
| Total liabilities | 34,787) | 35,543) | 36,410) | 35,976) | 19,055) | |
| Less: Current debt | 239) | 11) | 16) | 717) | 687) | |
| Less: Long-term debt, net of current portion | 15,607) | 17,698) | 19,717) | 18,002) | 9,465) | |
| Operating liabilities | 18,941) | 17,834) | 16,677) | 17,257) | 8,903) | |
| Net operating assets1 | 36,567) | 34,519) | 33,002) | 31,630) | 12,634) | |
| Balance-sheet-based aggregate accruals2 | 2,048) | 1,517) | 1,372) | 18,996) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.76% | 4.49% | 4.25% | 85.83% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | 21.43% | — | — | — | — | |
| Comcast Corp. | -6.76% | — | — | — | — | |
| Meta Platforms Inc. | 20.95% | — | — | — | — | |
| Netflix Inc. | 14.21% | — | — | — | — | |
| Walt Disney Co. | 3.09% | 1.73% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 7.77% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | -3.77% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 55,508 – 18,941 = 36,567
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 36,567 – 34,519 = 2,048
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,048 ÷ [(36,567 + 34,519) ÷ 2] = 5.76%
4 Click competitor name to see calculations.
The financial data reveals a significant shift in the composition of operating assets and the associated accruals between 2019 and 2022. While net operating assets have maintained a steady growth trajectory, the balance-sheet-based accruals experienced a precipitous decline after 2019, leading to a marked reduction in the accruals ratio.
- Net Operating Assets Trend
- Net operating assets exhibited consistent growth over the four-year period, increasing from US$ 31,630 million in 2019 to US$ 36,567 million by the end of 2022. This steady upward trend indicates a continuous expansion of the resource base utilized in the company's core operations.
- Aggregate Accruals Dynamics
- A substantial contraction in balance-sheet-based aggregate accruals occurred between December 31, 2019, and December 31, 2020, falling from US$ 18,996 million to US$ 1,372 million. Following this sharp decline, accruals remained relatively stable and low, with a gradual increase to US$ 1,517 million in 2021 and US$ 2,048 million in 2022.
- Accruals Ratio and Earnings Quality
- The balance-sheet-based accruals ratio underwent a dramatic correction, dropping from 85.83% in 2019 to 4.25% in 2020. For the subsequent two years, the ratio remained in a low range, ending at 5.76% in 2022. The transition from an exceptionally high ratio to a consistently low one suggests a fundamental change in the relationship between accounting earnings and cash flows, generally indicating an improvement in financial reporting quality as the reliance on non-cash accruals relative to net operating assets diminished significantly.
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Cash-Flow-Statement-Based Accruals Ratio
Paramount Global, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net earnings attributable to Paramount | 1,104) | 4,543) | 2,422) | 3,308) | 1,960) | |
| Less: Net cash flow provided by (used for) operating activities | (142) | 835) | 2,215) | 1,230) | 1,425) | |
| Less: Net cash flow (used for) provided by investing activities | (518) | 2,402) | 63) | (153) | (325) | |
| Cash-flow-statement-based aggregate accruals | 1,764) | 1,306) | 144) | 2,231) | 860) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 4.96% | 3.87% | 0.45% | 10.08% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | -7.90% | — | — | — | — | |
| Comcast Corp. | -3.88% | — | — | — | — | |
| Meta Platforms Inc. | 1.96% | — | — | — | — | |
| Netflix Inc. | 16.73% | — | — | — | — | |
| Walt Disney Co. | 1.50% | -0.29% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | -1.69% | 4.79% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | -1.31% | 12.91% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,764 ÷ [(36,567 + 34,519) ÷ 2] = 4.96%
2 Click competitor name to see calculations.
An analysis of the company's financial reporting quality from 2019 to 2022 reveals a consistent expansion of the operating asset base alongside significant volatility in aggregate accruals. Net operating assets demonstrated a steady upward trend, increasing annually from 31,630 million USD in 2019 to 36,567 million USD by the end of 2022.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals experienced a sharp decline in 2020, dropping from 2,231 million USD to 144 million USD. Following this contraction, a recovery trend is observed, with accruals rising to 1,306 million USD in 2021 and further increasing to 1,764 million USD in 2022. This pattern indicates fluctuating levels of divergence between reported accounting earnings and actual cash flow generation.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio shows a significant dip and subsequent gradual climb. After peaking at 10.08% in 2019, the ratio fell to a minimum of 0.45% in 2020, suggesting a period where earnings were almost entirely backed by cash flows. However, a steady increase is noted in the following two years, with the ratio rising to 3.87% in 2021 and 4.96% in 2022. This upward trajectory suggests that a growing proportion of the company's net operating assets is attributable to accruals, indicating a relative decrease in the cash-based quality of earnings compared to the 2020 baseline.
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