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
PayPal Holdings Inc., 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 | 78,717) | 75,803) | 70,379) | 51,333) | 43,332) | |
| Less: Cash and cash equivalents | 7,776) | 5,197) | 4,794) | 7,349) | 7,575) | |
| Less: Short-term investments | 3,092) | 4,303) | 8,289) | 3,412) | 1,534) | |
| Less: Funds receivable and customer accounts | 36,357) | 36,141) | 33,418) | 22,527) | 20,062) | |
| Operating assets | 31,492) | 30,162) | 23,878) | 18,045) | 14,161) | |
| Operating Liabilities | ||||||
| Total liabilities | 58,443) | 54,076) | 50,316) | 34,404) | 27,946) | |
| Less: Short-term debt | —) | —) | —) | —) | 1,998) | |
| Less: Current portion of long-term debt | 418) | 999) | —) | —) | —) | |
| Less: Long-term debt, excluding current portion | 10,417) | 8,049) | 8,939) | 4,965) | —) | |
| Operating liabilities | 47,608) | 45,028) | 41,377) | 29,439) | 25,948) | |
| Net operating assets1 | (16,116) | (14,866) | (17,499) | (11,394) | (11,787) | |
| Balance-sheet-based aggregate accruals2 | (1,250) | 2,633) | (6,105) | 393) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | — | — | — | — | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 21.70% | 27.93% | 3.73% | — | — | |
| Adobe Inc. | -8.24% | 14.14% | 8.20% | — | — | |
| Cadence Design Systems Inc. | 26.65% | 4.43% | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 17.56% | 173.39% | — | — | — | |
| Fair Isaac Corp. | -3.66% | -6.17% | -0.02% | — | — | |
| International Business Machines Corp. | 1.55% | -7.39% | — | — | — | |
| Intuit Inc. | 85.68% | 139.73% | -1.39% | — | — | |
| Microsoft Corp. | 42.27% | 40.52% | — | — | — | |
| Oracle Corp. | 9.90% | 5.62% | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | 85.21% | 69.06% | — | — | |
| Salesforce Inc. | 57.74% | 10.87% | — | — | — | |
| ServiceNow Inc. | 12.89% | 34.89% | — | — | — | |
| Synopsys Inc. | 5.01% | 0.36% | 8.40% | — | — | |
| Workday Inc. | 55.93% | -15.99% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 29.41% | 16.74% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 18.09% | 19.19% | 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
= 31,492 – 47,608 = -16,116
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= -16,116 – -14,866 = -1,250
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,250 ÷ [(-16,116 + -14,866) ÷ 2] = —
4 Click competitor name to see calculations.
The financial data reveals significant fluctuations in the net operating assets and balance-sheet-based aggregate accruals over the four-year period ending December 31, 2022.
- Net Operating Assets
- The net operating assets consistently show negative values across all years, indicating that liabilities exceed operating assets. The magnitude of the negative value increased markedly from -11,394 million USD in 2019 to -17,499 million USD in 2020, representing a substantial deterioration. This was followed by a moderate improvement in 2021, with the figure rising to -14,866 million USD, before turning slightly worse again to -16,116 million USD in 2022. Overall, the trend suggests continued pressure on net operating asset levels, with significant volatility particularly in 2020.
- Balance-sheet-based Aggregate Accruals
- This metric exhibits pronounced volatility. In 2019, a positive accrual figure of 393 million USD was recorded, shifting sharply to a negative accrual of -6,105 million USD in 2020, indicating a large decrease in accruals or, equivalently, a significant cash flow component reducing net assets. Subsequently, the accruals surged to 2,633 million USD in 2021 before declining once more to -1,250 million USD in 2022. This oscillation suggests variability in accounting accruals which could impact financial earnings quality and the timing of revenue and expense recognition.
- Balance-sheet-based Accruals Ratio
- No values were provided for the accruals ratio throughout the period, limiting the ability to interpret this specific measure of financial reporting quality in relative terms.
In summary, the company experiences considerable fluctuations in its operating assets and accrual measures over the analyzed period. The persistence of large negative net operating assets highlights potential concerns regarding the balance between operating liabilities and assets. The wide swings in aggregate accruals point toward inconsistencies in earnings management or operational cash flow timing, which could affect the reliability and predictability of reported earnings. The absence of data on the accruals ratio restricts further insights into the relative proportion of accruals to total assets or revenues.
Cash-Flow-Statement-Based Accruals Ratio
PayPal Holdings Inc., 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 income | 2,419) | 4,169) | 4,202) | 2,459) | 2,057) | |
| Less: Net cash provided by operating activities | 5,813) | 6,340) | 5,854) | 4,561) | 5,483) | |
| Less: Net cash (used in) provided by investing activities | (3,421) | (5,485) | (16,218) | (5,733) | 840) | |
| Cash-flow-statement-based aggregate accruals | 27) | 3,314) | 14,566) | 3,631) | (4,266) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | — | — | — | — | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | 11.87% | 11.80% | -13.65% | — | — | |
| Adobe Inc. | -19.93% | 9.21% | -0.48% | — | — | |
| Cadence Design Systems Inc. | 15.03% | -5.75% | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | -34.44% | -28.18% | — | — | — | |
| Fair Isaac Corp. | -13.92% | -17.25% | -10.25% | — | — | |
| International Business Machines Corp. | -7.22% | -1.64% | — | — | — | |
| Intuit Inc. | 25.60% | 58.72% | -34.22% | — | — | |
| Microsoft Corp. | 13.42% | 17.68% | — | — | — | |
| Oracle Corp. | -30.58% | 25.81% | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | -68.30% | -488.47% | — | — | |
| Salesforce Inc. | 21.96% | 10.57% | — | — | — | |
| ServiceNow Inc. | 8.80% | -21.14% | — | — | — | |
| Synopsys Inc. | -4.64% | -4.88% | 0.92% | — | — | |
| Workday Inc. | -0.65% | -18.51% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 1.94% | 11.13% | -27.89% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 2.90% | 8.62% | -15.22% | — | — | |
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 × 27 ÷ [(-16,116 + -14,866) ÷ 2] = —
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets value displays a negative balance throughout the observed periods, indicating a persistent net liability position. The extent of this negative balance deepened from -11,394 million USD in 2019 to -17,499 million USD in 2020, showing a significant increase in net operating liabilities. Following 2020, the negative net operating assets reduced somewhat to -14,866 million USD in 2021, before increasing again to -16,116 million USD in 2022. This pattern reflects volatility with an overall trend of high negative net operating assets, which could suggest increased operational liabilities or a change in asset composition over the years.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals derived from the cash flow statement exhibit considerable variance during the period. Starting at 3,631 million USD in 2019, the figure surged remarkably to 14,566 million USD in 2020, a near fourfold increase. However, in the subsequent years, aggregate accruals sharply declined to 3,314 million USD in 2021 and further decreased to 27 million USD in 2022. This sharp rise followed by a dramatic reduction might indicate fluctuations in accrual accounting practices or operational cash flow timing effects over these periods.
- Cash-flow-statement-based Accruals Ratio
- No data is available for the accruals ratio, which limits the ability to assess the proportion of accruals relative to cash flow or other base metrics. The absence of this ratio restricts comprehensive evaluation of earnings quality changes from an accrual perspective for the period analyzed.