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% | — | — | — | |
| Adobe Inc. | -8.24% | 14.14% | — | — | — | |
| AppLovin Corp. | 36.28% | — | — | — | — | |
| Cadence Design Systems Inc. | 26.65% | — | — | — | — | |
| Datadog Inc. | 17.56% | — | — | — | — | |
| International Business Machines Corp. | 1.55% | — | — | — | — | |
| Intuit Inc. | 85.68% | — | — | — | — | |
| Microsoft Corp. | 42.27% | — | — | — | — | |
| Oracle Corp. | 9.90% | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | — | — | — | — | |
| Salesforce Inc. | 57.74% | — | — | — | — | |
| ServiceNow Inc. | 12.89% | — | — | — | — | |
| Synopsys Inc. | 5.01% | 0.36% | — | — | — | |
| Workday Inc. | 55.93% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 29.53% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 19.09% | 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 a consistently negative position for net operating assets throughout the analyzed period. This persistent negative balance indicates a business model where operating liabilities consistently exceed operating assets, a structural characteristic typical of payment processors that hold significant customer balances.
- Net Operating Assets Trend
- Net operating assets experienced a notable expansion in negative value in 2020, reaching US$ 17,499 million, followed by a partial contraction to US$ 14,866 million in 2021, and a subsequent increase in negative balance to US$ 16,116 million by the end of 2022.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrate significant volatility. The figures shifted from a modest positive of US$ 393 million in 2019 to a substantial negative of US$ 6,105 million in 2020. This was followed by a sharp reversal to a positive US$ 2,633 million in 2021, before returning to a negative US$ 1,250 million in 2022.
- Financial Reporting Quality Analysis
- The oscillation between positive and negative aggregate accruals suggests instability in the relationship between reported accrual earnings and cash flows. The large negative accrual in 2020 suggests that cash flows from operations significantly exceeded reported net income for that period, while the positive swing in 2021 indicates the opposite trend, signaling fluctuations in reporting quality and working capital management.
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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% | — | — | — | |
| Adobe Inc. | -19.93% | 9.21% | — | — | — | |
| AppLovin Corp. | 22.07% | — | — | — | — | |
| Cadence Design Systems Inc. | 15.03% | — | — | — | — | |
| Datadog Inc. | -34.44% | — | — | — | — | |
| International Business Machines Corp. | -7.22% | — | — | — | — | |
| Intuit Inc. | 25.60% | — | — | — | — | |
| Microsoft Corp. | 13.42% | — | — | — | — | |
| Oracle Corp. | -30.58% | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | — | — | — | — | |
| Salesforce Inc. | 21.96% | — | — | — | — | |
| ServiceNow Inc. | 8.80% | — | — | — | — | |
| Synopsys Inc. | -4.64% | -4.88% | — | — | — | |
| Workday Inc. | -0.65% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 2.29% | 21.87% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 3.25% | 15.65% | — | — | — | |
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.
An analysis of financial reporting quality between 2019 and 2022 reveals a significant volatility in aggregate accruals contrasted with a consistently negative net operating asset position.
- Net Operating Assets Trend
- Net operating assets remained negative throughout the observed period, fluctuating between -11,394 million US dollars in 2019 and -17,499 million US dollars in 2020. This persistent negative balance suggests a business model where operating liabilities consistently exceed operating assets, a characteristic often associated with the management of third-party funds in payment services.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited a sharp increase in 2020, peaking at 14,566 million US dollars from a 2019 level of 3,631 million US dollars. This surge indicates a period where reported earnings significantly diverged from cash flows from operations. However, this trend reversed sharply in the following years, with accruals falling to 3,314 million US dollars in 2021 and nearly disappearing by December 31, 2022, reaching a nominal value of 27 million US dollars.
- Earnings Quality Implications
- The convergence of aggregate accruals toward zero by the end of 2022 suggests an increase in the quality of financial reporting. The substantial reduction in the gap between accrual-based earnings and cash-flow-based earnings indicates that net income is now more closely aligned with actual cash generation, reducing the potential for earnings distortion often associated with high accrual levels.
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