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
Twenty-First Century Fox Inc., balance sheet computation of aggregate accruals
US$ in millions
| Jun 30, 2018 | Jun 30, 2017 | Jun 30, 2016 | Jun 30, 2015 | Jun 30, 2014 | Jun 30, 2013 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 53,831) | 50,724) | 48,365) | 50,051) | 54,793) | 50,944) | |
| Less: Cash and cash equivalents | 7,622) | 6,163) | 4,424) | 8,428) | 5,415) | 6,659) | |
| Operating assets | 46,209) | 44,561) | 43,941) | 41,623) | 49,378) | 44,285) | |
| Operating Liabilities | |||||||
| Total liabilities | 32,269) | 33,092) | 32,932) | 31,244) | 33,351) | 30,300) | |
| Less: Current borrowings | 1,054) | 457) | 427) | 244) | 799) | 137) | |
| Less: Non-current borrowings | 18,469) | 19,456) | 19,298) | 18,795) | 18,259) | 16,321) | |
| Operating liabilities | 12,746) | 13,179) | 13,207) | 12,205) | 14,293) | 13,842) | |
| Net operating assets1 | 33,463) | 31,382) | 30,734) | 29,418) | 35,085) | 30,443) | |
| Balance-sheet-based aggregate accruals2 | 2,081) | 648) | 1,316) | (5,667) | 4,642) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 6.42% | 2.09% | 4.38% | -17.57% | 14.17% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Alphabet Inc. | — | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30), 10-K (reporting date: 2015-06-30), 10-K (reporting date: 2014-06-30), 10-K (reporting date: 2013-06-30).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 46,209 – 12,746 = 33,463
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= 33,463 – 31,382 = 2,081
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,081 ÷ [(33,463 + 31,382) ÷ 2] = 6.42%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals from 2014 to 2018 reveals a period of significant volatility followed by relative stabilization. The relationship between net operating assets and aggregate accruals indicates substantial fluctuations in reporting quality and cash flow alignment, particularly during the 2014 to 2016 window.
- Net Operating Assets Trend
- Net operating assets experienced an initial contraction, decreasing from 35,085 million US$ in 2014 to 29,418 million US$ in 2015. Following this decline, a consistent upward trajectory was observed, with assets growing steadily to 33,463 million US$ by June 30, 2018.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals demonstrated extreme variance over the five-year period. A positive balance of 4,642 million US$ in 2014 shifted sharply to a negative 5,667 million US$ in 2015, representing a substantial reversal in the gap between accrual-based earnings and cash flows. This figure returned to positive territory in 2016 at 1,316 million US$, dipped to 648 million US$ in 2017, and rose again to 2,081 million US$ in 2018.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals, swinging from 14.17% in 2014 to -17.57% in 2015. This sharp inversion suggests a period where cash flow significantly exceeded accrual-based earnings. From 2016 onward, the ratio stabilized at significantly lower levels, recording 4.38% in 2016, 2.09% in 2017, and 6.42% in 2018. The reduction in the ratio's magnitude post-2015 indicates a more tempered relationship between operating assets and accruals, potentially reflecting improved earnings quality or a stabilization of accounting estimates.
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Cash-Flow-Statement-Based Accruals Ratio
Twenty-First Century Fox Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Jun 30, 2018 | Jun 30, 2017 | Jun 30, 2016 | Jun 30, 2015 | Jun 30, 2014 | Jun 30, 2013 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to Twenty-First Century Fox, Inc. stockholders | 4,464) | 2,952) | 2,755) | 8,306) | 4,514) | 7,097) | |
| Less: Net cash provided by operating activities | 4,227) | 3,785) | 3,048) | 3,617) | 2,964) | 3,002) | |
| Less: Net cash (used in) provided by investing activities | (1,177) | (752) | (1,638) | 6,736) | (935) | 86) | |
| Cash-flow-statement-based aggregate accruals | 1,414) | (81) | 1,345) | (2,047) | 2,485) | 4,009) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 4.36% | -0.26% | 4.47% | -6.35% | 7.58% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Alphabet Inc. | — | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30), 10-K (reporting date: 2015-06-30), 10-K (reporting date: 2014-06-30), 10-K (reporting date: 2013-06-30).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,414 ÷ [(33,463 + 31,382) ÷ 2] = 4.36%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between June 30, 2014, and June 30, 2018, reveals significant volatility in the relationship between accounting earnings and operational cash flows. While the asset base remained relatively stable, the accruals figures exhibited an alternating pattern of positive and negative values, indicating fluctuating levels of non-cash earnings.
- Net Operating Assets Trend
- Net operating assets showed a general stability over the five-year period. After an initial decrease from 35,085 million USD in 2014 to 29,418 million USD in 2015, the balance gradually recovered, ending at 33,463 million USD in 2018. This indicates a consistent scale of operational investment despite the fluctuations in accruals.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited high volatility, shifting signs in every consecutive period. A peak of 2,485 million USD in 2014 was followed by a sharp decline to -2,047 million USD in 2015. The values then returned to positive territory in 2016 (1,345 million USD), dipped to near zero in 2017 (-81 million USD), and rose again to 1,414 million USD in 2018. This oscillation suggests that the gap between accrual-based reporting and cash generation was inconsistent across the reporting window.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals, fluctuating between a high of 7.58% in 2014 and a low of -6.35% in 2015. The ratio remained moderate in 2016 (4.47%) and 2018 (4.36%), with a brief period of near-zero accruals in 2017 (-0.26%). The alternating signs of the ratio indicate alternating periods where earnings exceeded cash flows (positive ratios) and periods where cash flows exceeded earnings (negative ratios), the latter of which typically suggests higher earnings quality or more conservative accounting during those specific intervals.
Overall, the data demonstrates that the entity did not maintain a consistent trend in its accruals management. The periodic reversal of the accruals ratio suggests that the discrepancies between cash flow and net income were transient and cyclical rather than indicative of a long-term systemic shift in reporting quality.
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