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
Vertex Pharmaceuticals Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 22,533,200) | 22,730,200) | 18,150,900) | 13,432,500) | 11,751,808) | |
| Less: Cash and cash equivalents | 4,569,600) | 10,369,100) | 10,504,000) | 6,795,000) | 5,988,187) | |
| Less: Marketable securities | 1,546,300) | 849,200) | 274,500) | 729,900) | 670,710) | |
| Operating assets | 16,417,300) | 11,511,900) | 7,372,400) | 5,907,600) | 5,092,911) | |
| Operating Liabilities | ||||||
| Total liabilities | 6,123,600) | 5,149,800) | 4,238,200) | 3,332,500) | 3,064,993) | |
| Less: Current finance lease liabilities | 5,200) | 50,600) | 40,800) | 46,900) | 42,434) | |
| Less: Long-term finance lease liabilities | 112,800) | 376,100) | 430,800) | 509,800) | 539,042) | |
| Operating liabilities | 6,005,600) | 4,723,100) | 3,766,600) | 2,775,800) | 2,483,517) | |
| Net operating assets1 | 10,411,700) | 6,788,800) | 3,605,800) | 3,131,800) | 2,609,394) | |
| Balance-sheet-based aggregate accruals2 | 3,622,900) | 3,183,000) | 474,000) | 522,406) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 42.13% | 61.24% | 14.07% | 18.20% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | 13.10% | -22.39% | -14.27% | -9.69% | — | |
| Amgen Inc. | -10.36% | 57.08% | 4.07% | 0.70% | — | |
| Bristol-Myers Squibb Co. | -3.21% | -7.12% | -3.86% | -13.40% | — | |
| Danaher Corp. | -3.94% | 3.48% | -1.55% | 16.41% | — | |
| Eli Lilly & Co. | 29.18% | 28.84% | 11.38% | 16.60% | — | |
| Gilead Sciences Inc. | -11.79% | 1.04% | -2.92% | -2.34% | — | |
| Johnson & Johnson | 10.61% | -21.13% | 19.84% | 3.75% | — | |
| Merck & Co. Inc. | 6.20% | 3.16% | 0.46% | 25.14% | — | |
| Pfizer Inc. | -11.48% | 30.66% | 24.95% | -7.11% | — | |
| Regeneron Pharmaceuticals Inc. | 25.51% | 1.17% | 11.07% | 43.54% | — | |
| Thermo Fisher Scientific Inc. | 2.28% | 4.96% | -1.78% | 43.38% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 1.64% | 7.36% | 4.84% | 6.18% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.24% | 8.72% | 3.57% | 4.72% | — | |
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 16,417,300 – 6,005,600 = 10,411,700
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 10,411,700 – 6,788,800 = 3,622,900
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,622,900 ÷ [(10,411,700 + 6,788,800) ÷ 2] = 42.13%
4 Click competitor name to see calculations.
- Net operating assets
- The net operating assets exhibit a consistent and substantial upward trend over the observed period. Starting at 3,131,800 thousand US dollars at the end of 2021, the figure increases to 3,605,800 thousand in 2022, nearly doubling to 6,788,800 thousand in 2023, and reaching 10,411,700 thousand by the end of 2024. This growth indicates a significant expansion in the company's investment in operational resources and assets over the four-year span.
- Balance-sheet-based aggregate accruals
- Balance-sheet-based aggregate accruals display a non-linear pattern. The amount initially declines from 522,406 thousand US dollars in 2021 to 474,000 thousand in 2022, suggesting a reduction in accruals during this interval. However, from 2022 onwards, there is a marked increase, rising sharply to 3,183,000 thousand in 2023 and further to 3,622,900 thousand in 2024. This substantial increase in accruals in the latter years may reflect shifts in earnings management, timing differences, or changing operational conditions affecting accrual components.
- Balance-sheet-based accruals ratio
- The accruals ratio, expressed as a percentage, mirrors the behavior observed in aggregate accruals but with more volatility. It shows a decline from 18.2% in 2021 to 14.07% in 2022, indicating a smaller proportion of accruals relative to net operating assets at that time. Subsequently, there is a dramatic increase to 61.24% in 2023 and a slight decrease to 42.13% in 2024. These elevated levels in 2023 and 2024 suggest a higher relative reliance on accruals, which could imply greater earnings management or accrual-based adjustments occurring in these years. The sharp rise and subsequent partial reduction in the accrual ratio warrant close monitoring for potential implications on the quality of financial reporting.
Cash-Flow-Statement-Based Accruals Ratio
Vertex Pharmaceuticals Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | (535,600) | 3,619,600) | 3,322,000) | 2,342,100) | 2,711,647) | |
| Less: Net cash provided by (used in) operating activities | (492,600) | 3,537,300) | 4,129,900) | 2,643,500) | 3,253,505) | |
| Less: Net cash (used in) provided by investing activities | (3,770,000) | (3,141,700) | (321,100) | (340,900) | 99,388) | |
| Cash-flow-statement-based aggregate accruals | 3,727,000) | 3,224,000) | (486,800) | 39,500) | (641,246) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 43.34% | 62.03% | -14.45% | 1.38% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | 10.32% | -24.89% | -16.25% | -10.28% | — | |
| Amgen Inc. | -11.16% | 52.47% | 8.81% | -12.87% | — | |
| Bristol-Myers Squibb Co. | -4.97% | -5.99% | -9.10% | -12.73% | — | |
| Danaher Corp. | -1.25% | 8.20% | 1.44% | 18.48% | — | |
| Eli Lilly & Co. | 28.52% | 28.13% | 10.32% | 5.30% | — | |
| Gilead Sciences Inc. | -18.05% | -0.19% | -4.95% | -4.86% | — | |
| Johnson & Johnson | 10.58% | 13.66% | 10.78% | 8.23% | — | |
| Merck & Co. Inc. | 5.00% | 2.23% | 0.61% | 29.09% | — | |
| Pfizer Inc. | -5.24% | 19.96% | 18.46% | 13.18% | — | |
| Regeneron Pharmaceuticals Inc. | 12.04% | 14.35% | 18.61% | 49.24% | — | |
| Thermo Fisher Scientific Inc. | 4.71% | 3.80% | -0.06% | 34.69% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 2.07% | 9.68% | 2.52% | 8.19% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 3.82% | 9.13% | 3.06% | 6.04% | — | |
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,727,000 ÷ [(10,411,700 + 6,788,800) ÷ 2] = 43.34%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets have demonstrated a consistent and substantial increase over the four-year period. Starting at approximately 3.13 billion US dollars at the end of 2021, the value rose to about 3.61 billion at the end of 2022, then sharply increased to 6.79 billion in 2023, and continued climbing to approximately 10.41 billion by the end of 2024. This trend indicates a significant expansion in the company's operational resources and investment base.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals showed marked volatility throughout the period. Initially, there was a modest positive accrual of 39.5 million US dollars in 2021, followed by a notable negative accrual of -486.8 million in 2022, suggesting a reversal or adjustment in accruals. In the subsequent years, the accruals shifted dramatically to large positive values, reaching 3.22 billion in 2023 and increasing slightly to 3.73 billion in 2024. This fluctuation highlights considerable changes in non-cash components of earnings, potentially impacting earnings quality.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio exhibited significant fluctuations, starting with a low positive rate of 1.38% in 2021, declining sharply to a negative ratio of -14.45% in 2022, indicative of negative accrual influences relative to net operating assets. Thereafter, the ratio surged to 62.03% in 2023 and moderated to 43.34% in 2024, reflecting a high proportion of accruals relative to operating assets in those years. Such elevated ratios may suggest increased earnings management or changes in the quality of earnings.