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
Warner Bros. Discovery Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 34,427) | 34,087) | 33,735) | 32,550) | 22,555) | |
| Less: Cash and cash equivalents | 3,905) | 2,091) | 1,552) | 986) | 7,309) | |
| Operating assets | 30,522) | 31,996) | 32,183) | 31,564) | 15,246) | |
| Operating Liabilities | ||||||
| Total liabilities | 21,031) | 21,704) | 21,769) | 22,033) | 17,532) | |
| Less: Finance lease liabilities, current | 58) | 57) | 47) | —) | —) | |
| Less: Current portion of debt | 339) | 335) | 609) | 1,860) | 30) | |
| Less: Noncurrent portion of debt | 14,420) | 15,069) | 14,810) | 15,185) | 14,755) | |
| Less: Finance lease liabilities, noncurrent | 197) | 184) | 203) | —) | —) | |
| Operating liabilities | 6,017) | 6,059) | 6,100) | 4,988) | 2,747) | |
| Net operating assets1 | 24,505) | 25,937) | 26,083) | 26,576) | 12,499) | |
| Balance-sheet-based aggregate accruals2 | (1,432) | (146) | (493) | 14,077) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -5.68% | -0.56% | -1.87% | 72.05% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | 1.73% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | 200.00% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 30,522 – 6,017 = 24,505
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 24,505 – 25,937 = -1,432
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,432 ÷ [(24,505 + 25,937) ÷ 2] = -5.68%
4 Click competitor name to see calculations.
An analysis of financial reporting quality between 2018 and 2021 reveals a significant shift in the relationship between reported earnings and cash flows. The period is characterized by a sharp transition from high positive accruals to consistent negative accruals, indicating a fundamental change in earnings composition.
- Net Operating Assets
- Net operating assets exhibited a gradual and steady decline over the four-year period. Starting at 26,576 million USD in 2018, the value decreased to 24,505 million USD by December 31, 2021, representing a total contraction of approximately 7.8%.
- Balance-Sheet-Based Aggregate Accruals
- A stark reversal is observed in aggregate accruals. In 2018, accruals were substantially positive at 14,077 million USD. This figure shifted abruptly to negative territory in 2019 at -493 million USD, followed by -146 million USD in 2020, and ending at -1,432 million USD in 2021. This trend suggests a move away from accrual-driven earnings toward a state where cash flow exceeds accrual-based reporting.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals. A high ratio of 72.05% in 2018 indicates that a significant portion of reported earnings was derived from non-cash accruals. This ratio plummeted to -1.87% in 2019 and fluctuated slightly to -0.56% in 2020, before declining further to -5.68% in 2021. The transition to negative ratios suggests an improvement in the quality of earnings from a cash-flow perspective, as negative accruals typically indicate that cash flows from operations are higher than net income.
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Cash-Flow-Statement-Based Accruals Ratio
Warner Bros. Discovery Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) available to Discovery, Inc. | 1,006) | 1,219) | 2,069) | 594) | (337) | |
| Less: Cash provided by operating activities | 2,798) | 2,739) | 3,399) | 2,576) | 1,629) | |
| Less: Cash used in investing activities | (56) | (703) | (438) | (8,593) | (633) | |
| Cash-flow-statement-based aggregate accruals | (1,736) | (817) | (892) | 6,611) | (1,333) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -6.88% | -3.14% | -3.39% | 33.84% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | -0.29% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 4.79% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | 12.91% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,736 ÷ [(24,505 + 25,937) ÷ 2] = -6.88%
2 Click competitor name to see calculations.
The financial reporting quality, as measured by cash-flow-statement-based accruals, exhibits a significant shift between 2018 and 2021. The period is characterized by a transition from high positive accruals to a consistent negative accrual trend, indicating a fundamental change in the relationship between reported earnings and operational cash flows.
- Net Operating Assets
- A steady decline in net operating assets is observed, moving from 26,576 million US dollars in 2018 to 24,505 million US dollars by 2021. This represents a gradual contraction in the capital tied up in the operating cycle over the four-year period.
- Cash-flow-statement-based aggregate accruals
- Aggregate accruals underwent a sharp reversal after 2018. While 2018 recorded a high positive value of 6,611 million US dollars, the subsequent years saw a shift to negative values, starting at -892 million US dollars in 2019 and reaching -1,736 million US dollars by 2021. This trajectory indicates that in the later years, cash flow from operations exceeded the accrual-based earnings.
- Cash-flow-statement-based accruals ratio
- The accruals ratio mirrors the trend of aggregate accruals, starting at a high of 33.84% in 2018 before dropping to -3.39% in 2019. The ratio remained negative through 2020 (-3.14%) and further declined to -6.88% in 2021. The shift from a high positive ratio to a negative ratio suggests an improvement in earnings quality, as the gap between accounting profits and actual cash receipts narrowed and eventually inverted.
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