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.
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Warner Bros. Discovery Inc. pages available for free this week:
- Analysis of Profitability Ratios
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Selected Financial Data since 2008
- Net Profit Margin since 2008
- Return on Equity (ROE) since 2008
- Debt to Equity since 2008
- Total Asset Turnover since 2008
- Price to Operating Profit (P/OP) since 2008
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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 | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Finance lease liabilities, current | ||||||
| Less: Current portion of debt | ||||||
| Less: Noncurrent portion of debt | ||||||
| Less: Finance lease liabilities, noncurrent | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | ||||||
| Comcast Corp. | ||||||
| Meta Platforms Inc. | ||||||
| Netflix Inc. | ||||||
| Walt Disney Co. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | ||||||
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
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a slight downward trend over the four-year period. Starting at 26,576 million US dollars at the end of 2018, the figure decreased marginally each year, reaching 24,505 million US dollars by the end of 2021. This steady decline suggests a gradual reduction in operational asset investment or efficient asset management.
- Balance-sheet-based Aggregate Accruals
- There was significant volatility in the balance-sheet-based aggregate accruals during the timeframe. In 2018, accruals were notably positive at 14,077 million US dollars. However, in subsequent years, accruals turned negative with -493 million in 2019, -146 million in 2020, and a further decline to -1,432 million in 2021. The shift from a large positive figure to negative accruals illustrates an evolving accounting or operational environment possibly impacting earnings quality.
- Balance-sheet-based Accruals Ratio
- The accruals ratio showed a sharp decline from a high positive value of 72.05% in 2018 to negative values thereafter. The ratio dropped to -1.87% in 2019, then a modest increase to -0.56% in 2020, followed by a further decline to -5.68% in 2021. This pattern signals that the accrual component of earnings shifted from a significant positive contribution to a negative one, which could reflect changes in revenue recognition, expense matching, or asset valuation practices.
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. | ||||||
| Less: Cash provided by operating activities | ||||||
| Less: Cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | ||||||
| Comcast Corp. | ||||||
| Meta Platforms Inc. | ||||||
| Netflix Inc. | ||||||
| Walt Disney Co. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | ||||||
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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
The analysis of the financial reporting quality measures over the four-year period reveals several noteworthy trends in the company's operating assets and accruals.
- Net Operating Assets
- The net operating assets exhibit a gradual decline from US$26,576 million in 2018 to US$24,505 million in 2021. This decrease suggests a modest contraction in the company's net operating asset base over the period, with a cumulative reduction of approximately US$2,071 million or roughly 7.8%. The decline is steady each year, indicating a consistent reduction in assets used for operations or a reduction in related liabilities.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals show significant volatility. Starting from a positive US$6,611 million in 2018, the figure turns negative in 2019 and continues to deepen through 2020 and 2021, reaching -US$1,736 million by the end of 2021. This sharp reversal from a substantial positive accrual balance to negative balances may indicate changes in working capital management or earnings quality, with accruals reducing earnings in recent years as opposed to boosting them in 2018.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, aligns with the trends observed in aggregate accruals. It starts at a relatively high positive ratio of 33.84% in 2018, signifying a large proportion of accruals relative to net operating assets. However, this ratio turns negative in 2019 at -3.39% and remains negative, with further decline to -6.88% by 2021. The negative ratios indicate that accruals have increasingly detracted from cash flows compared to the asset base, which may be indicative of decreasing earnings quality or more conservative accounting practices regarding revenue recognition and expense matching.
Overall, the data illustrate a transition from a period with positive and relatively high accruals to one dominated by negative accruals, accompanied by a gradual decline in net operating assets. This pattern suggests a shift in the company's operational finance dynamics, potentially reflecting changes in asset utilization, cash flow management, or accounting policies over the timeframe.