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
Yahoo! Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 48,083,079) | 45,203,966) | 61,960,344) | 16,804,959) | 17,103,253) | |
| Less: Cash and cash equivalents | 1,119,469) | 1,631,911) | 2,667,916) | 2,077,590) | 2,667,778) | |
| Less: Short-term marketable securities | 5,700,925) | 4,225,112) | 5,327,412) | 1,330,304) | 1,516,175) | |
| Operating assets | 41,262,685) | 39,346,943) | 53,965,016) | 13,397,065) | 12,919,300) | |
| Operating Liabilities | ||||||
| Total liabilities | 16,999,003) | 16,124,546) | 23,174,752) | 3,674,362) | 2,497,650) | |
| Less: Convertible notes | 1,299,945) | 1,233,485) | 1,170,423) | 1,110,585) | —) | |
| Less: Net lease obligations | 23,000) | 33,000) | 47,000) | 44,000) | 37,000) | |
| Operating liabilities | 15,676,058) | 14,858,061) | 21,957,329) | 2,519,777) | 2,460,650) | |
| Net operating assets1 | 25,586,627) | 24,488,882) | 32,007,687) | 10,877,288) | 10,458,650) | |
| Balance-sheet-based aggregate accruals2 | 1,097,745) | (7,518,805) | 21,130,399) | 418,638) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.38% | -26.62% | 98.54% | 3.92% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | — | — | — | — | — | |
| Adobe Inc. | — | — | — | — | — | |
| AppLovin Corp. | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | |
| Datadog Inc. | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | |
| Synopsys Inc. | — | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Net operating assets = Operating assets – Operating liabilities
= 41,262,685 – 15,676,058 = 25,586,627
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= 25,586,627 – 24,488,882 = 1,097,745
3 2016 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,097,745 ÷ [(25,586,627 + 24,488,882) ÷ 2] = 4.38%
4 Click competitor name to see calculations.
The analysis of financial reporting quality between 2013 and 2016 reveals extreme volatility in both net operating assets and aggregate accruals, with a significant anomaly occurring in 2014 followed by a sharp reversal in 2015.
- Net Operating Assets Trend
- Net operating assets experienced a substantial increase from 10.88 billion US dollars in 2013 to a peak of 32.01 billion US dollars in 2014. This growth was followed by a contraction to 24.49 billion US dollars in 2015 and a relative stabilization at 25.59 billion US dollars by the end of 2016.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibited highly erratic movements. After a relatively low base of 418.6 million US dollars in 2013, accruals spiked to 21.13 billion US dollars in 2014. This was followed by a dramatic swing to a negative 7.52 billion US dollars in 2015, before returning to a positive position of 1.10 billion US dollars in 2016.
- Accruals Ratio and Earnings Quality
- The balance-sheet-based accruals ratio serves as a primary indicator of reporting quality. In 2013, the ratio was 3.92%, suggesting a strong alignment between earnings and cash flows. However, 2014 saw an unprecedented surge to 98.54%, indicating that a vast majority of the reported earnings were comprised of non-cash accruals, which typically signals a decrease in earnings quality. This was countered in 2015 by a negative ratio of -26.62%, implying that cash flows exceeded reported earnings, often a result of significant non-cash charges or asset write-downs. By 2016, the ratio normalized to 4.38%, returning to a level consistent with the 2013 baseline.
The data indicates a period of significant financial instability or structural change between 2014 and 2015, characterized by a massive accumulation of accruals followed by a substantial correction. The return to a low positive ratio in 2016 suggests a restoration of reporting stability.
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Cash-Flow-Statement-Based Accruals Ratio
Yahoo! Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Yahoo! Inc. | (214,321) | (4,359,082) | 7,521,731) | 1,366,281) | 3,945,479) | |
| Less: Net cash provided by (used in) operating activities | 1,248,863) | (2,383,422) | 896,700) | 1,195,247) | (281,554) | |
| Less: Net cash (used in) provided by investing activities | (1,574,265) | 1,752,112) | 3,761,969) | (23,221) | 3,362,044) | |
| Cash-flow-statement-based aggregate accruals | 111,081) | (3,727,772) | 2,863,062) | 194,255) | 864,989) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 0.44% | -13.20% | 13.35% | 1.82% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | — | — | — | — | — | |
| Adobe Inc. | — | — | — | — | — | |
| AppLovin Corp. | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | |
| Datadog Inc. | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | |
| Synopsys Inc. | — | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 111,081 ÷ [(25,586,627 + 24,488,882) ÷ 2] = 0.44%
2 Click competitor name to see calculations.
The financial data reflects a period of significant volatility in reporting quality and asset composition between 2013 and 2016. While the reporting period began and ended with low accruals, the intervening years were characterized by drastic swings in the relationship between reported earnings and actual cash flows.
- Net Operating Assets
- A substantial expansion in net operating assets occurred in 2014, increasing from 10.88 billion USD to 32.01 billion USD. This peak was followed by a contraction to 24.49 billion USD in 2015, with a subsequent slight increase to 25.59 billion USD by the end of 2016.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited extreme variance over the four-year period. Following a modest 194 million USD in 2013, accruals surged to 2.86 billion USD in 2014. This trend reversed sharply in 2015, as accruals shifted to a negative 3.73 billion USD, before normalizing to 111 million USD in 2016.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio tracks the proportion of earnings not supported by cash flows relative to the asset base. The ratio increased from 1.82% in 2013 to 13.35% in 2014, signaling a period where accruals played a more prominent role in reported earnings. A significant reversal occurred in 2015, with the ratio dropping to -13.20%, indicating that cash flows exceeded accrual-based earnings. By 2016, the ratio converged toward zero at 0.44%, suggesting a return to high reporting quality where earnings are closely aligned with cash flow.
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