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
eBay Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 22,819) | 25,981) | 23,847) | 17,785) | 45,132) | |
| Less: Cash and cash equivalents | 2,202) | 2,120) | 1,816) | 1,832) | 6,328) | |
| Less: Short-term investments | 2,713) | 3,743) | 5,333) | 4,299) | 3,770) | |
| Operating assets | 17,904) | 20,118) | 16,698) | 11,654) | 35,034) | |
| Operating Liabilities | ||||||
| Total liabilities | 16,538) | 17,918) | 13,308) | 11,209) | 25,226) | |
| Less: Short-term debt | 1,546) | 781) | 1,451) | —) | 850) | |
| Less: Long-term debt | 7,685) | 9,234) | 7,509) | 6,779) | 6,777) | |
| Operating liabilities | 7,307) | 7,903) | 4,348) | 4,430) | 17,599) | |
| Net operating assets1 | 10,597) | 12,215) | 12,350) | 7,224) | 17,435) | |
| Balance-sheet-based aggregate accruals2 | (1,618) | (135) | 5,126) | (10,211) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -14.19% | -1.10% | 52.38% | -82.82% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Amazon.com Inc. | — | — | — | — | — | |
| Home Depot Inc. | — | — | — | — | — | |
| Lowe’s Cos. Inc. | — | — | — | — | — | |
| TJX Cos. Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 17,904 – 7,307 = 10,597
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= 10,597 – 12,215 = -1,618
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,618 ÷ [(10,597 + 12,215) ÷ 2] = -14.19%
4 Click competitor name to see calculations.
The analysis of financial reporting quality between 2015 and 2018 reveals significant volatility in both the absolute value of aggregate accruals and the resulting accruals ratio, contrasted by a more stable trend in net operating assets following an initial period of expansion.
- Net Operating Assets Trend
- Net operating assets experienced a sharp increase from US$ 7,224 million in 2015 to US$ 12,350 million in 2016. This was followed by a period of gradual contraction, with assets declining slightly to US$ 12,215 million in 2017 and further to US$ 10,597 million by December 31, 2018.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrated substantial fluctuations over the four-year period. A significant negative value of US$ -10,211 million in 2015 shifted to a positive US$ 5,126 million in 2016. This positive swing was reversed in subsequent years, with accruals returning to negative territory at US$ -135 million in 2017 and US$ -1,618 million in 2018.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio mirrored the volatility of aggregate accruals, moving from -82.82% in 2015 to a peak of 52.38% in 2016. This transition indicates a dramatic shift in the composition of earnings relative to cash flows. By 2017 and 2018, the ratio stabilized into negative territory, recording -1.10% and -14.19% respectively, which suggests a return to a more conservative accrual profile by the end of the analyzed period.
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Cash-Flow-Statement-Based Accruals Ratio
eBay Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 2,530) | (1,016) | 7,266) | 1,725) | 46) | |
| Less: Net cash provided by operating activities | 2,661) | 3,146) | 2,827) | 2,877) | 5,677) | |
| Less: Net cash (used in) provided by investing activities | 2,894) | (1,296) | (2,008) | (673) | (2,673) | |
| Cash-flow-statement-based aggregate accruals | (3,025) | (2,866) | 6,447) | (479) | (2,958) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -26.52% | -23.33% | 65.87% | -3.88% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Amazon.com Inc. | — | — | — | — | — | |
| Home Depot Inc. | — | — | — | — | — | |
| Lowe’s Cos. Inc. | — | — | — | — | — | |
| TJX Cos. Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -3,025 ÷ [(10,597 + 12,215) ÷ 2] = -26.52%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2015 to 2018 reveals significant volatility in aggregate accruals, characterized by a substantial anomaly in 2016 followed by a trend toward conservative accrual levels.
- Cash-flow-statement-based accruals ratio
- A dramatic fluctuation is observed in the accruals ratio, which moved from -3.88% in 2015 to a peak of 65.87% in 2016. This sharp increase indicates a period where reported earnings significantly exceeded cash flows from operations. However, this trend reversed abruptly in 2017 and 2018, with the ratio dropping to -23.33% and -26.52% respectively. These negative ratios suggest that cash flows from operations surpassed net income in the latter two years, typically signifying higher earnings quality and more conservative accounting practices.
- Aggregate accruals trend
- The absolute value of cash-flow-statement-based aggregate accruals reflects the same volatility as the ratio. After a relatively low negative value of -479 million USD in 2015, accruals spiked to 6,447 million USD in 2016. This was followed by a shift back to negative territory, reaching -2,866 million USD in 2017 and -3,025 million USD in 2018. The sustained negative accruals in the final two years indicate a consistent pattern of cash flow exceeding accrual-based earnings.
- Net operating assets movements
- Net operating assets experienced a substantial increase between 2015 and 2016, rising from 7,224 million USD to 12,350 million USD. This expansion in the asset base coincided with the peak in the accruals ratio. Subsequently, net operating assets remained relatively stable in 2017 at 12,215 million USD before declining to 10,597 million USD by the end of 2018, suggesting a contraction or optimization of the operating asset base.
Overall, the data suggests a significant divergence between earnings and cash flows in 2016, which was subsequently corrected. The progression toward increasingly negative accruals ratios by 2018 points toward an improvement in the quality of reported earnings relative to cash generation.
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