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
3M Co., 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 | 47,072) | 47,344) | 44,659) | 36,500) | 37,987) | |
| Less: Cash and cash equivalents | 4,564) | 4,634) | 2,353) | 2,853) | 3,053) | |
| Less: Marketable securities, current | 201) | 404) | 98) | 380) | 1,076) | |
| Operating assets | 42,307) | 42,306) | 42,208) | 33,267) | 33,858) | |
| Operating Liabilities | ||||||
| Total liabilities | 31,955) | 34,413) | 34,533) | 26,652) | 26,365) | |
| Less: Short-term borrowings and current portion of long-term debt | 1,307) | 806) | 2,795) | 1,211) | 1,853) | |
| Less: Current obligations of finance leases | 7) | 22) | 21) | 17) | 13) | |
| Less: Long-term debt, excluding current portion | 16,056) | 17,989) | 17,518) | 13,411) | 12,096) | |
| Less: Finance leases, net of current obligations | 93) | 93) | 111) | 75) | 60) | |
| Operating liabilities | 14,492) | 15,503) | 14,088) | 11,938) | 12,343) | |
| Net operating assets1 | 27,815) | 26,803) | 28,120) | 21,329) | 21,515) | |
| Balance-sheet-based aggregate accruals2 | 1,012) | (1,317) | 6,791) | (186) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 3.71% | -4.80% | 27.47% | -0.87% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | 30.23% | — | — | — | — | |
| Caterpillar Inc. | 4.22% | — | — | — | — | |
| Eaton Corp. plc | 10.92% | — | — | — | — | |
| GE Aerospace | -33.29% | — | — | — | — | |
| Honeywell International Inc. | 9.04% | — | — | — | — | |
| Lockheed Martin Corp. | 23.38% | — | — | — | — | |
| RTX Corp. | 1.48% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.06% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 3.43% | 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
= 42,307 – 14,492 = 27,815
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 27,815 – 26,803 = 1,012
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,012 ÷ [(27,815 + 26,803) ÷ 2] = 3.71%
4 Click competitor name to see calculations.
The analysis of the provided financial quality measures over the four-year period reveals several notable trends and fluctuations in key indicators.
- Net Operating Assets
- The value of net operating assets exhibited an overall upward trajectory from 2018 through 2021. Starting at approximately US$21.3 billion in 2018, the metric increased significantly to roughly US$28.1 billion by the end of 2019. Although there was a slight decline in 2020 to about US$26.8 billion, the figure rose again in 2021 to approximately US$27.8 billion. This pattern suggests a general expansion in operating asset bases over the period, with a minor contraction occurring in 2020.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals showed considerable volatility throughout the timeframe. In 2018, the figure was slightly negative, around -US$186 million, indicating marginally conservative financial reporting or low accrual activity. However, in 2019, accruals surged impressively to approximately US$6.8 billion, demonstrating a substantial increase in non-cash earnings components or adjustments. This was followed by a reversal in 2020, dropping to a negative US$1.3 billion, indicating a strong reduction or reversal of previously accrued amounts. In 2021, accruals returned to a positive figure of about US$1.0 billion, indicating a moderate accrual level compared to earlier years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, reflecting accruals as a percentage of net operating assets, mirrored the trends seen in aggregate accruals with pronounced shifts. The ratio was negative at -0.87% in 2018, rose sharply to a high of 27.47% in 2019, indicating a large proportion of accruals relative to operating assets. Following this peak, the ratio markedly declined to -4.8% in 2020, signaling a contraction of accruals relative to the asset base. In 2021, the ratio moderated to a positive but considerably lower 3.71%, indicating a normalization of accrual levels relative to net operating assets.
Overall, the data reflect significant fluctuations in accrual-related measures, with a pronounced peak in 2019 followed by a marked contraction in 2020 and a moderate recovery in 2021. Meanwhile, net operating assets generally trended upward, albeit with some short-term variability. These patterns suggest periods of varying financial reporting adjustments or operational changes which impacted accrual components distinctly during the period under review.
Cash-Flow-Statement-Based Accruals Ratio
3M Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to 3M | 5,921) | 5,384) | 4,570) | 5,349) | 4,858) | |
| Less: Net cash provided by operating activities | 7,454) | 8,113) | 7,070) | 6,439) | 6,240) | |
| Less: Net cash (used in) provided by investing activities | (1,317) | (580) | (6,444) | 222) | (3,086) | |
| Cash-flow-statement-based aggregate accruals | (216) | (2,149) | 3,944) | (1,312) | 1,704) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -0.79% | -7.83% | 15.95% | -6.12% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | -43.09% | — | — | — | — | |
| Caterpillar Inc. | 5.38% | — | — | — | — | |
| Eaton Corp. plc | 7.52% | — | — | — | — | |
| GE Aerospace | -53.22% | — | — | — | — | |
| Honeywell International Inc. | 2.16% | — | — | — | — | |
| Lockheed Martin Corp. | -10.24% | — | — | — | — | |
| RTX Corp. | -1.96% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -13.86% | -3.12% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -8.91% | -5.18% | — | — | — | |
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 × -216 ÷ [(27,815 + 26,803) ÷ 2] = -0.79%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed a varying trend over the analyzed periods. There was a significant increase from US$21,329 million at the end of 2018 to US$28,120 million by the end of 2019. This was followed by a slight decline to US$26,803 million in 2020, before rising again to US$27,815 million in 2021. The fluctuations suggest a volatile investment or utilization of operating assets during these years, with an overall upward movement compared to the initial value in 2018.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals displayed notable volatility. Starting with a negative value of -US$1,312 million in 2018, they shifted to a substantially positive number of US$3,944 million in 2019, indicating a reversal in accruals. In the subsequent years, the values dropped back to negative figures: -US$2,149 million in 2020 and then a smaller negative amount of -US$216 million in 2021. These movements reflect considerable changes in non-cash adjustments to operating cash flows, with marked variability that could impact earnings quality assessment.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the pattern seen in aggregate accruals. Beginning at -6.12% in 2018, it rose sharply to 15.95% in 2019, suggesting a period with substantial accrual-based adjustments relative to net operating assets. In 2020, the ratio reverted to a negative level of -7.83%, and then moved closer to zero with -0.79% in 2021. The ratio’s swings indicate that the proportion of accruals to net operating assets was unstable across the time frame, implicating fluctuations in financial reporting quality or operational adjustments.