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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AbbVie Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Selected Financial Data since 2012
- Net Profit Margin since 2012
- Return on Assets (ROA) since 2012
- Price to Earnings (P/E) since 2012
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
AbbVie Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Current portion of long-term debt and finance lease obligations | ||||||
| Less: Long-term debt and finance lease obligations, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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.
The financial reporting quality measures demonstrate distinct and significant shifts over the analyzed period. Net operating assets exhibited a declining trend from 2021 through 2023, falling from 82,290 million US dollars to 56,966 million US dollars. In 2024, this trend reversed slightly, with net operating assets rising to 64,953 million US dollars.
Balance-sheet-based aggregate accruals consistently registered negative values from 2021 to 2023, indicating a potential decrease in earnings quality or an increase in items that may not translate into cash flow. Specifically, aggregate accruals decreased from -8,384 million US dollars in 2021 to -14,363 million US dollars in 2023, demonstrating an increasing magnitude of negative accruals. However, in 2024, aggregate accruals swung positively to 7,987 million US dollars, marking a notable change in this metric.
The balance-sheet-based accruals ratio mirrors the pattern observed in aggregate accruals, starting with a negative -9.69% in 2021 and deteriorating further to -22.39% by 2023, indicative of declining financial reporting quality. The sharp rise to a positive 13.1% in 2024 represents an inflection point, potentially signaling improved accrual management or changes in operational or accounting policies.
- Summary of Observations:
- Net operating assets decreased steadily for three consecutive years before a moderate rebound in the final year.
- Aggregate accruals became increasingly negative over the first three years, reflecting potentially lower earnings quality, followed by a substantial positive reversal in the last year.
- The accruals ratio also declined significantly prior to shifting to a positive figure, suggesting a marked change in the accruals dynamics in the latest period.
Overall, the data indicates a period of deteriorating financial reporting quality from 2021 to 2023, followed by an abrupt improvement in 2024. This pattern highlights the necessity for further investigation into the causes of the negative accrual trends and the subsequent positive reversal to fully understand the implications for earnings quality and cash flow predictability.
Cash-Flow-Statement-Based Accruals Ratio
AbbVie Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net earnings attributable to AbbVie Inc. | ||||||
| Less: Cash flows from operating activities | ||||||
| Less: Cash flows from investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 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.
- Net Operating Assets
-
The net operating assets exhibited a declining trend from 2021 through 2023, decreasing from $82,290 million to $56,966 million. This was followed by a moderate increase in 2024 to $64,953 million. The initial decline over the three-year period may indicate asset reductions or reallocation of resources, while the 2024 rebound suggests some restoration or expansion of operating assets.
- Cash-Flow-Statement-Based Aggregate Accruals
-
This measure displayed a negative trend from 2021 to 2023, with aggregate accruals becoming increasingly negative, moving from -$8,891 million to -$15,967 million. This indicates a potential buildup of accruals that may reflect increasing non-cash adjustments or timing differences in recognizing expenses and revenues. Notably, in 2024, the metric shifted to a positive value of $6,292 million, signaling a significant reversal in accrual behavior.
- Cash-Flow-Statement-Based Accruals Ratio
-
The accruals ratio mirrors the trend observed in aggregate accruals, starting at -10.28% in 2021 and declining more steeply to -24.89% by 2023. This deepening negative ratio suggests increasing reliance on accruals in earnings relative to cash flow, which may reflect heightened earnings management or changes in operating efficiency. The reversal to a positive ratio of 10.32% in 2024 is substantial, indicating a shift toward accruals that contribute positively relative to cash flows, which could reflect changes in accounting estimates, policies, or operational improvements.