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
Allergan Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 12,415,700) | 10,574,300) | 9,179,300) | 8,508,600) | 8,308,100) | |
| Less: Cash and equivalents | 4,911,400) | 3,046,100) | 2,701,800) | 2,406,100) | 1,991,200) | |
| Less: Short-term investments | 55,000) | 603,000) | 260,600) | 179,900) | 749,100) | |
| Operating assets | 7,449,300) | 6,925,200) | 6,216,900) | 5,922,600) | 5,567,800) | |
| Operating Liabilities | ||||||
| Total liabilities | 4,652,700) | 4,104,800) | 3,316,700) | 3,176,200) | 3,527,000) | |
| Less: Notes payable | 72,100) | 55,600) | 48,800) | 83,900) | 28,100) | |
| Less: Convertible notes | —) | —) | —) | —) | 642,500) | |
| Less: Long-term debt, excluding current maturities | 2,085,300) | 2,098,300) | 1,512,400) | 1,515,400) | 1,534,200) | |
| Operating liabilities | 2,495,300) | 1,950,900) | 1,755,500) | 1,576,900) | 1,322,200) | |
| Net operating assets1 | 4,954,000) | 4,974,300) | 4,461,400) | 4,345,700) | 4,245,600) | |
| Balance-sheet-based aggregate accruals2 | (20,300) | 512,900) | 115,700) | 100,100) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -0.41% | 10.87% | 2.63% | 2.33% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | — | — | — | — | — | |
| 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. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31), 10-K (reporting date: 2010-12-31).
1 2014 Calculation
Net operating assets = Operating assets – Operating liabilities
= 7,449,300 – 2,495,300 = 4,954,000
2 2014 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2014 – Net operating assets2013
= 4,954,000 – 4,974,300 = -20,300
3 2014 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -20,300 ÷ [(4,954,000 + 4,974,300) ÷ 2] = -0.41%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a steady increase from 2011 through 2013, rising from US$4,345,700 thousand to US$4,974,300 thousand. This trend indicates growth in the core operating asset base over this period. However, in 2014, a slight decline occurred, bringing the figure down marginally to US$4,954,000 thousand, which may suggest stabilization or minor contraction in operating assets.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals showed moderate growth from US$100,100 thousand in 2011 to US$115,700 thousand in 2012. A substantial increase was observed in 2013, with accruals soaring to US$512,900 thousand, reflecting significant changes in accrual components on the balance sheet, potentially indicating more aggressive revenue recognition or expense matching practices. In 2014, there was a notable reversal to a negative value of -US$20,300 thousand, which may imply a reversal of previous accruals or changes in accounting treatments.
- Balance-sheet-based Accruals Ratio
- The accruals ratio remained relatively low in 2011 and 2012 at 2.33% and 2.63%, respectively, aligning with typical accrual levels relative to net operating assets. In 2013, this ratio sharply escalated to 10.87%, signifying an unusually high level of accruals relative to operating assets, which could raise concerns regarding earnings quality for that period. In 2014, the ratio shifted to a negative -0.41%, consistent with the negative aggregate accruals, suggesting a potential correction or adjustment following the previous year's elevated accruals.
Cash-Flow-Statement-Based Accruals Ratio
Allergan Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| Net earnings attributable to Allergan, Inc. | 1,524,200) | 985,100) | 1,098,800) | 934,500) | 600) | |
| Less: Net cash provided by operating activities | 1,927,800) | 1,695,400) | 1,599,900) | 1,081,900) | 463,900) | |
| Less: Net cash (used in) provided by investing activities | 182,700) | (1,375,300) | (589,300) | 340,800) | (977,200) | |
| Cash-flow-statement-based aggregate accruals | (586,300) | 665,000) | 88,200) | (488,200) | 513,900) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -11.81% | 14.10% | 2.00% | -11.36% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | — | — | — | — | — | |
| 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. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31), 10-K (reporting date: 2010-12-31).
1 2014 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -586,300 ÷ [(4,954,000 + 4,974,300) ÷ 2] = -11.81%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets showed a generally upward trend from 2011 to 2014. Starting at approximately 4.35 billion US dollars in 2011, the value increased slightly to around 4.46 billion in 2012. A more substantial rise occurred in 2013, reaching nearly 5 billion, before stabilizing close to this level in 2014 at approximately 4.95 billion. This pattern suggests growth in the core operations' asset base, with a significant increase realized primarily between 2012 and 2013.
- Cash-flow-statement-based aggregate accruals
- This measure exhibited considerable volatility throughout the period. In 2011, the amount was negative, approximately -488 million US dollars, implying potential cash flow challenges or adjustments. In 2012 and 2013, the accruals shifted to positive values of 88 million and 665 million respectively, indicating improved accrual-based earnings relative to cash flows. However, in 2014 the figure reverted to a negative value of about -586 million, signaling a reversal or potential deterioration in the quality of earnings as reflected by accruals.
- Cash-flow-statement-based accruals ratio
- Reflecting the trends in aggregate accruals, the accruals ratio started at -11.36% in 2011, moved to a positive 2% in 2012, and reached a peak of 14.1% in 2013. The considerable increase in 2013 could indicate stronger accrual earnings relative to cash flows during that year. In 2014, the ratio declined sharply back to -11.81%, mirroring the downturn in aggregate accruals and possibly signaling less sustainable earnings or a return to negative accruals dynamics.