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 PLC, balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 94,699,100) | 101,787,600) | 118,341,900) | 128,986,300) | 135,840,700) | |
| Less: Cash and cash equivalents | 2,503,300) | 880,400) | 1,817,200) | 1,724,000) | 1,096,000) | |
| Less: Marketable securities | 3,411,600) | 1,026,900) | 4,632,100) | 11,501,500) | 9,300) | |
| Operating assets | 88,784,200) | 99,880,300) | 111,892,600) | 115,760,800) | 134,735,400) | |
| Operating Liabilities | ||||||
| Total liabilities | 36,502,700) | 36,656,600) | 44,504,800) | 52,785,800) | 59,251,400) | |
| Less: Current portion of long-term debt and capital leases | 4,532,500) | 868,300) | 4,231,800) | 2,797,900) | 2,432,800) | |
| Less: Long-term debt and capital leases, excluding current portion | 18,116,500) | 22,929,400) | 25,843,500) | 29,970,800) | 40,293,400) | |
| Operating liabilities | 13,853,700) | 12,858,900) | 14,429,500) | 20,017,100) | 16,525,200) | |
| Net operating assets1 | 74,930,500) | 87,021,400) | 97,463,100) | 95,743,700) | 118,210,200) | |
| Balance-sheet-based aggregate accruals2 | (12,090,900) | (10,441,700) | 1,719,400) | (22,466,500) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -14.93% | -11.32% | 1.78% | -21.00% | — | |
| 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: 2019-12-31), 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).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 88,784,200 – 13,853,700 = 74,930,500
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 74,930,500 – 87,021,400 = -12,090,900
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -12,090,900 ÷ [(74,930,500 + 87,021,400) ÷ 2] = -14.93%
4 Click competitor name to see calculations.
The financial data reveals notable trends in the net operating assets and accrual measures over the four-year period ending December 31, 2019. These metrics provide insight into the company's asset base and the quality of its earnings through accrual accounting.
- Net Operating Assets
- There is a consistent declining trend in net operating assets from 2016 through 2019. The figure decreased from approximately US$95.74 billion in 2016 to about US$74.93 billion in 2019. This reduction represents a decrease of roughly 21.7%, indicating a substantial contraction in the operating asset base over the period under review.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility. In 2016, the value was negative at approximately -US$22.47 billion, which shifted dramatically to a positive US$1.72 billion in 2017. Subsequently, it reverted to negative amounts in 2018 and 2019, recorded at around -US$10.44 billion and -US$12.09 billion respectively. This pattern suggests fluctuations in the timing and recognition of revenues and expenses relative to cash flows, potentially reflecting changes in accounting estimates or operational performance.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio aligns with the aggregate accruals trend and exhibits significant variability. The ratio was -21% in 2016, rising sharply to 1.78% in 2017, then declining to -11.32% in 2018 and further to -14.93% in 2019. Negative values indicate that accruals reduce reported earnings relative to cash flows, while the positive ratio in 2017 signals an anomaly or temporary shift in the quality of earnings during that year. The negative ratios in 2018 and 2019 reaffirm the presence of conservative earnings recognition or potential earnings management pressures.
Overall, the data suggests a declining operating asset base accompanied by fluctuating accrual measures, pointing to variable earnings quality and possible shifts in accounting practices or operational dynamics across the observed years.
Cash-Flow-Statement-Based Accruals Ratio
Allergan PLC, cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to shareholders | (5,271,000) | (5,096,400) | (4,125,500) | 14,973,400) | 3,915,200) | |
| Less: Net cash provided by operating activities | 7,238,700) | 5,640,100) | 5,873,400) | 1,425,300) | 4,530,000) | |
| Less: Net cash (used in) provided by investing activities | (2,858,800) | 3,098,500) | (878,000) | 24,333,300) | (37,120,900) | |
| Cash-flow-statement-based aggregate accruals | (9,650,900) | (13,835,000) | (9,120,900) | (10,785,200) | 36,506,100) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -11.92% | -15.00% | -9.44% | -10.08% | — | |
| 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: 2019-12-31), 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).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -9,650,900 ÷ [(74,930,500 + 87,021,400) ÷ 2] = -11.92%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a decreasing trend over the four-year period. Starting at approximately 95.7 billion US dollars at the end of 2016, the value increased slightly in 2017 to around 97.5 billion but then declined notably in subsequent years, reaching approximately 74.9 billion by the end of 2019. This represents a significant reduction in net operating assets, indicating a possible downsizing of operational capacity or a shift in asset structure during this time frame.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals, expressed in thousands of US dollars, were negative in all periods, indicating a consistent use of accrual accounting adjustments relative to operating cash flows. The absolute value increased in 2018 to over 13.8 billion, which represents the highest outflow in the analyzed periods. There was a decrease in the absolute value in 2019, although it remained substantial at approximately 9.65 billion. This pattern suggests fluctuations in non-cash adjustments affecting reported earnings.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, presented as a percentage, follows a pattern similar to aggregate accruals. It remained negative throughout the period, with values ranging from -9.44% in 2017 to a peak negative value of -15% in 2018. In 2019, the ratio improved slightly but remained markedly negative at -11.92%. This suggests a varying but consistently material impact of accruals on the company's quality of earnings, with the most significant deviation occurring in 2018.