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 analysis of financial reporting quality indicates a prevailing trend of negative balance-sheet-based accruals throughout the majority of the period, suggesting a conservative accounting posture where reported earnings are generally supported by cash flow.
- Net Operating Assets Trend
- Net operating assets reached a peak of US$ 97,463,100 thousand in 2017, following a value of US$ 95,743,700 thousand in 2016. A consistent decline followed this peak, with assets decreasing to US$ 87,021,400 thousand in 2018 and further contracting to US$ 74,930,500 thousand by December 31, 2019.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant fluctuations. A deep negative position of US$ -22,466,500 thousand in 2016 shifted to a positive US$ 1,719,400 thousand in 2017. This positive movement was short-lived, as accruals returned to negative values of US$ -10,441,700 thousand in 2018 and US$ -12,090,900 thousand in 2019.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio followed a volatile path, beginning at -21.00% in 2016, rising to 1.78% in 2017, and subsequently falling to -11.32% in 2018 and -14.93% in 2019. The predominance of negative ratios suggests that earnings were lower than the cash flow generated relative to the size of the operating assets, which is typically indicative of high reporting quality and a lack of aggressive earnings accruals.
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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.
An analysis of the financial reporting quality from 2016 through 2019 reveals a consistent pattern of negative aggregate accruals coupled with a general contraction in net operating assets over the latter half of the period.
- Net Operating Assets Trend
- Net operating assets experienced a slight increase between 2016 and 2017, peaking at 97,463,100 thousand USD. This was followed by a significant downward trend, with assets declining to 87,021,400 thousand USD in 2018 and further decreasing to 74,930,500 thousand USD by the end of 2019. This represents a total reduction of approximately 22.8% from the 2017 peak.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals remained negative throughout the entire four-year period, indicating that cash flows from operations consistently exceeded reported accrual-based earnings. The magnitude of these negative accruals fluctuated, reaching a peak negative value of 13,835,000 thousand USD in 2018, before moderating to 9,650,900 thousand USD in 2019.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio stayed negative for the duration of the observed period, signifying a conservative relationship between earnings and cash flow. The ratio shifted from -10.08% in 2016 to -9.44% in 2017, then expanded sharply to -15.00% in 2018, coinciding with the highest level of negative aggregate accruals. By 2019, the ratio narrowed to -11.92%, though it remained significantly lower than the levels observed in the first two years of the analysis.
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