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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Anadarko Petroleum Corp. pages available for free this week:
- Cash Flow Statement
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Dividend Discount Model (DDM)
- Net Profit Margin since 2005
- Return on Equity (ROE) since 2005
- Price to Earnings (P/E) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Anadarko Petroleum Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Long-term debt, 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 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= – =
3 2016 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.
- Net Operating Assets
- Net operating assets show a general decline over the four-year period. Starting at 33,517 million US dollars in 2013, the figure decreases to 27,636 million US dollars by the end of 2016. This represents a reduction of approximately 17.6%, indicating a contraction in the asset base used for operations.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals display considerable volatility and negative values in 2014 and 2016. In 2013, aggregate accruals are positive at 837 million US dollars but fall sharply to negative 3,476 million in 2014. The figure rebounds to a modest positive 228 million in 2015 before declining again to negative 2,633 million in 2016. This fluctuation suggests irregularities or variability in the recognition of accruals, reflecting inconsistencies in earnings quality or operational adjustments.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio parallels the movements of aggregate accruals, showing significant fluctuations between positive and negative values. It starts at 2.53% in 2013, shifts to a negative 10.94% in 2014, slightly positive at 0.76% in 2015, and again negative at -9.09% in 2016. The large negative ratios in 2014 and 2016 could indicate periods where accruals substantially reduced reported earnings, pointing to potential challenges in earnings quality during those years.
Cash-Flow-Statement-Based Accruals Ratio
Anadarko Petroleum Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to common stockholders | ||||||
| Less: Net cash provided by (used in) operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 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 demonstrated a decreasing trend over the four-year period. Starting at 33,517 million USD in 2013, there was a decline each subsequent year, reaching 27,636 million USD by the end of 2016. This consistent reduction suggests a gradual decline in the investment in operating assets or a shift in asset composition.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals fluctuated significantly within the period. A positive value was recorded in 2013 at 129 million USD, followed by a sharp decline to -3,744 million USD in 2014. The value slightly recovered to -44 million USD in 2015 but fell again to -3,309 million USD in 2016. These substantial negative accruals in 2014 and 2016 indicate periods where cash flow differed considerably from reported earnings, potentially highlighting periods of reduced earnings quality.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the pattern observed in aggregate accruals, starting at a low positive level of 0.39% in 2013 and deteriorating markedly in 2014 to -11.78%. A near stabilization occurred in 2015 at -0.15%, but a notable decline recurred in 2016 with -11.43%. The negative and volatile nature of the ratio suggests variability in earnings quality and may indicate challenges in earnings sustainability over the analyzed years.