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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- Analysis of Solvency Ratios
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Present Value of Free Cash Flow to Equity (FCFE)
- Net Profit Margin since 2005
- Current Ratio since 2005
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
- Price to Sales (P/S) since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Apache Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| 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: 2015-12-31), 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).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= – =
3 2015 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 analysis of the annual financial reporting quality measure data reveals notable trends over the four-year period ending December 31, 2015. Several key patterns emerge from the data related to net operating assets, balance-sheet-based aggregate accruals, and the balance-sheet-based accruals ratio.
- Net Operating Assets
- Net operating assets demonstrate a declining trend from 2012 to 2015. The values decreased steadily from US$43,516 million in 2012 to US$43,212 million in 2013, then sharply declined to US$38,613 million in 2014, followed by a significant drop to US$11,539 million in 2015. This considerable reduction in net operating assets in 2015 could indicate changes in the company's asset base, possibly due to asset disposals, impairments, or operational restructuring.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit substantial variability and a negative shift over the period. Initially, the accruals were positive at US$7,602 million in 2012, turning slightly negative in 2013 at -US$304 million. This negative trend intensified with accruals reaching -US$4,599 million in 2014 and a pronounced decline to -US$27,074 million in 2015. Such a shift towards large negative accruals suggests a significant change in the recognition of earnings components or adjustments in working capital accounts affecting the accrual measures.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the changes seen in aggregate accruals, shifting markedly from a high positive ratio of 19.14% in 2012 to negative values in subsequent years. The ratio turns slightly negative in 2013 at -0.7%, deepens in 2014 to -11.24%, and finally reaches an extreme negative ratio of -107.97% in 2015. This indicates that the proportion of accruals relative to net operating assets not only reversed direction but grew disproportionately large in magnitude. The notably large negative ratio in 2015 corresponds with the significant drop in net operating assets and the sharp increase in negative accruals, emphasizing potentially lower earnings quality or increased risk in the reported financials.
Overall, the data suggests a deterioration in financial reporting quality indicators over the analyzed period. The declining net operating assets, coupled with increasingly negative and large magnitude accruals and ratios, could reflect heightened earnings management activities or other economic factors impacting the reliability of the financial statements.
Cash-Flow-Statement-Based Accruals Ratio
Apache Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Apache shareholders | ||||||
| Less: Net cash provided by 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: 2015-12-31), 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).
1 2015 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.
The financial data reveals significant fluctuations in key measures related to operating assets and accruals over the four-year period.
- Net Operating Assets
- The net operating assets remained relatively stable from 2012 to 2013, with a slight decline from 43,516 million US dollars to 43,212 million US dollars. However, this metric experienced a more pronounced decrease in 2014, dropping to 38,613 million US dollars, followed by a substantial decline in 2015 to 11,539 million US dollars. This represents a marked contraction in the asset base over the observed period, especially between 2014 and 2015.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed a sharp reversal from a positive figure of 6,921 million US dollars in 2012 to negative values starting 2013. The accruals shifted to -487 million in 2013 and continued to decline more severely through 2014 (-4,230 million) and 2015 (-22,294 million). The trajectory implies increasing adjustments or non-cash items reducing reported cash flows relative to net income, especially notable in 2015.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrored the trend in aggregate accruals, moving from a substantially positive 17.43% in 2012 to negative figures in the following years: -1.12% in 2013, -10.34% in 2014, and a steep plunge to -88.91% in 2015. This indicates a progressively worsening quality of earnings, where cash flows are declining significantly relative to reported accruals, with 2015 reflecting exceedingly poor accrual quality.
Overall, the data points to a deteriorating financial reporting quality over the four years, characterized by a notable depletion in net operating assets and a considerable increase in negative accruals relative to cash flows. These trends suggest growing earnings management risks or financial stress, particularly evident in the marked changes recorded in 2015.