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
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 | 18,842) | 55,952) | 61,637) | 60,737) | 52,051) | |
| Less: Cash and cash equivalents | 1,467) | 769) | 1,906) | 160) | 295) | |
| Operating assets | 17,375) | 55,183) | 59,731) | 60,577) | 51,756) | |
| Operating Liabilities | ||||||
| Total liabilities | 14,614) | 27,815) | 26,244) | 29,406) | 23,058) | |
| Less: Current debt | 1) | —) | 53) | 990) | 431) | |
| Less: Long-term debt, excluding current maturities | 8,777) | 11,245) | 9,672) | 11,355) | 6,785) | |
| Operating liabilities | 5,836) | 16,570) | 16,519) | 17,061) | 15,842) | |
| Net operating assets1 | 11,539) | 38,613) | 43,212) | 43,516) | 35,914) | |
| Balance-sheet-based aggregate accruals2 | (27,074) | (4,599) | (304) | 7,602) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -107.97% | -11.24% | -0.70% | 19.14% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings 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
= 17,375 – 5,836 = 11,539
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 11,539 – 38,613 = -27,074
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -27,074 ÷ [(11,539 + 38,613) ÷ 2] = -107.97%
4 Click competitor name to see calculations.
The financial data for the period between December 31, 2012, and December 31, 2015, reveals a significant reversal in accrual patterns and a substantial contraction in the asset base. The trend is defined by a shift from positive accruals to deeply negative values, culminating in a severe decline in net operating assets by the end of the analyzed period.
- Net Operating Assets
- Net operating assets remained relatively stable between 2012 and 2013, moving from 43,516 million US$ to 43,212 million US$. A more pronounced decline occurred in 2014, where the value fell to 38,613 million US$, followed by a precipitous drop to 11,539 million US$ in 2015. This represents a total reduction of approximately 73.5% over the four-year span.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals transitioned from a positive 7,602 million US$ in 2012 to a negative 304 million US$ in 2013. This negative trajectory accelerated through 2014 to -4,599 million US$ and reached a nadir of -27,074 million US$ in 2015. The shift from positive to deeply negative accruals indicates that cash flows significantly exceeded accrual-based earnings, a pattern frequently associated with large non-cash charges or asset impairments.
- Balance-sheet-based Accruals Ratio
- The accruals ratio exhibited a sharp and accelerating downward trend, starting at 19.14% in 2012 and falling to -0.70% in 2013. The ratio continued to decline to -11.24% in 2014, ending with an extreme value of -107.97% in 2015. The magnitude of the 2015 ratio, coupled with the simultaneous collapse in net operating assets, indicates a major correction in asset valuation, likely resulting from significant write-downs that impacted the reporting quality and the overall structure of the balance sheet.
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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 | (23,119) | (5,403) | 2,232) | 2,001) | 4,584) | |
| Less: Net cash provided by operating activities | 2,834) | 8,379) | 9,835) | 8,504) | 9,953) | |
| Less: Net cash used in investing activities | (3,659) | (9,552) | (7,116) | (13,424) | (8,645) | |
| Cash-flow-statement-based aggregate accruals | (22,294) | (4,230) | (487) | 6,921) | 3,276) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -88.91% | -10.34% | -1.12% | 17.43% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings 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 × -22,294 ÷ [(11,539 + 38,613) ÷ 2] = -88.91%
2 Click competitor name to see calculations.
A significant downward trend is observed across all accrual-based metrics between 2012 and 2015, characterized by a transition from positive accruals to substantial negative values. This trajectory indicates a fundamental shift in the relationship between reported earnings and cash flows, culminating in a sharp contraction of the asset base in the final period.
- Net Operating Assets
- Net operating assets remained relatively stable from 2012 to 2014, moving from 43,516 million USD to 38,613 million USD. However, a precipitous decline occurred in 2015, with assets falling to 11,539 million USD, representing a reduction of approximately 70% within a single fiscal year.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals shifted from a positive position of 6,921 million USD in 2012 to increasingly negative figures over the subsequent three years. The values moved to -487 million USD in 2013 and -4,230 million USD in 2014, before experiencing a severe acceleration to -22,294 million USD in 2015. This progression suggests that non-cash charges significantly exceeded cash-based earnings toward the end of the period.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the collapse of aggregate accruals, starting at 17.43% in 2012 and dropping to -1.12% in 2013. The downward momentum continued to -10.34% in 2014 and culminated in a sharp decline to -88.91% in 2015. Such a drastic negative ratio typically reflects massive non-cash write-downs or impairment charges that reduce reported net income while having no immediate impact on operational cash flow.
The convergence of a collapsing net operating asset base and an extremely negative accruals ratio in 2015 suggests a period of significant balance sheet restructuring or asset impairment. The magnitude of the negative accruals relative to the remaining operating assets indicates that accounting losses heavily outweighed cash generation during the final analyzed year.
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