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
Boston Scientific Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 32,469) | 32,229) | 30,777) | 30,565) | 20,999) | |
| Less: Cash and cash equivalents | 928) | 1,925) | 1,734) | 217) | 146) | |
| Operating assets | 31,541) | 30,304) | 29,043) | 30,348) | 20,853) | |
| Operating Liabilities | ||||||
| Total liabilities | 14,896) | 15,608) | 15,451) | 16,688) | 12,273) | |
| Less: Current debt obligations | 20) | 261) | 13) | 1,416) | 2,253) | |
| Less: Long-term debt | 8,915) | 8,804) | 9,130) | 8,592) | 4,803) | |
| Operating liabilities | 5,961) | 6,543) | 6,308) | 6,680) | 5,217) | |
| Net operating assets1 | 25,580) | 23,761) | 22,735) | 23,668) | 15,636) | |
| Balance-sheet-based aggregate accruals2 | 1,819) | 1,026) | (933) | 8,032) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 7.37% | 4.41% | -4.02% | 40.87% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | -0.73% | — | — | — | — | |
| Elevance Health Inc. | 0.32% | — | — | — | — | |
| Intuitive Surgical Inc. | -10.21% | — | — | — | — | |
| Medtronic PLC | -1.37% | — | — | — | — | |
| UnitedHealth Group Inc. | 17.32% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 6.46% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.30% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 31,541 – 5,961 = 25,580
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 25,580 – 23,761 = 1,819
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,819 ÷ [(25,580 + 23,761) ÷ 2] = 7.37%
4 Click competitor name to see calculations.
An analysis of the financial reporting quality indicators from 2019 to 2022 reveals a significant shift in the relationship between accounting earnings and cash flows, characterized by a substantial reduction in accruals following a peak in 2019.
- Net Operating Assets
- Net operating assets remained relatively stable over the four-year period, experiencing a slight contraction in 2020 to 22,735 million US dollars before trending upward to 25,580 million US dollars by December 31, 2022. This gradual growth indicates a steady expansion of the operational asset base relative to operating liabilities.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibited extreme volatility, starting at a high of 8,032 million US dollars in 2019. A sharp reversal occurred in 2020, where accruals turned negative to -933 million US dollars, suggesting that cash flows from operations exceeded accounting earnings during that period. From 2021 onward, accruals returned to positive territory, rising to 1,026 million US dollars and further increasing to 1,819 million US dollars in 2022.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, which measures the proportion of net operating assets comprised of accruals, mirrored the volatility of the aggregate accruals. A high ratio of 40.87% in 2019 suggests a significant divergence between reported earnings and cash flow. This ratio plummeted to -4.02% in 2020, indicating a period of high earnings quality where cash realization exceeded accrual-based reporting. The ratio then stabilized and grew modestly to 4.41% in 2021 and 7.37% in 2022, suggesting a return to a more normalized and sustainable level of accrual-based earnings.
The overall trend indicates a marked improvement in earnings quality since 2019. The drastic reduction in the accruals ratio from 40.87% to single-digit percentages suggests that current earnings are more closely aligned with actual cash flow generation, reducing the likelihood of significant future write-downs or earnings reversals.
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Cash-Flow-Statement-Based Accruals Ratio
Boston Scientific Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 698) | 1,041) | (82) | 4,700) | 1,671) | |
| Less: Cash provided by operating activities | 1,526) | 1,870) | 1,508) | 1,836) | 310) | |
| Less: Cash used for investing activities | (2,011) | (1,597) | (411) | (5,041) | (1,921) | |
| Cash-flow-statement-based aggregate accruals | 1,183) | 768) | (1,179) | 7,905) | 3,282) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 4.80% | 3.30% | -5.08% | 40.22% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | -2.08% | — | — | — | — | |
| Elevance Health Inc. | 8.35% | — | — | — | — | |
| Intuitive Surgical Inc. | -20.88% | — | — | — | — | |
| Medtronic PLC | -0.97% | — | — | — | — | |
| UnitedHealth Group Inc. | 21.73% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.70% | 11.34% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.25% | 14.62% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,183 ÷ [(25,580 + 23,761) ÷ 2] = 4.80%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between 2019 and 2022 reveals a period of significant volatility in accruals followed by a trend toward stabilization. The most notable fluctuation occurred between 2019 and 2020, with subsequent years showing a gradual return to low positive accrual levels.
- Net Operating Assets
- Net operating assets remained relatively stable over the four-year period. After a slight decrease from 23,668 million US$ in 2019 to 22,735 million US$ in 2020, the asset base expanded steadily, reaching 25,580 million US$ by December 31, 2022. This growth indicates a consistent expansion of the operating asset base in the latter half of the observed period.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited extreme variance. A substantial peak of 7,905 million US$ was recorded in 2019, which shifted abruptly to a negative value of -1,179 million US$ in 2020. From 2021 onward, accruals returned to positive territory, recording 768 million US$ and 1,183 million US$ in 2021 and 2022, respectively. This suggests a significant correction in the relationship between reported earnings and cash flows following the 2019 peak.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals, starting at an elevated 40.22% in 2019. This high ratio typically indicates a larger gap between accounting earnings and cash flow. The ratio plummeted to -5.08% in 2020 before stabilizing at 3.30% in 2021 and 4.80% in 2022. The convergence toward low single-digit percentages suggests an improvement in earnings quality and a closer alignment between reported net income and operational cash generation in the most recent reporting years.
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