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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Delta Air Lines Inc. pages available for free this week:
- Statement of Comprehensive Income
- Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Dividend Discount Model (DDM)
- Price to Operating Profit (P/OP) since 2007
- Price to Book Value (P/BV) since 2007
- Price to Sales (P/S) since 2007
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Balance-Sheet-Based Accruals Ratio
Delta Air Lines Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of debt and finance leases | ||||||
| Less: Debt and finance leases, 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 | ||||||
| FedEx Corp. | ||||||
| Uber Technologies Inc. | ||||||
| Union Pacific Corp. | ||||||
| United Airlines Holdings Inc. | ||||||
| United Parcel Service Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 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 data reveals significant fluctuations in the financial reporting quality of Delta Air Lines Inc. over the four-year period ending December 31, 2021. Analysis of net operating assets, balance-sheet-based aggregate accruals, and the balance-sheet-based accruals ratio provides insight into underlying changes in asset utilization and earnings quality.
- Net Operating Assets
- This metric experienced a moderate increase from US$21,690 million in 2018 to US$23,636 million in 2019, indicating growth in operating asset investment. However, it sharply declined to US$16,595 million in 2020, reflecting a substantial reduction possibly linked to external economic or operational factors during that year. A partial recovery was observed in 2021 as net operating assets rose to US$19,488 million, yet remained below the 2018 and 2019 levels.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals increased from US$1,585 million in 2018 to US$1,946 million in 2019, a trend consistent with the growth in net operating assets. In contrast, 2020 showed a drastic reversal with a large negative accrual value of -US$7,041 million, indicating significant reversals or adjustments in earnings components and potentially reflecting earnings management or economic disruption impacts. By 2021, aggregate accruals rebounded to a positive value of US$2,893 million, suggesting a normalization of accrual accounting practices or operational conditions.
- Balance-sheet-based Accruals Ratio
- The accruals ratio followed a similar pattern to aggregate accruals but exhibited more pronounced percentage changes. It increased from 7.58% in 2018 to 8.59% in 2019, indicating slightly higher accrual-based earnings relative to net operating assets. A sharp negative swing to -35% in 2020 signified considerable negative accruals in relation to the asset base, which may suggest atypical financial reporting events or one-time adjustments during that period. The ratio then markedly increased to 16.04% in 2021, exceeding prior years, indicating a higher proportion of accruals relative to net operating assets and potential variability in earnings quality.
In summary, the four-year span is characterized by an initial phase of growth and stability in net operating assets and accruals, followed by a severe disruption in 2020 marked by negative aggregate accruals and an abnormally high negative accrual ratio, and lastly a recovery phase in 2021 with positive but fluctuating accrual figures and ratios. These patterns suggest that the company experienced unusual financial conditions or adjustments in 2020, impacting the quality and composition of reported earnings. The volatility observed in accrual measures in the latter years calls for careful consideration when assessing earnings sustainability and financial reporting quality for this period.
Cash-Flow-Statement-Based Accruals Ratio
Delta Air Lines Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | ||||||
| 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 | ||||||
| FedEx Corp. | ||||||
| Uber Technologies Inc. | ||||||
| Union Pacific Corp. | ||||||
| United Airlines Holdings Inc. | ||||||
| United Parcel Service Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 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 exhibited a fluctuating trend over the analyzed period. There was an increase from 21,690 million US dollars at the end of 2018 to 23,636 million US dollars in 2019, indicating asset growth. However, this was followed by a sharp decline to 16,595 million US dollars by the end of 2020. In 2021, a partial recovery occurred, with net operating assets rising to 19,488 million US dollars.
- Cash-flow-statement-based Aggregate Accruals
- This measure showed a declining trend across the period from 2018 to 2021. Initially, aggregate accruals were positive, reaching 1,314 million US dollars in 2018, then decreasing steadily to 905 million in 2019 and further to 646 million in 2020. A significant change occurred in 2021 when aggregate accruals turned negative, amounting to -2,086 million US dollars, suggesting a reversal in accrual adjustments derived from the cash flow statement.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals, starting at 6.29% in 2018 and progressively decreasing to 3.99% in 2019 and 3.21% in 2020. By 2021, the ratio had sharply declined into negative territory at -11.56%. This movement denotes a shift from positive to negative accruals relative to net operating assets, potentially reflecting changes in earnings quality and the use of accruals in financial reporting.