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
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 | 72,459) | 71,996) | 64,532) | 60,266) | 53,292) | |
| Less: Cash and cash equivalents | 7,933) | 8,307) | 2,882) | 1,565) | 1,814) | |
| Less: Short-term investments | 3,386) | 5,789) | —) | 203) | 825) | |
| Operating assets | 61,140) | 57,900) | 61,650) | 58,498) | 50,653) | |
| Operating Liabilities | ||||||
| Total liabilities | 68,572) | 70,462) | 49,174) | 46,579) | 39,382) | |
| Less: Current maturities of debt and finance leases | 1,782) | 1,732) | 2,287) | 1,518) | 2,242) | |
| Less: Debt and finance leases, excluding current maturities | 25,138) | 27,425) | 8,873) | 8,253) | 6,592) | |
| Operating liabilities | 41,652) | 41,305) | 38,014) | 36,808) | 30,548) | |
| Net operating assets1 | 19,488) | 16,595) | 23,636) | 21,690) | 20,105) | |
| Balance-sheet-based aggregate accruals2 | 2,893) | (7,041) | 1,946) | 1,585) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 16.04% | -35.00% | 8.59% | 7.58% | — | |
| 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 | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 200.00% | — | — | — | — | |
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
= 61,140 – 41,652 = 19,488
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 19,488 – 16,595 = 2,893
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,893 ÷ [(19,488 + 16,595) ÷ 2] = 16.04%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals between 2018 and 2021 reveals a period of extreme volatility, characterized by a severe downturn in 2020 followed by a sharp recovery in 2021. The relationship between net operating assets and aggregate accruals indicates significant shifts in the quality of reported earnings relative to cash flows during this timeframe.
- Net Operating Assets Trends
- Net operating assets experienced moderate growth from 21,690 million USD in 2018 to 23,636 million USD in 2019. A substantial contraction occurred in 2020, with assets falling to 16,595 million USD, a decrease of approximately 30% from the prior year. By 2021, the asset base began to recover, increasing to 19,488 million USD.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals remained positive and stable through 2018 and 2019, ending the latter year at 1,946 million USD. In 2020, a drastic reversal occurred as accruals shifted to a deep negative position of -7,041 million USD. This trend reversed again in 2021, with accruals surging to 2,893 million USD, marking the highest absolute positive value in the analyzed period.
- Accruals Ratio Analysis
- The accruals ratio showed a slight increase from 7.58% in 2018 to 8.59% in 2019. The year 2020 saw an unprecedented drop to -35.00%, suggesting that cash flows from operations significantly exceeded reported accounting earnings, often a sign of conservative reporting or major asset write-downs. This was followed by a sharp spike to 16.04% in 2021, indicating a significant increase in non-cash earnings relative to the net operating asset base.
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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) | 280) | (12,385) | 4,767) | 3,935) | 3,577) | |
| Less: Net cash provided by (used in) operating activities | 3,264) | (3,793) | 8,425) | 7,014) | 5,148) | |
| Less: Net cash used in investing activities | (898) | (9,238) | (4,563) | (4,393) | (5,366) | |
| Cash-flow-statement-based aggregate accruals | (2,086) | 646) | 905) | 1,314) | 3,795) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -11.56% | 3.21% | 3.99% | 6.29% | — | |
| 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 | 2.42% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -17.51% | — | — | — | — | |
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 × -2,086 ÷ [(19,488 + 16,595) ÷ 2] = -11.56%
2 Click competitor name to see calculations.
Analysis of the financial reporting quality reveals a marked divergence between accrual-based earnings and cash flow over the four-year period ending December 31, 2021. A consistent decline in the accruals ratio suggests a fundamental shift in the relationship between operating assets and cash flow, moving from a period of positive accruals toward significant negative accruals.
- Net Operating Assets Trend
- Net operating assets exhibited volatility, increasing from US$ 21,690 million in 2018 to US$ 23,636 million in 2019. A sharp contraction followed in 2020, with assets falling to US$ 16,595 million, before a partial recovery to US$ 19,488 million was observed in 2021.
- Aggregate Accruals Dynamics
- Cash-flow-statement-based aggregate accruals trended downward throughout the period. Values decreased from US$ 1,314 million in 2018 to US$ 905 million in 2019 and US$ 646 million in 2020. A significant reversal occurred in 2021, as aggregate accruals shifted to a negative value of US$ 2,086 million.
- Accruals Ratio Interpretation
- The cash-flow-statement-based accruals ratio demonstrates a continuous downward trajectory, falling from 6.29% in 2018 to 3.21% in 2020. The ratio underwent a dramatic pivot in 2021, reaching -11.56%. This inversion indicates that cash flows exceeded accrual-based operating income by a substantial margin in the final year, signaling a shift in the quality of earnings where cash generation became the dominant driver relative to accounting accruals.
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