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
Devon Energy 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 | 23,721) | 21,025) | 9,912) | 13,717) | 19,566) | |
| Less: Cash, cash equivalents and restricted cash | 1,454) | 2,271) | 2,237) | 1,844) | 2,414) | |
| Operating assets | 22,267) | 18,754) | 7,675) | 11,873) | 17,152) | |
| Operating Liabilities | ||||||
| Total liabilities | 12,425) | 11,626) | 6,893) | 7,797) | 10,380) | |
| Less: Short-term debt | 251) | —) | —) | —) | 162) | |
| Less: Current finance lease liabilities | 8) | 8) | 8) | 7) | —) | |
| Less: Long-term debt | 6,189) | 6,482) | 4,298) | 4,294) | 5,785) | |
| Less: Long-term finance lease liabilities | 249) | 247) | 244) | 240) | —) | |
| Operating liabilities | 5,728) | 4,889) | 2,343) | 3,256) | 4,433) | |
| Net operating assets1 | 16,539) | 13,865) | 5,332) | 8,617) | 12,719) | |
| Balance-sheet-based aggregate accruals2 | 2,674) | 8,533) | (3,285) | (4,102) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 17.59% | 88.90% | -47.10% | -38.45% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | 0.03% | — | — | — | — | |
| ConocoPhillips | -5.86% | — | — | — | — | |
| ExxonMobil Holdings Corp. | -1.19% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -1.34% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | -1.05% | 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
= 22,267 – 5,728 = 16,539
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 16,539 – 13,865 = 2,674
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,674 ÷ [(16,539 + 13,865) ÷ 2] = 17.59%
4 Click competitor name to see calculations.
An analysis of the financial reporting quality over the four-year period reveals significant volatility in the relationship between net operating assets and aggregate accruals, characterized by a dramatic shift in the accruals ratio between 2020 and 2021.
- Net Operating Assets Trend
- Net operating assets experienced a contraction from US$ 8,617 million in 2019 to US$ 5,332 million in 2020. This was followed by a substantial expansion phase, with assets increasing to US$ 13,865 million in 2021 and further rising to US$ 16,539 million by the end of 2022.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals remained negative during 2019 and 2020, posting values of US$ -4,102 million and US$ -3,285 million, respectively. A sharp reversal occurred in 2021, where accruals spiked to a positive US$ 8,533 million, before declining to US$ 2,674 million in 2022.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrored this instability, moving from -38.45% in 2019 to a low of -47.10% in 2020, suggesting that cash flows exceeded accrual-based earnings during those years. The ratio peaked at 88.90% in 2021, indicating a period where a high proportion of the asset base was tied to non-cash accruals. By 2022, the ratio moderated to 17.59%, signaling a return toward a more stable relationship between reported earnings and the operating asset base.
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Cash-Flow-Statement-Based Accruals Ratio
Devon Energy 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 earnings (loss) attributable to Devon | 6,015) | 2,813) | (2,680) | (355) | 3,064) | |
| Less: Net cash from operating activities | 8,530) | 4,899) | 1,464) | 2,043) | 2,228) | |
| Less: Net cash from investing activities | (5,123) | (1,574) | (1,127) | (1,551) | (1,493) | |
| Cash-flow-statement-based aggregate accruals | 2,608) | (512) | (3,017) | (847) | 2,329) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 17.16% | -5.33% | -43.26% | -7.94% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | -1.22% | — | — | — | — | |
| ConocoPhillips | -1.56% | — | — | — | — | |
| ExxonMobil Holdings Corp. | -2.93% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -2.11% | -10.40% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | -1.75% | -10.60% | — | — | — | |
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 × 2,608 ÷ [(16,539 + 13,865) ÷ 2] = 17.16%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality from 2019 to 2022 reveals significant volatility in both net operating assets and aggregate accruals, culminating in a complete reversal of the accruals ratio by the end of the period.
- Net Operating Assets Trend
- Net operating assets experienced a sharp decline in 2020, falling to 5,332 million USD from 8,617 million USD in 2019. However, a substantial recovery followed, with assets increasing to 13,865 million USD in 2021 and reaching a peak of 16,539 million USD by December 31, 2022. This represents a significant expansion of the asset base following the 2020 contraction.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals shifted from negative to positive territory over the four-year span. A significant negative spike occurred in 2020, reaching -3,017 million USD. This was followed by a moderate recovery to -512 million USD in 2021, before shifting to a positive 2,608 million USD in 2022. The transition from deeply negative accruals to positive accruals indicates a fundamental shift in the relationship between reported earnings and actual cash flow.
- Accruals Ratio Analysis
- The accruals ratio mirrored the volatility of the aggregate accruals. The ratio dropped sharply to -43.26% in 2020, suggesting that cash flows significantly exceeded accounting earnings during that period, often characteristic of large non-cash charges or impairments. The ratio normalized to -5.33% in 2021 and transitioned to 17.16% in 2022. The move into positive percentage territory in 2022 indicates that accounting earnings exceeded cash flows, marking a departure from the previous three years of negative accruals.
The overall trend demonstrates a transition from a period of heavy non-cash adjustments and asset contraction in 2020 toward a period of asset growth and positive accruals by 2022. The magnitude of the swing in the accruals ratio, from -43.26% to 17.16%, highlights a period of instability in earnings quality and cash flow alignment.
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