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% | -3.43% | — | — | — | |
| ConocoPhillips | -5.86% | 44.50% | — | — | — | |
| Exxon Mobil Corp. | -1.19% | -4.87% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -1.34% | 1.09% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | -1.05% | 1.02% | 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.
- Net operating assets
- There is a notable upward trend in net operating assets over the observed periods. The value decreased significantly from 8,617 million US dollars in 2019 to 5,332 million US dollars in 2020. However, this was followed by a marked increase to 13,865 million US dollars in 2021 and further growth to 16,539 million US dollars in 2022. This pattern indicates a recovery and expansion phase in the net operating assets after the initial decline.
- Balance-sheet-based aggregate accruals
- The balance-sheet-based aggregate accruals also experienced considerable fluctuations. Initially, the accruals were negative, standing at -4,102 million US dollars in 2019 and slightly improving to -3,285 million US dollars in 2020. A significant reversal occurred in 2021, with aggregate accruals reaching a positive 8,533 million US dollars, followed by a decrease to 2,674 million US dollars in 2022. This indicates a shift from negative to positive accruals, suggesting changes in accounting estimates, timing differences in revenue or expense recognition, or operational adjustments.
- Balance-sheet-based accruals ratio
- The accruals ratio shows a highly volatile pattern over the four years. It was negative in 2019 and 2020, at -38.45% and -47.1% respectively, reflecting the negative aggregate accruals relative to net operating assets during those years. In 2021, the ratio surged dramatically to 88.9%, indicating a large positive deviation in accruals. In 2022, the ratio decreased to 17.59%, still positive but much lower compared to the previous year. This volatility reflects significant changes in the accrual accounting components relative to the size of net operating assets, which may signal variations in earnings quality or financial reporting policies over time.
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% | -4.57% | — | — | — | |
| ConocoPhillips | -1.56% | -0.78% | — | — | — | |
| Exxon Mobil Corp. | -2.93% | -6.69% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -2.11% | -5.23% | -14.30% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | -1.75% | -5.33% | -18.29% | — | — | |
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.
The analysis of the annual financial reporting quality measures reveals notable fluctuations and trends over the four-year period ending December 31, 2022.
- Net Operating Assets
- There is a significant fluctuation in net operating assets during the period. The value decreased from 8,617 million US dollars in 2019 to 5,332 million US dollars in 2020, indicating a reduction in operating capital. This was followed by a substantial increase in 2021 to 13,865 million US dollars, and a further rise to 16,539 million US dollars in 2022. The overall trend after 2020 is upward, suggesting increased investment or growth in net operating assets.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure shows considerable volatility across the years. In 2019, the aggregate accruals were negative at -847 million US dollars, worsening significantly in 2020 to -3,017 million US dollars, indicating a potential decline in earnings quality or operational challenges. In 2021, the value improved back to -512 million US dollars, and notably, in 2022, it shifted to a positive 2,608 million US dollars. The transition from negative to positive accruals in 2022 may reflect an improvement in operational cash flow alignment or changes in accounting estimates.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the trends in aggregate accruals. It started at -7.94% in 2019, sharply decreased to -43.26% in 2020, highlighting a pronounced divergence between earnings and cash flows during that year. By 2021, the ratio improved to -5.33%, suggesting a closer alignment between accrual-based earnings and cash flows. In 2022, the ratio turned positive to 17.16%, indicating that accruals now contribute positively to earnings beyond the cash flow basis. This positive shift may warrant further evaluation to understand the underlying causes, such as changes in revenue recognition or expense deferrals.
Overall, the data exhibits instability in financial reporting quality measures, with a period of deterioration around 2020 followed by recovery and improvement through 2022. The positive accruals and increasing net operating assets in the latest period suggest a potential enhancement in operational or financial management; however, such changes should be reviewed carefully given the previous volatility.