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
DuPont de Nemours Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 69,396) | 188,030) | 192,164) | 79,511) | 68,026) | |
| Less: Cash and cash equivalents | 1,540) | 13,482) | 13,438) | 6,607) | 8,577) | |
| Less: Marketable securities | —) | 134) | 956) | —) | —) | |
| Operating assets | 67,856) | 174,414) | 177,770) | 72,904) | 59,449) | |
| Operating Liabilities | ||||||
| Total liabilities | 27,840) | 91,851) | 90,237) | 52,282) | 41,843) | |
| Less: Short-term borrowings and finance lease obligations | 3,830) | 2,802) | 4,015) | 907) | 995) | |
| Less: Long-term debt, excluding debt within one year | 13,617) | 37,662) | 30,056) | 20,456) | 16,215) | |
| Operating liabilities | 10,393) | 51,387) | 56,166) | 30,919) | 24,633) | |
| Net operating assets1 | 57,463) | 123,027) | 121,604) | 41,985) | 34,816) | |
| Balance-sheet-based aggregate accruals2 | (65,564) | 1,423) | 79,619) | 7,169) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -72.65% | 1.16% | 97.34% | 18.67% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 67,856 – 10,393 = 57,463
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 57,463 – 123,027 = -65,564
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -65,564 ÷ [(57,463 + 123,027) ÷ 2] = -72.65%
4 Click competitor name to see calculations.
The financial data from 2016 to 2019 reveals extreme volatility in both the scale of net operating assets and the quality of earnings as measured by balance-sheet-based accruals. The period is characterized by a rapid expansion of the asset base followed by a significant contraction and a reversal in accrual trends.
- Net Operating Assets Trend
- A substantial increase is observed between 2016 and 2017, with net operating assets rising from US$ 41,985 million to US$ 121,604 million. This elevated level remained relatively stable through 2018 at US$ 123,027 million before experiencing a sharp decline to US$ 57,463 million by the end of 2019, representing a reduction of approximately 53% from the prior year.
- Balance-Sheet-Based Aggregate Accruals
- Accruals exhibited a dramatic spike in 2017, reaching US$ 79,619 million. This was followed by a sharp correction in 2018 to US$ 1,423 million and a further plunge into negative territory in 2019, ending at -US$ 65,564 million. This trajectory suggests a transition from a period of significant non-cash asset growth to a period of substantial non-cash adjustments or divestitures.
- Balance-Sheet-Based Accruals Ratio Analysis
- The accruals ratio mirrors the volatility of the aggregate accruals, peaking at 97.34% in 2017. This indicates a phase where accruals represented a disproportionately large share of net operating assets, which typically signals lower earnings quality. The ratio collapsed to 1.16% in 2018 and transitioned to a deep negative value of -72.65% in 2019. The shift to a significant negative ratio implies that cash flows significantly exceeded accounting earnings during the 2019 period, a pattern often associated with major asset disposals or significant accounting write-downs.
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Cash-Flow-Statement-Based Accruals Ratio
DuPont de Nemours Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income attributable to DuPont | 498) | 3,844) | 1,460) | 4,318) | 7,685) | |
| Less: Cash provided by operating activities | 1,409) | 4,731) | 8,695) | 5,478) | 7,516) | |
| Less: Cash (used for) provided by investing activities | (2,313) | (2,462) | 4,274) | (3,479) | (1,350) | |
| Cash-flow-statement-based aggregate accruals | 1,402) | 1,575) | (11,509) | 2,319) | 1,519) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.55% | 1.29% | -14.07% | 6.04% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,402 ÷ [(57,463 + 123,027) ÷ 2] = 1.55%
2 Click competitor name to see calculations.
The financial data indicates a period of significant volatility in balance sheet composition and accrual levels between 2016 and 2019. The most pronounced fluctuations occurred in 2017, characterized by a substantial expansion of net operating assets and a simultaneous sharp reversal in aggregate accruals, followed by a contraction in assets and a stabilization of accrual ratios in the subsequent two years.
- Net Operating Assets (NOA)
- A substantial increase in net operating assets is observed from 2016 to 2017, where values rose from 41,985 million US$ to 121,604 million US$. This asset base remained relatively stable through 2018 at 123,027 million US$ before experiencing a significant reduction to 57,463 million US$ by December 31, 2019. This pattern suggests major structural changes in the organization's asset base, likely reflecting large-scale acquisitions followed by subsequent divestitures or corporate restructuring.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibited extreme variance during the analyzed period. Following a positive accrual of 2,319 million US$ in 2016, a significant negative swing to -11,509 million US$ occurred in 2017. By 2018 and 2019, these figures normalized to 1,575 million US$ and 1,402 million US$, respectively. The deep negative accrual in 2017 indicates that cash flows from operations significantly exceeded reported accrual-based earnings during that fiscal year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, used as a proxy for financial reporting quality, mirrors the volatility of the aggregate accruals. The ratio shifted from 6.04% in 2016 to -14.07% in 2017, representing a sharp departure from previous trends. However, a trend toward stabilization is evident in the final two years, with the ratio settling at 1.29% in 2018 and 1.55% in 2019. The reduction in the absolute value of the ratio in the later period suggests an improvement in the quality of earnings, as reported earnings more closely aligned with actual cash flows.
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