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
EOG Resources Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 37,124,608) | 33,934,474) | 29,833,078) | 29,459,433) | 26,975,244) | |
| Less: Cash and cash equivalents | 2,027,972) | 1,555,634) | 834,228) | 1,599,895) | 718,506) | |
| Operating assets | 35,096,636) | 32,378,840) | 28,998,850) | 27,859,538) | 26,256,738) | |
| Operating Liabilities | ||||||
| Total liabilities | 15,483,892) | 14,570,286) | 13,549,805) | 15,477,852) | 14,032,209) | |
| Less: Current portion of long-term debt | 1,014,524) | 913,093) | 356,235) | 6,579) | 6,579) | |
| Less: Long-term debt, excluding current portion | 4,160,919) | 5,170,169) | 6,030,836) | 6,979,779) | 6,653,685) | |
| Operating liabilities | 10,308,449) | 8,487,024) | 7,162,734) | 8,491,494) | 7,371,945) | |
| Net operating assets1 | 24,788,187) | 23,891,816) | 21,836,116) | 19,368,044) | 18,884,793) | |
| Balance-sheet-based aggregate accruals2 | 896,371) | 2,055,700) | 2,468,072) | 483,251) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 3.68% | 8.99% | 11.98% | 2.53% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
| Occidental Petroleum Corp. | — | — | — | — | — | |
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
= 35,096,636 – 10,308,449 = 24,788,187
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 24,788,187 – 23,891,816 = 896,371
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 896,371 ÷ [(24,788,187 + 23,891,816) ÷ 2] = 3.68%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated a steady upward trend over the four-year period. Starting at approximately 19.4 billion US dollars in 2016, the figure increased consistently each year, reaching nearly 24.8 billion US dollars by the end of 2019. This growth suggests an expansion in the company's operating asset base during these years.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibited considerable volatility throughout the observed timeframe. In 2016, accruals were at approximately 483 million US dollars, followed by a sharp increase to around 2.47 billion US dollars in 2017. The accruals then decreased to about 2.06 billion US dollars in 2018 and further contracted to roughly 896 million US dollars in 2019. This pattern indicates significant fluctuations in accrual accounting components from year to year.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrored the fluctuations seen in aggregate accruals but in relative terms. It rose markedly from 2.53% in 2016 to a peak of 11.98% in 2017, suggesting a substantial increase in accruals relative to the asset base at that time. Subsequently, the ratio declined to 8.99% in 2018 and further dropped to 3.68% in 2019, reflecting a reduction in accruals relative to net operating assets in the later years.
- Overall Observations
- The data indicates that while net operating assets were on a consistent growth trajectory, balance-sheet-based accruals and their ratio experienced high variability, particularly with a pronounced peak in 2017. The elevated accruals in that year could point to changes in accounting estimates, recognition timing, or one-time adjustments impacting earnings quality. The subsequent decline in accruals and the accruals ratio towards 2019 may suggest a reversion to more normalized accrual levels, potentially indicating improved earnings quality or changes in accounting practices.
Cash-Flow-Statement-Based Accruals Ratio
EOG Resources Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 2,734,910) | 3,419,040) | 2,582,579) | (1,096,686) | (4,524,515) | |
| Less: Net cash provided by operating activities | 8,163,180) | 7,768,608) | 4,265,336) | 2,359,063) | 3,595,165) | |
| Less: Net cash used in investing activities | (6,177,173) | (6,170,162) | (3,987,409) | (1,252,944) | (5,320,256) | |
| Cash-flow-statement-based aggregate accruals | 748,903) | 1,820,594) | 2,304,652) | (2,202,805) | (2,799,424) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 3.08% | 7.96% | 11.19% | -11.52% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
| Occidental Petroleum Corp. | — | — | — | — | — | |
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 × 748,903 ÷ [(24,788,187 + 23,891,816) ÷ 2] = 3.08%
2 Click competitor name to see calculations.
The analysis of the annual financial reporting quality measures over the four-year period reveals several noteworthy trends.
- Net Operating Assets
- The net operating assets consistently increased each year from 2016 to 2019. The value rose from approximately 19.4 billion US dollars in 2016 to nearly 24.8 billion US dollars by the end of 2019, indicating a steady growth in the company’s operating asset base during this period.
- Cash-Flow-Statement-Based Aggregate Accruals
- This metric exhibited significant fluctuations over the four years. It started at a negative value of about -2.2 billion US dollars in 2016, surged to a positive 2.3 billion in 2017, and then decreased to positive values of approximately 1.8 billion in 2018 and 0.75 billion in 2019. The shift from a large negative to positive values followed by a decline suggests variability in the accruals component influencing cash flow, with potential implications for earnings quality and cash flow timing.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio displayed a declining trend over the observed period. It moved from a negative rate of around -11.52% in 2016 to a positive 11.19% in 2017, followed by a steady decrease to 7.96% in 2018 and further down to 3.08% in 2019. This decreasing trend in the ratio suggests diminishing accruals relative to cash flows, which may indicate improving cash flow quality or a reduction in accrual-based earnings adjustments over time.