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
Edwards Lifesciences Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 8,502,600) | 7,237,100) | 6,488,100) | 5,323,700) | 5,695,800) | |
| Less: Cash and cash equivalents | 862,800) | 1,183,200) | 1,179,100) | 714,100) | 818,300) | |
| Less: Short-term investments | 604,000) | 219,400) | 337,800) | 242,400) | 519,200) | |
| Operating assets | 7,035,800) | 5,834,500) | 4,971,200) | 4,367,200) | 4,358,300) | |
| Operating Liabilities | ||||||
| Total liabilities | 2,666,700) | 2,662,800) | 2,339,800) | 2,183,300) | 2,739,600) | |
| Less: Short-term debt | —) | —) | —) | —) | 598,000) | |
| Less: Long-term debt | 595,700) | 595,000) | 594,400) | 593,800) | 438,400) | |
| Operating liabilities | 2,071,000) | 2,067,800) | 1,745,400) | 1,589,500) | 1,703,200) | |
| Net operating assets1 | 4,964,800) | 3,766,700) | 3,225,800) | 2,777,700) | 2,655,100) | |
| Balance-sheet-based aggregate accruals2 | 1,198,100) | 540,900) | 448,100) | 122,600) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 27.44% | 15.47% | 14.93% | 4.51% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | 3.72% | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 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
= 7,035,800 – 2,071,000 = 4,964,800
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 4,964,800 – 3,766,700 = 1,198,100
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,198,100 ÷ [(4,964,800 + 3,766,700) ÷ 2] = 27.44%
4 Click competitor name to see calculations.
The data reveals distinct trends in the financial reporting quality metrics over the four-year period ending December 31, 2021. The net operating assets demonstrate a consistent and notable increase year over year. Starting from approximately 2.78 billion USD in 2018, the figure ascended steadily to nearly 4.96 billion USD by the end of 2021, indicating significant growth in the company's operational asset base.
Balance-sheet-based aggregate accruals exhibit a similar upward trajectory, although with more pronounced year-to-year changes. From around 123 million USD in 2018, these accruals surged dramatically to roughly 1.20 billion USD by 2021. This sharp increase especially in the final year suggests an acceleration in accrual components relative to overall operations.
Correspondingly, the balance-sheet-based accruals ratio—expressed as a percentage of net operating assets—rises significantly throughout the period. Beginning at a modest 4.51% in 2018, the ratio grows to nearly 27.44% by 2021. This escalation implies a growing proportion of accruals compared to net operating assets, raising considerations about the accrual quality and potential impacts on earnings management or financial statement conservatism.
Overall, the data indicates robust growth in the company's net operating assets accompanied by a proportionally larger increase in accruals. The increasing accruals ratio may warrant closer monitoring to assess the implications for financial reporting quality and the sustainability of earnings trends in future periods.
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Cash-Flow-Statement-Based Accruals Ratio
Edwards Lifesciences Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income | 1,503,100) | 823,400) | 1,046,900) | 722,200) | 583,600) | |
| Less: Net cash provided by operating activities | 1,732,100) | 1,054,300) | 1,179,400) | 926,800) | 1,000,700) | |
| Less: Net cash (used in) provided by investing activities | (1,722,500) | (531,100) | (595,800) | 76,700) | (647,200) | |
| Cash-flow-statement-based aggregate accruals | 1,493,500) | 300,200) | 463,300) | (281,300) | 230,100) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 34.21% | 8.59% | 15.43% | -10.36% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | 0.35% | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 11.34% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 14.62% | — | — | — | — | |
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 × 1,493,500 ÷ [(4,964,800 + 3,766,700) ÷ 2] = 34.21%
2 Click competitor name to see calculations.
The analysis of the financial reporting quality measures over the four-year period reveals several notable trends and changes.
- Net Operating Assets
- There is a consistent increase in net operating assets from 2,777,700 thousand US dollars at the end of 2018 to 4,964,800 thousand US dollars by the end of 2021. This represents a substantial growth in assets over the examined periods, indicating expansion in the company's operational base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals show a significant fluctuation with a negative amount in 2018 (-281,300 thousand US dollars), followed by positive values in subsequent years (463,300 thousand in 2019, 300,200 thousand in 2020, and a marked increase to 1,493,500 thousand in 2021). This shift from negative to positive accruals suggests changes in working capital management or accounting practices that impact reported earnings relative to cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio also demonstrates a notable upward trend, moving from -10.36% in 2018 to 34.21% in 2021. The negative value in 2018 indicates cash flows exceeding earnings, whereas the increase to a high positive ratio in 2021 highlights a growing disparity where earnings increasingly rely on accruals rather than cash flows. This rising ratio could suggest greater earnings management or changes in revenue recognition policies.
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