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
Fair Isaac Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Sep 30, 2024 | Sep 30, 2023 | Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 1,717,884) | 1,575,281) | 1,442,034) | 1,567,776) | 1,606,240) | 1,433,448) | |
| Less: Cash and cash equivalents | 150,667) | 136,778) | 133,202) | 195,354) | 157,394) | 106,426) | |
| Operating assets | 1,567,217) | 1,438,503) | 1,308,832) | 1,372,422) | 1,448,846) | 1,327,022) | |
| Operating Liabilities | |||||||
| Total liabilities | 2,680,563) | 2,263,271) | 2,243,981) | 1,678,718) | 1,275,158) | 1,143,681) | |
| Less: Current finance lease liabilities | 3,144) | —) | —) | —) | 2,186) | 1,935) | |
| Less: Current maturities on debt | 15,000) | 50,000) | 30,000) | 250,000) | 95,000) | 218,000) | |
| Less: Long-term debt, excluding current maturities | 2,194,021) | 1,811,658) | 1,823,669) | 1,009,018) | 739,435) | 606,790) | |
| Less: Non-current finance lease liabilities | 7,263) | —) | —) | —) | 3,076) | 3,489) | |
| Operating liabilities | 461,135) | 401,613) | 390,312) | 419,700) | 435,461) | 313,467) | |
| Net operating assets1 | 1,106,082) | 1,036,890) | 918,520) | 952,722) | 1,013,385) | 1,013,555) | |
| Balance-sheet-based aggregate accruals2 | 69,192) | 118,370) | (34,202) | (60,663) | (170) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 6.46% | 12.11% | -3.66% | -6.17% | -0.02% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | 35.69% | 16.32% | 21.70% | 27.93% | 3.73% | — | |
| Adobe Inc. | -3.83% | 1.85% | -8.24% | 14.14% | 8.20% | — | |
| Cadence Design Systems Inc. | 39.84% | 11.17% | 26.65% | 4.43% | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| International Business Machines Corp. | 2.79% | 2.42% | 1.55% | -7.39% | — | — | |
| Intuit Inc. | 3.35% | -1.74% | 85.68% | 139.73% | -1.39% | — | |
| Microsoft Corp. | 52.18% | 22.96% | 42.27% | 40.52% | 14.41% | — | |
| Oracle Corp. | 4.30% | 51.77% | 9.90% | 5.62% | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | 89.91% | 137.01% | -124.73% | 85.21% | 69.06% | — | |
| Salesforce Inc. | -2.46% | -2.30% | 57.74% | 10.87% | — | — | |
| ServiceNow Inc. | 22.91% | 61.79% | 12.89% | 34.89% | — | — | |
| Synopsys Inc. | 7.85% | 13.85% | 5.01% | 0.36% | 8.40% | — | |
| Workday Inc. | 28.44% | -11.24% | 55.93% | -15.99% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 26.35% | 18.48% | 29.42% | 16.66% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-09-30), 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 1,567,217 – 461,135 = 1,106,082
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 1,106,082 – 1,036,890 = 69,192
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 69,192 ÷ [(1,106,082 + 1,036,890) ÷ 2] = 6.46%
4 Click competitor name to see calculations.
The analysis of the financial quality measures over the five-year period reveals notable fluctuations in net operating assets and accruals that impact the overall accruals ratio.
- Net Operating Assets
-
The net operating assets exhibit some variability but generally maintain an upward trajectory over the period. Starting at approximately 1,013,385 thousand US dollars in 2020, there is a decrease in the subsequent two years, reaching a low of 918,520 thousand in 2022. Following this dip, net operating assets increase significantly to 1,036,890 thousand in 2023 and continue to grow to 1,106,082 thousand by 2024. This pattern suggests an initial contraction of operating assets followed by robust expansion in the later years.
- Balance-sheet-based Aggregate Accruals
-
The aggregate accruals reflect considerable volatility and shifts in sign over the years. The value begins with a small negative accrual of -170 thousand in 2020, which sharply drops to -60,663 thousand in 2021, indicating a large increase in negative accruals. In 2022, the negative accrual magnitude lessens to -34,202 thousand. Notably, in 2023, the figure reverses direction, rising to a positive 118,370 thousand, then moderates to a positive 69,192 thousand in 2024. This reversal from negative to positive accruals may signify changes in earnings management or operational adjustments impacting accrual accounting components.
- Balance-sheet-based Accruals Ratio
-
The accruals ratio mimics the behavior of aggregate accruals but normalized relative to net operating assets, revealing shifts in financial reporting quality. The ratio starts near zero (-0.02%) in 2020, plunges to -6.17% in 2021, and improves somewhat to -3.66% in 2022. A marked turnaround occurs in 2023 with the ratio rising to 12.11%, indicating a substantial increase in accruals relative to the asset base, then declines to 6.46% in 2024. The negative ratios in earlier years followed by notably high positive values suggest variability in accrual management and potentially changing accounting or operational factors influencing earnings quality.
Overall, the data illustrates a period characterized by an initial contraction in net operating assets and large negative accruals, followed by a recovery and growth in net operating assets alongside significant positive accruals. The fluctuations in the accruals ratio, especially the shift from negative to positive territory, could imply changes in earnings quality or the timing of revenue and expense recognition that warrant further investigation for comprehensive financial evaluation.
Cash-Flow-Statement-Based Accruals Ratio
Fair Isaac Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Sep 30, 2024 | Sep 30, 2023 | Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income | 512,811) | 429,375) | 373,541) | 392,084) | 236,411) | 192,124) | |
| Less: Net cash provided by operating activities | 632,964) | 468,915) | 509,450) | 423,817) | 364,916) | 260,350) | |
| Less: Net cash used in investing activities | (27,993) | (15,954) | (5,671) | 137,850) | (24,583) | (42,760) | |
| Cash-flow-statement-based aggregate accruals | (92,160) | (23,586) | (130,238) | (169,583) | (103,922) | (25,466) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -8.60% | -2.41% | -13.92% | -17.25% | -10.25% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | 24.31% | -0.19% | 11.87% | 11.80% | -13.65% | — | |
| Adobe Inc. | -21.90% | -21.73% | -19.93% | 9.21% | -0.48% | — | |
| Cadence Design Systems Inc. | 17.36% | 3.78% | 15.03% | -5.75% | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| International Business Machines Corp. | -3.73% | 0.99% | -7.22% | -1.64% | — | — | |
| Intuit Inc. | -8.44% | -8.74% | 25.60% | 58.72% | -34.22% | — | |
| Microsoft Corp. | 30.89% | 5.22% | 13.42% | 17.68% | -8.19% | — | |
| Oracle Corp. | -1.01% | 42.79% | -30.58% | 25.81% | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | 33.84% | -37.95% | -196.64% | -68.30% | -488.47% | — | |
| Salesforce Inc. | -8.44% | -8.49% | 21.96% | 10.57% | — | — | |
| ServiceNow Inc. | -7.12% | 15.44% | 8.80% | -21.14% | — | — | |
| Synopsys Inc. | -7.64% | 0.20% | -4.64% | -4.88% | 0.92% | — | |
| Workday Inc. | 34.56% | 18.64% | -0.65% | -18.51% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 12.10% | 7.37% | 1.97% | 11.15% | -28.80% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | -15.54% | — | |
Based on: 10-K (reporting date: 2024-09-30), 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -92,160 ÷ [(1,106,082 + 1,036,890) ÷ 2] = -8.60%
2 Click competitor name to see calculations.
Analyzing the annual financial reporting quality measures over the five-year period reveals several notable trends and fluctuations.
- Net Operating Assets (US$ in thousands)
- There is a general trend of variability in net operating assets across the years. Starting at 1,013,385 in 2020, the value decreased consecutively to 952,722 in 2021 and 918,520 in 2022, indicating a contraction in net operating assets during this period. However, this downward trend reversed in 2023, with net operating assets increasing to 1,036,890, followed by a further rise to 1,106,082 in 2024. The rebounding figures in the last two years suggest a recovery or expansion phase in the company's operating asset base.
- Cash-Flow-Statement-Based Aggregate Accruals (US$ in thousands)
- The aggregate accruals display substantial volatility during the examined years. The value begins at -103,922 in 2020, worsening to -169,583 in 2021, which is the most negative point in the series, indicating a higher level of accrual adjustments relative to cash flows. In 2022, accruals improve to -130,238 but then sharply improve to -23,586 in 2023, suggesting a significant reduction in non-cash accounting adjustments. Nonetheless, in 2024, the accruals worsen again to -92,160, implying a return to greater accrual activity.
- Cash-Flow-Statement-Based Accruals Ratio (%)
- The accruals ratio moves in a pattern similar to aggregate accruals, starting at -10.25% in 2020 and declining more severely to -17.25% in 2021, reinforcing the observation of increasing accrual-based adjustments relative to cash flows. In 2022, the ratio improves to -13.92%, then drastically rises toward zero at -2.41% in 2023, denoting a period of enhanced financial reporting quality with fewer accruals. However, the ratio declines again in 2024 to -8.6%, indicating some deterioration in accrual-based adjustments.
Overall, the data illustrates an initial period of declining net operating assets and increasing accrual-based financial adjustments through 2021. The company then experiences recovery and improvement in both net operating assets and accrual quality in 2023. However, the partial setback in accruals ratio and aggregate accruals during 2024 may warrant attention to monitor future reporting quality trends.