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.
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Fidelity National Information Services Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- Analysis of Long-term (Investment) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Price to FCFE (P/FCFE)
- Operating Profit Margin since 2005
- Price to Sales (P/S) since 2005
- Analysis of Revenues
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Fidelity National Information Services Inc., 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 | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | ||||||
| Adobe Inc. | ||||||
| Cadence Design Systems Inc. | ||||||
| CrowdStrike Holdings Inc. | ||||||
| Fair Isaac Corp. | ||||||
| International Business Machines Corp. | ||||||
| Intuit Inc. | ||||||
| Microsoft Corp. | ||||||
| Oracle Corp. | ||||||
| Palantir Technologies Inc. | ||||||
| Palo Alto Networks Inc. | ||||||
| Salesforce Inc. | ||||||
| ServiceNow Inc. | ||||||
| Synopsys Inc. | ||||||
| Workday Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | ||||||
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
= – =
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated a declining trend over the observed period. Starting at approximately $68,496 million at the end of 2019, the figure slightly decreased to $67,543 million in 2020 and further to $65,875 million in 2021. A substantial reduction was observed in 2022, with net operating assets falling sharply to approximately $45,355 million. This significant decline in the final year may suggest either asset disposals, efficiency improvements, or other operational changes impacting asset levels.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals showed considerable variation over the timeframe. In 2019, the value was notably positive at $49,992 million, indicating a strong accrual component. However, from 2020 onwards, the accruals became negative. The negative value deepened slightly to -$953 million in 2020, marginally increased its negative position to -$1,668 million in 2021, and then significantly dropped to -$20,520 million in 2022. This progression toward increasingly negative accruals implies a shift in the company's earnings quality or accounting practices, potentially reflecting more conservative revenue or expense recognition.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the aggregate accruals' trend and displayed a sharp change in financial reporting quality. A very high positive ratio of 114.92% at the end of 2019 converted into negative ratios afterwards: -1.4% in 2020, -2.5% in 2021, and a significant drop to -36.9% in 2022. The substantial decline to a negative ratio in the most recent year further highlights a major shift in accrual accounting, which may influence the assessment of earnings persistence and reliability.
Cash-Flow-Statement-Based Accruals Ratio
Fidelity National Information Services Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net earnings (loss) attributable to FIS common stockholders | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | ||||||
| Adobe Inc. | ||||||
| Cadence Design Systems Inc. | ||||||
| CrowdStrike Holdings Inc. | ||||||
| Fair Isaac Corp. | ||||||
| International Business Machines Corp. | ||||||
| Intuit Inc. | ||||||
| Microsoft Corp. | ||||||
| Oracle Corp. | ||||||
| Palantir Technologies Inc. | ||||||
| Palo Alto Networks Inc. | ||||||
| Salesforce Inc. | ||||||
| ServiceNow Inc. | ||||||
| Synopsys Inc. | ||||||
| Workday Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | ||||||
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] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets consistently decreased over the observed period, declining from 68,496 million US dollars in 2019 to 45,355 million US dollars in 2022. This indicates a reduction of approximately 33.8% over four years, suggesting a significant contraction in operating asset base.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals demonstrated a pronounced shift from positive to negative values. In 2019, the figure was 5,389 million US dollars, transitioning to negative figures in subsequent years. By 2022, the accruals reached a notably large negative value of -20,286 million US dollars, evidencing increasing discrepancies between reported earnings and actual cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio reflected a significant adverse trend. Starting at 12.39% in 2019, it became negative in 2020 (-4.95%) and continued to worsen, reaching -36.48% in 2022. This substantial decline implies deteriorating quality of earnings, with a growing portion of earnings not supported by cash flows.