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
HP Inc., balance sheet computation of aggregate accruals
US$ in millions
| Oct 31, 2018 | Oct 31, 2017 | Oct 31, 2016 | Oct 31, 2015 | Oct 31, 2014 | Oct 31, 2013 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 34,622) | 32,913) | 29,010) | 106,882) | 103,206) | 105,676) | |
| Less: Cash and cash equivalents | 5,166) | 6,997) | 6,288) | 17,433) | 15,133) | 12,163) | |
| Operating assets | 29,456) | 25,916) | 22,722) | 89,449) | 88,073) | 93,513) | |
| Operating Liabilities | |||||||
| Total liabilities | 35,261) | 36,321) | 32,899) | 78,731) | 76,079) | 78,020) | |
| Less: Notes payable and short-term borrowings | 1,463) | 1,072) | 78) | 2,885) | 3,486) | 5,979) | |
| Less: Long-term debt, excluding current portion | 4,524) | 6,747) | 6,758) | 21,780) | 16,039) | 16,608) | |
| Operating liabilities | 29,274) | 28,502) | 26,063) | 54,066) | 56,554) | 55,433) | |
| Net operating assets1 | 182) | (2,586) | (3,341) | 35,383) | 31,519) | 38,080) | |
| Balance-sheet-based aggregate accruals2 | 2,768) | 755) | (38,724) | 3,864) | (6,561) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | — | — | -241.71% | 11.55% | -18.85% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Apple Inc. | — | — | — | — | — | — | |
| Arista Networks Inc. | — | — | — | — | — | — | |
| Cisco Systems Inc. | — | — | — | — | — | — | |
| Dell Technologies Inc. | — | — | — | — | — | — | |
| Super Micro Computer Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 29,456 – 29,274 = 182
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= 182 – -2,586 = 2,768
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,768 ÷ [(182 + -2,586) ÷ 2] = —
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited significant fluctuations over the analyzed period. From 2014 to 2015, there was an increase from 31,519 million to 35,383 million US dollars, indicating growth in operational assets. However, in 2016 and 2017, the values sharply declined into negative territory with -3,341 million and -2,586 million US dollars respectively, suggesting a reversal or substantial reduction in net operating assets. By 2018, the figure slightly recovered to 182 million US dollars, close to neutral but still significantly below the initial levels in 2014 and 2015.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals showed marked volatility across the recorded years. In 2014, the accruals were negative at -6,561 million US dollars, then shifted to a positive 3,864 million US dollars in 2015, indicating a significant change in accounting estimations or timing of income recognition. The most substantial change occurred in 2016 with an extreme negative value of -38,724 million US dollars, reflecting a large adjustment or write-down. In 2017 and 2018, the accruals returned to positive values of 755 million and 2,768 million US dollars respectively, suggesting normalization or stabilization in accrual accounting.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, which measures the proportion of accrual-based earnings relative to net operating assets, also displayed notable variability. It started negative at -18.85% in 2014, increased to 11.55% in 2015, and then drastically plunged to -241.71% in 2016. Data for 2017 and 2018 are missing, but the earlier trend indicates considerable instability in accrual quality, especially highlighted by the extreme negative figure in 2016. This may point to significant earnings management or extraordinary operational adjustments during that year.
Cash-Flow-Statement-Based Accruals Ratio
HP Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Oct 31, 2018 | Oct 31, 2017 | Oct 31, 2016 | Oct 31, 2015 | Oct 31, 2014 | Oct 31, 2013 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 5,327) | 2,526) | 2,496) | 4,554) | 5,013) | 5,113) | |
| Less: Net cash provided by operating activities | 4,528) | 3,677) | 3,230) | 6,490) | 12,333) | 11,608) | |
| Less: Net cash (used in) provided by investing activities | (716) | (1,717) | 48) | (5,534) | (2,792) | (2,803) | |
| Cash-flow-statement-based aggregate accruals | 1,515) | 566) | (782) | 3,598) | (4,528) | (3,692) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | — | — | -4.88% | 10.76% | -13.01% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Apple Inc. | — | — | — | — | — | — | |
| Arista Networks Inc. | — | — | — | — | — | — | |
| Cisco Systems Inc. | — | — | — | — | — | — | |
| Dell Technologies Inc. | — | — | — | — | — | — | |
| Super Micro Computer Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,515 ÷ [(182 + -2,586) ÷ 2] = —
2 Click competitor name to see calculations.
The analysis of the financial reporting quality measures over the five-year period reveals notable fluctuations and shifts in key financial metrics.
- Net Operating Assets
- The net operating assets exhibited a positive and growing trend during the first two years, increasing from 31,519 million USD in 2014 to 35,383 million USD in 2015. However, this trend reversed significantly in the next two years, where the values turned negative, recorded at -3,341 million USD and -2,586 million USD in 2016 and 2017 respectively. By 2018, there was a modest recovery resulting in a positive value of 182 million USD, indicating a considerable reduction from the previous positive peaks and a period of volatility in the firm's operating asset base.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure showed high volatility throughout the period. Starting at -4,528 million USD in 2014, it swung to a positive 3,598 million USD in 2015. The following years saw a return to negative and then positive values: -782 million USD in 2016, increasing to 566 million USD in 2017, and further rising to 1,515 million USD in 2018. This pattern suggests inconsistent accrual activity over the period, which might reflect varying earnings management or operational finance changes.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio began at a negative -13.01% in 2014, moved into positive territory at 10.76% in 2015, and dropped back to -4.88% in 2016. The absence of data for 2017 and 2018 limits the analysis for these years, but the initial three-year trend indicates oscillation between negative and positive values, further emphasizing the irregularities in accruals relative to cash flows.
Overall, the data indicates significant instability in both net operating assets and accrual measures within the period studied. The shifts from positive to negative values and vice versa suggest changes in operational efficiency, asset management, or accounting practices. The fluctuating accruals and the corresponding ratio underscore potential variability in earnings quality or financial reporting practices. The recovery in net operating assets by 2018 to a positive, albeit small, figure may suggest a stabilization phase following volatility.