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
Halliburton Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 25,982) | 25,085) | 27,000) | 36,942) | 32,240) | |
| Less: Cash and equivalents | 2,008) | 2,337) | 4,009) | 10,077) | 2,291) | |
| Operating assets | 23,974) | 22,748) | 22,991) | 26,865) | 29,949) | |
| Operating Liabilities | ||||||
| Total liabilities | 16,438) | 16,736) | 17,552) | 21,447) | 15,942) | |
| Less: Short-term borrowings and current maturities of long-term debt | 36) | 512) | 170) | 659) | 14) | |
| Less: Long-term debt, excluding current maturities | 10,421) | 10,430) | 12,214) | 14,687) | 7,840) | |
| Operating liabilities | 5,981) | 5,794) | 5,168) | 6,101) | 8,088) | |
| Net operating assets1 | 17,993) | 16,954) | 17,823) | 20,764) | 21,861) | |
| Balance-sheet-based aggregate accruals2 | 1,039) | (869) | (2,941) | (1,097) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.95% | -5.00% | -15.24% | -5.15% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| SLB N.V. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 23,974 – 5,981 = 17,993
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= 17,993 – 16,954 = 1,039
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,039 ÷ [(17,993 + 16,954) ÷ 2] = 5.95%
4 Click competitor name to see calculations.
The financial reporting quality from 2015 to 2018 is characterized by significant volatility in accruals relative to net operating assets, culminating in a pivot from negative to positive accruals by the end of the analyzed period.
- Net Operating Assets
- A downward trend was observed from 2015 through 2017, with values declining from 20,764 million to 16,954 million. This contraction was followed by a moderate recovery in 2018, where assets increased to 17,993 million.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals were consistently negative for the first three years of the period, reaching a peak negative value of -2,941 million in 2016. A sharp reversal occurred in 2018, as the figure transitioned to a positive 1,039 million, suggesting a shift in the relationship between reported earnings and cash flow.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals, dropping from -5.15% in 2015 to -15.24% in 2016. After returning to -5.00% in 2017, the ratio shifted to a positive 5.95% in 2018. This progression indicates that while earnings were significantly lower than cash flow contributions relative to assets in 2016, the trend reversed by 2018, where accruals began to contribute positively to the net income relative to the balance sheet base.
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Cash-Flow-Statement-Based Accruals Ratio
Halliburton Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to company | 1,656) | (463) | (5,763) | (671) | 3,500) | |
| Less: Cash flows provided by (used in) operating activities | 3,157) | 2,468) | (1,703) | 2,906) | 4,062) | |
| Less: Cash flows used in investing activities | (1,993) | (1,927) | (710) | (2,192) | (3,138) | |
| Cash-flow-statement-based aggregate accruals | 492) | (1,004) | (3,350) | (1,385) | 2,576) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.82% | -5.77% | -17.36% | -6.50% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| SLB N.V. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 492 ÷ [(17,993 + 16,954) ÷ 2] = 2.82%
2 Click competitor name to see calculations.
An analysis of the cash-flow-statement-based accruals from 2015 to 2018 reveals a period of significant volatility in reporting quality indicators, characterized by a sharp divergence between accounting earnings and operating cash flows that eventually normalized and reversed.
- Net Operating Assets Trend
- A general contraction in net operating assets is observed from 2015 through 2017, with values declining from US$ 20,764 million to US$ 16,954 million. This downward trajectory was interrupted in 2018, when assets experienced a modest recovery to US$ 17,993 million.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals demonstrated substantial fluctuations. A significant negative spike occurred in 2016, reaching -US$ 3,350 million. This was followed by a period of recovery, with negative accruals narrowing to -US$ 1,004 million in 2017 and transitioning into positive territory at US$ 492 million by December 31, 2018.
- Accruals Ratio Interpretation
- The accruals ratio exhibited high volatility, plummeting to -17.36% in 2016. The subsequent shift to -5.77% in 2017 and 2.82% in 2018 indicates a fundamental change in the relationship between reported earnings and cash flow. The persistent negative ratios through 2017 suggest a period where cash flows from operations exceeded accounting earnings, typically indicative of conservative accounting. The transition to a positive ratio in 2018 suggests a reversal of this trend, where accounting earnings began to exceed operating cash flows.
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