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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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 | ||||||
| Less: Cash and equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings and current maturities of long-term debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Schlumberger Ltd. | ||||||
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
= – =
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= – =
3 2018 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 demonstrate a decreasing trend from 2015 to 2017, reducing from 20,764 million US dollars to 16,954 million US dollars. However, in 2018, there is a slight increase to 17,993 million US dollars, indicating a modest recovery or reinvestment during that period.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show significant fluctuations over the analyzed years. They start at a negative value of -1,097 million US dollars in 2015, sharply decline to -2,941 million US dollars in 2016, then rise to a less negative figure of -869 million US dollars in 2017. In 2018, the measure turns positive, reaching 1,039 million US dollars, suggesting a reversal in accrual accounting impacts on the balance sheet.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the pattern observed in aggregate accruals. In 2015, it is -5.15%, falling substantially to -15.24% in 2016, which represents a pronounced increase in accrual-based adjustments relative to net operating assets. The ratio then improves to -5% in 2017 and further turns positive to 5.95% in 2018. This shift from negative to positive accrual ratios signals changes in accounting estimates or operating asset management that may affect earnings quality.
- Overall Insights
- The data reveals a volatile pattern in accrual measures and net operating assets over the four-year period. The substantial negative accruals in 2016 could suggest more aggressive accrual accounting or temporary operational challenges. The subsequent return to less negative and then positive accrual values indicates potential improvements in earnings quality or changes in accounting policies. The net operating assets' dip and slight recovery align with these shifts, reflecting adjustments in asset utilization or investment strategies.
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 | ||||||
| Less: Cash flows provided by (used in) operating activities | ||||||
| Less: Cash flows 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 | ||||||
| Schlumberger Ltd. | ||||||
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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a declining trend from 2015 to 2017, decreasing from 20,764 million US dollars in 2015 to 16,954 million US dollars in 2017. However, in 2018, there is a slight recovery as the amount increases to 17,993 million US dollars. Overall, the level of net operating assets reduced over the period but shows signs of stabilization toward the end.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals are negative for three out of the four years, indicating a predominance of cash inflows over accounting earnings adjustments for most of the period. The value starts at -1,385 million US dollars in 2015, worsens significantly to -3,350 million US dollars in 2016, then improves to -1,004 million US dollars in 2017. In 2018, there is a notable shift as the accruals turn positive to 492 million US dollars, suggesting a possible change in earnings quality or accounting adjustments.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio follows a pattern similar to the aggregate accruals in percentage terms. It starts at -6.5% in 2015 and declines sharply to -17.36% in 2016, indicating increasing reliance on non-cash earnings components. The ratio then recovers to -5.77% in 2017 and turns positive at 2.82% in 2018. This positive ratio in 2018 may reflect a shift toward higher accruals relative to cash flow, which could imply changes in earnings quality or accounting policies.