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
Hershey Co., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 10,948,820) | 10,412,231) | 9,131,845) | 8,140,395) | 7,703,020) | |
| Less: Cash and cash equivalents | 463,889) | 329,266) | 1,143,987) | 493,262) | 587,998) | |
| Operating assets | 10,484,931) | 10,082,965) | 7,987,858) | 7,647,133) | 7,115,022) | |
| Operating Liabilities | ||||||
| Total liabilities | 7,649,276) | 7,655,002) | 6,893,962) | 6,395,401) | 6,295,754) | |
| Less: Short-term debt | 693,790) | 939,423) | 74,041) | 32,282) | 1,197,929) | |
| Less: Current portion of long-term debt | 753,578) | 2,844) | 438,829) | 703,390) | 5,387) | |
| Less: Long-term portion of long-term debt | 3,343,977) | 4,086,627) | 4,089,755) | 3,530,813) | 3,254,280) | |
| Operating liabilities | 2,857,931) | 2,626,108) | 2,291,337) | 2,128,916) | 1,838,158) | |
| Net operating assets1 | 7,627,000) | 7,456,857) | 5,696,521) | 5,518,217) | 5,276,864) | |
| Balance-sheet-based aggregate accruals2 | 170,143) | 1,760,336) | 178,304) | 241,353) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 2.26% | 26.77% | 3.18% | 4.47% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | -3.05% | 3.39% | — | — | — | |
| Mondelēz International Inc. | 7.90% | 0.47% | — | — | — | |
| PepsiCo Inc. | 0.98% | 4.76% | — | — | — | |
| Philip Morris International Inc. | 75.98% | 10.28% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | 11.97% | 3.62% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 7.61% | -0.13% | 200.00% | — | — | |
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
= 10,484,931 – 2,857,931 = 7,627,000
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 7,627,000 – 7,456,857 = 170,143
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 170,143 ÷ [(7,627,000 + 7,456,857) ÷ 2] = 2.26%
4 Click competitor name to see calculations.
The analysis of the annual financial reporting quality measures reveals several notable trends over the four-year period.
- Net Operating Assets
- The net operating assets exhibited a steady upward trajectory from 2019 through 2022. The value increased from approximately 5.52 billion USD at the end of 2019 to about 7.63 billion USD by the close of 2022. This growth indicates an expansion in the company's operational asset base over the period under review.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals showed considerable variability across the years. Starting at around 241 million USD in 2019, the figure decreased to approximately 178 million USD in 2020. However, in 2021, there was a sharp and substantial increase to about 1.76 billion USD, representing a significant deviation from previous levels. In 2022, the accruals dramatically reduced again to near 170 million USD, returning closer to earlier values. This volatility may warrant further investigation to understand underlying factors driving such fluctuations.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, reflecting the proportion of accruals relative to net operating assets, similarly exhibited a marked spike in 2021. The ratio decreased from 4.47% in 2019 to 3.18% in 2020, then surged to an exceptionally high 26.77% in 2021 before sharply declining to 2.26% in 2022. This abnormal peak in 2021 suggests a significant increase in accruals relative to the asset base for that year, which could imply changes in earnings quality, accounting policies, or business operations during that period.
Overall, the data shows a stable increase in net operating assets, accompanied by a largely stable accrual ratio except for a pronounced anomaly in 2021, characterized by an extreme increase in aggregate accruals and the accruals ratio. The sharp spike in 2021 is an outlier relative to the surrounding years and may impact the interpretation of financial reporting quality for that year. Further qualitative analysis would be necessary to identify the causes of this anomaly and to assess its implications fully.
Cash-Flow-Statement-Based Accruals Ratio
Hershey Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to The Hershey Company | 1,644,817) | 1,477,512) | 1,278,708) | 1,149,692) | 1,177,562) | |
| Less: Net cash provided by operating activities | 2,327,837) | 2,082,884) | 1,699,657) | 1,763,873) | 1,599,993) | |
| Less: Net cash used in investing activities | (787,376) | (2,222,828) | (531,280) | (780,480) | (1,502,894) | |
| Cash-flow-statement-based aggregate accruals | 104,356) | 1,617,456) | 110,331) | 166,299) | 1,080,463) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.38% | 24.59% | 1.97% | 3.08% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | -1.32% | -0.16% | — | — | — | |
| Mondelēz International Inc. | 8.02% | 0.42% | — | — | — | |
| PepsiCo Inc. | 1.04% | -1.48% | — | — | — | |
| Philip Morris International Inc. | 57.17% | -3.48% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | 9.94% | -0.70% | 7.54% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 4.81% | -4.89% | -2.34% | — | — | |
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 × 104,356 ÷ [(7,627,000 + 7,456,857) ÷ 2] = 1.38%
2 Click competitor name to see calculations.
The analysis of the annual financial reporting quality measures reveals several notable trends over the four-year period.
- Net Operating Assets
- The net operating assets show a consistent upward trend from 2019 to 2022. Starting at approximately 5.52 billion US dollars in 2019, the figure increased modestly to about 5.70 billion in 2020. A more significant rise is evident in 2021, reaching nearly 7.46 billion US dollars, followed by a slight increase to approximately 7.63 billion in 2022. This consistent growth indicates an expansion in the company's operational asset base over the period under review.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals exhibit substantial volatility. In 2019, accruals were recorded at approximately 166 million US dollars, decreasing to roughly 110 million in 2020. However, there was a sharp surge in 2021, with accruals escalating dramatically to about 1.62 billion US dollars, before dropping back to around 104 million US dollars in 2022. This significant spike in 2021 suggests an atypical event or accounting adjustment impacting accruals for that period.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the pattern of aggregate accruals but expressed as a percentage of net operating assets. It declined from 3.08% in 2019 to 1.97% in 2020, then spiked sharply to 24.59% in 2021, indicating a substantial increase in accruals relative to operating assets during that year. The ratio then sharply declined to 1.38% in 2022, returning to a level lower than that of the initial years in the series. This spike in 2021 may raise concerns about the quality of earnings for that year, as unusually high accruals can indicate earnings management or significant non-cash adjustments.
Overall, the data points to steady growth in net operating assets, while accrual-related measures fluctuate considerably, particularly in 2021. The extraordinary rise and fall in both aggregate accruals and the accruals ratio during 2021 stand out as key observations that could warrant further investigation to understand underlying causes and implications for financial reporting quality in that year.