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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Hess Corp. pages available for free this week:
- Statement of Comprehensive Income
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Income Statement
- Analysis of Liquidity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Reportable Segments
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Price to Sales (P/S) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Hess Corp., 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: Current portion of long-term debt | ||||||
| Less: Current portion of finance lease obligations | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Less: Long-term finance lease obligations | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
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.
The analysis of the annual financial reporting quality measures over the four-year period reveals several notable trends and fluctuations.
- Net Operating Assets
- The net operating assets demonstrate a declining trend from 2019 to 2021, decreasing from $15,558 million to $12,990 million. This represents a reduction of approximately 16.5% over two years. However, in 2022, there is a reversal as the net operating assets increase to $14,491 million, suggesting a recovery or an expansion in operating asset base after the prior decline.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility throughout the period. Initially, there is a positive value of $692 million in 2019, followed by a sharp decline to negative $2,428 million in 2020, indicating a significant reduction in accrual adjustments that year. In 2021, the value rebounds closer to zero, registering at negative $140 million, showing a moderation of the previous year's extreme change. Then, in 2022, the aggregate accruals swing back to a positive value of $1,501 million, signifying an increase in accruals relative to prior years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals but presented in percentage terms relative to net operating assets. It peaks at 4.55% in 2019 and then sharply declines to -16.93% in 2020, indicating a substantial negative adjustment on a proportional basis, which could reflect changes in earnings quality or financial reporting practices. In 2021, this ratio moderates significantly to -1.07%, suggesting improved stability or normalization in accruals. In 2022, the ratio rises notably to 10.92%, marking the highest positive proportion in the period, indicative of increased accrual components relative to net operating assets.
Overall, the data indicates that the years 2020 and 2022 were characterized by marked fluctuations in accruals and their ratios, implying potential variability in earnings quality or financial reporting choices. The recovery in net operating assets in 2022 alongside increased accrual ratios may warrant further investigation to understand the nature and implications of these accrual changes on reported financial performance.
Cash-Flow-Statement-Based Accruals Ratio
Hess Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Hess Corporation | ||||||
| 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 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
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 exhibited a decreasing trend from 2019 to 2021, declining from 15,558 million US dollars in 2019 to 12,990 million in 2021. However, there was a reversal in this trend in 2022, with net operating assets increasing to 14,491 million US dollars.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals showed significant volatility over the periods. Initially, there was a positive value of 793 million US dollars in 2019, followed by a sharp decrease to -2,719 million in 2020, indicating a significant reduction in accruals. The value remained negative in 2021 at -1,006 million but improved to a positive 707 million in 2022. This pattern suggests fluctuations in accruals, potentially reflecting changes in earnings quality or operational cash flow timing.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals, moving from a positive 5.21% in 2019 to a strongly negative -18.96% in 2020. It then improved somewhat but remained negative at -7.7% in 2021 before returning to a positive 5.15% in 2022. Such swings in the ratio indicate variations in the proportion of accruals to net operating assets, which may imply shifts in earnings management or the underlying quality of the reported financial results.