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
International Business Machines Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 152,186 | 123,382 | 125,356 | 117,470 | 110,495 | |
| Less: Cash and cash equivalents | 8,172 | 11,379 | 11,972 | 7,826 | 7,686 | |
| Less: Restricted cash | 141 | 225 | 262 | — | — | |
| Less: Marketable securities | 696 | 618 | 608 | 701 | 508 | |
| Operating assets | 143,177 | 111,160 | 112,514 | 108,943 | 102,301 | |
| Operating Liabilities | ||||||
| Total liabilities | 131,202 | 106,452 | 107,631 | 99,078 | 96,071 | |
| Less: Short-term debt | 8,797 | 10,207 | 6,987 | 7,513 | 6,461 | |
| Less: Long-term debt, excluding current maturities | 54,102 | 35,605 | 39,837 | 34,655 | 33,428 | |
| Operating liabilities | 68,303 | 60,640 | 60,807 | 56,910 | 56,182 | |
| Net operating assets1 | 74,874 | 50,520 | 51,707 | 52,033 | 46,119 | |
| Balance-sheet-based aggregate accruals2 | 24,354 | (1,187) | (326) | 5,914 | — | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 38.84% | -2.32% | -0.63% | 12.05% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Adobe Inc. | 2.25% | 77.63% | -0.97% | -7.49% | 7.81% | |
| Alphabet Inc. | 17.40% | 28.17% | -3.66% | 7.61% | — | |
| Autodesk Inc. | 197.08% | -191.79% | -90.11% | -9.31% | — | |
| Facebook Inc. | 8.16% | 27.43% | 9.27% | 13.83% | — | |
| Intuit Inc. | 29.27% | 1.03% | -1.49% | -4.87% | — | |
| Microsoft Corp. | 47.05% | -1.64% | 69.19% | -40.94% | — | |
| Oracle Corp. | 2.79% | -15.16% | 25.88% | -3.24% | — | |
| salesforce.com inc. | 74.65% | -10.22% | 38.26% | 13.00% | — | |
| ServiceNow Inc. | 121.81% | 234.32% | — | -207.79% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Computer Services | 24.24% | 10.66% | 12.32% | 3.19% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Technology | 6.22% | 2.01% | 12.50% | 10.58% | — | |
Based on: 10-K (filing date: 2020-02-25), 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 143,177 – 68,303 = 74,874
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 74,874 – 50,520 = 24,354
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 24,354 ÷ [(74,874 + 50,520) ÷ 2] = 38.84%
4 Click competitor name to see calculations.
| Financial ratio | Description | The company |
|---|---|---|
| Balance-sheet-based accruals ratio | Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. | Using the balance-sheet-based accruals ratio, International Business Machines Corp. deteriorated earnings quality from 2018 to 2019. |
Cash-Flow-Statement-Based Accruals Ratio
International Business Machines Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income attributable to IBM | 9,431 | 8,728 | 5,753 | 11,872 | 13,190 | |
| Less: Net cash provided by operating activities | 14,770 | 15,247 | 16,724 | 16,958 | 17,008 | |
| Less: Net cash used in investing activities | (26,936) | (4,913) | (7,096) | (10,976) | (8,159) | |
| Cash-flow-statement-based aggregate accruals | 21,597 | (1,606) | (3,875) | 5,890 | 4,341 | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 34.45% | -3.14% | -7.47% | 12.00% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Adobe Inc. | -9.78% | 43.94% | -17.08% | -1.50% | 13.69% | |
| Alphabet Inc. | 11.73% | 17.73% | 12.54% | 26.77% | — | |
| Autodesk Inc. | 54.30% | -648.67% | -173.41% | 7.24% | — | |
| Facebook Inc. | 4.54% | 11.74% | 37.69% | 21.02% | — | |
| Intuit Inc. | -15.95% | -34.47% | -50.61% | -71.57% | — | |
| Microsoft Corp. | 8.59% | -83.67% | 149.68% | 47.44% | — | |
| Oracle Corp. | -74.80% | -13.86% | 40.94% | 1.37% | — | |
| salesforce.com inc. | 28.72% | -8.64% | 11.45% | -3.70% | — | |
| ServiceNow Inc. | 16.38% | -387.26% | — | -427.40% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Computer Services | 2.80% | -5.23% | 27.74% | 16.84% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Technology | -8.33% | -12.73% | 14.50% | 15.81% | — | |
Based on: 10-K (filing date: 2020-02-25), 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 21,597 ÷ [(74,874 + 50,520) ÷ 2] = 34.45%
2 Click competitor name to see calculations.
| Financial ratio | Description | The company |
|---|---|---|
| Cash-flow-statement-based accruals ratio | Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. | Using the cash-flow-statement-based accruals ratio, International Business Machines Corp. deteriorated earnings quality from 2018 to 2019. |