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, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 151,880) | 137,175) | 135,241) | 127,243) | 132,001) | |
| Less: Cash and cash equivalents | 13,587) | 13,947) | 13,068) | 7,886) | 6,650) | |
| Less: Restricted cash | 54) | 214) | 21) | 103) | 307) | |
| Less: Marketable securities | 830) | 644) | 373) | 852) | 600) | |
| Operating assets | 137,409) | 122,370) | 121,779) | 118,402) | 124,444) | |
| Operating Liabilities | ||||||
| Total liabilities | 119,139) | 109,783) | 112,628) | 105,222) | 113,005) | |
| Less: Short-term debt | 6,424) | 5,089) | 6,426) | 4,760) | 6,787) | |
| Less: Long-term debt, excluding current maturities | 54,836) | 49,884) | 50,121) | 46,189) | 44,917) | |
| Operating liabilities | 57,879) | 54,810) | 56,081) | 54,273) | 61,301) | |
| Net operating assets1 | 79,530) | 67,560) | 65,698) | 64,129) | 63,143) | |
| Balance-sheet-based aggregate accruals2 | 11,970) | 1,862) | 1,569) | 986) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 16.28% | 2.79% | 2.42% | 1.55% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 2.83% | 35.69% | 16.32% | 21.70% | 27.93% | |
| Adobe Inc. | -5.28% | -3.83% | 1.85% | -8.24% | 14.14% | |
| AppLovin Corp. | -20.02% | -0.63% | -1.52% | 36.28% | — | |
| Cadence Design Systems Inc. | 9.47% | 39.84% | 11.17% | 26.65% | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 53.88% | -28.51% | -35.73% | 17.56% | — | |
| Intuit Inc. | 3.52% | 3.35% | -1.74% | 85.68% | 139.73% | |
| Microsoft Corp. | 21.81% | 52.18% | 22.96% | 42.27% | 40.52% | |
| Oracle Corp. | 20.79% | 4.30% | 51.77% | 9.90% | 5.62% | |
| Palantir Technologies Inc. | 509.21% | — | — | — | — | |
| Palo Alto Networks Inc. | 32.24% | 89.91% | 137.01% | -124.73% | 85.21% | |
| Salesforce Inc. | 0.71% | -2.46% | -2.30% | 57.74% | — | |
| ServiceNow Inc. | 41.98% | 22.91% | 61.79% | 12.89% | — | |
| Synopsys Inc. | 154.48% | 7.85% | 13.85% | 5.01% | 0.36% | |
| Workday Inc. | 20.74% | 28.44% | -11.24% | 55.93% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 21.94% | 26.16% | 18.26% | 29.59% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 14.51% | 21.35% | 8.92% | 18.19% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 137,409 – 57,879 = 79,530
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 79,530 – 67,560 = 11,970
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 11,970 ÷ [(79,530 + 67,560) ÷ 2] = 16.28%
4 Click competitor name to see calculations.
Net operating assets exhibited a consistent upward trend over the four-year period, increasing from 64,129 million to 79,530 million. However, balance-sheet-based aggregate accruals and the corresponding accruals ratio demonstrate a significantly different pattern, particularly in the final year.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals increased steadily from 986 million in 2022 to 1,862 million in 2024. This represents an approximate doubling over the three-year period. A substantial and disproportionate increase is then observed in 2025, with accruals reaching 11,970 million. This represents a more than six-fold increase from the prior year.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio mirrored the trend in aggregate accruals. It rose from 1.55% in 2022 to 2.79% in 2024, indicating a growing reliance on accruals relative to net operating assets. The ratio experienced a dramatic surge in 2025, reaching 16.28%. This substantial increase suggests a significant deviation from the historical relationship between accruals and operating assets.
The escalating accruals ratio in 2025 warrants further investigation. While increasing accruals are not inherently negative, the magnitude of the change raises potential concerns regarding the quality of reported earnings. A substantial rise could indicate aggressive revenue recognition practices, delayed expense recognition, or other accounting manipulations. The significant divergence between the growth in net operating assets and the growth in accruals in the final year is particularly noteworthy and requires deeper scrutiny to determine the underlying drivers and potential implications for financial reporting quality.
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Cash-Flow-Statement-Based Accruals Ratio
International Business Machines Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income attributable to IBM | 10,593) | 6,023) | 7,502) | 1,639) | 5,743) | |
| Less: Net cash provided by operating activities | 13,193) | 13,445) | 13,931) | 10,435) | 12,796) | |
| Less: Net cash used in investing activities | (10,302) | (4,937) | (7,070) | (4,202) | (5,975) | |
| Cash-flow-statement-based aggregate accruals | 7,702) | (2,485) | 641) | (4,594) | (1,078) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 10.47% | -3.73% | 0.99% | -7.22% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | -6.95% | 24.31% | -0.19% | 11.87% | 11.80% | |
| Adobe Inc. | -14.85% | -21.90% | -21.73% | -19.93% | 9.21% | |
| AppLovin Corp. | -27.29% | -10.24% | -15.40% | 22.07% | — | |
| Cadence Design Systems Inc. | -3.48% | 17.36% | 3.78% | 15.03% | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 206.67% | 30.92% | 53.36% | -34.44% | — | |
| Intuit Inc. | -0.10% | -8.44% | -8.74% | 25.60% | 58.72% | |
| Microsoft Corp. | 12.55% | 30.89% | 5.22% | 13.42% | 17.68% | |
| Oracle Corp. | 13.98% | -1.01% | 42.79% | -30.58% | 25.81% | |
| Palantir Technologies Inc. | 2,593.23% | — | — | — | — | |
| Palo Alto Networks Inc. | -8.91% | 33.84% | -37.95% | -196.64% | -68.30% | |
| Salesforce Inc. | -6.66% | -8.44% | -8.49% | 21.96% | — | |
| ServiceNow Inc. | -29.72% | -7.12% | 15.44% | 8.80% | — | |
| Synopsys Inc. | 71.60% | -7.64% | 0.20% | -4.64% | -4.88% | |
| Workday Inc. | -4.25% | 34.56% | 18.64% | -0.65% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 10.41% | 11.97% | 7.19% | 2.21% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.09% | 6.25% | 1.40% | 2.99% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 7,702 ÷ [(79,530 + 67,560) ÷ 2] = 10.47%
2 Click competitor name to see calculations.
The information presents a review of net operating assets alongside cash-flow-statement-based accruals and the resulting accruals ratio over a four-year period. Net operating assets demonstrate a consistent upward trend throughout the period, increasing from 64,129 US$ millions in 2022 to 79,530 US$ millions in 2025. However, the cash-flow-statement-based aggregate accruals exhibit significant volatility. The accruals ratio, calculated from these figures, correspondingly fluctuates considerably.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals were negative in 2022, at -4,594 US$ millions, indicating that cash flows from operations were substantially higher than reported net income. A substantial shift occurred in 2023, with accruals turning positive at 641 US$ millions. This positive trend was short-lived, as accruals became negative again in 2024, reaching -2,485 US$ millions. By 2025, accruals had risen significantly to 7,702 US$ millions, representing the largest accrual value within the observed period.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals. In 2022, the ratio was -7.22%, reflecting the negative accruals and suggesting a potential overstatement of earnings relative to cash flow. The ratio became positive in 2023, reaching 0.99%, indicating a closer alignment between earnings and cash flow. A return to negative accruals in 2024 resulted in a ratio of -3.73%. The most notable change occurred in 2025, with the accruals ratio increasing to 10.47%, suggesting a significant reliance on accruals relative to cash flow and potentially indicating an aggressive recognition of revenue or underestimation of expenses.
The substantial fluctuations in both aggregate accruals and the accruals ratio warrant further investigation. While an increasing trend in net operating assets is positive, the volatility in accruals could signal changes in accounting practices, revenue recognition policies, or underlying business operations. The significant positive accruals ratio in 2025, in particular, should be examined to determine its sustainability and potential impact on the quality of reported earnings.
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