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, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 137,175) | 135,241) | 127,243) | 132,001) | 155,971) | |
| Less: Cash and cash equivalents | 13,947) | 13,068) | 7,886) | 6,650) | 13,212) | |
| Less: Restricted cash | 214) | 21) | 103) | 307) | 463) | |
| Less: Marketable securities | 644) | 373) | 852) | 600) | 600) | |
| Operating assets | 122,370) | 121,779) | 118,402) | 124,444) | 141,696) | |
| Operating Liabilities | ||||||
| Total liabilities | 109,783) | 112,628) | 105,222) | 113,005) | 135,244) | |
| Less: Short-term debt | 5,089) | 6,426) | 4,760) | 6,787) | 7,183) | |
| Less: Long-term debt, excluding current maturities | 49,884) | 50,121) | 46,189) | 44,917) | 54,355) | |
| Operating liabilities | 54,810) | 56,081) | 54,273) | 61,301) | 73,706) | |
| Net operating assets1 | 67,560) | 65,698) | 64,129) | 63,143) | 67,990) | |
| Balance-sheet-based aggregate accruals2 | 1,862) | 1,569) | 986) | (4,847) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 2.79% | 2.42% | 1.55% | -7.39% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 35.69% | 16.32% | 21.70% | 27.93% | 3.73% | |
| Adobe Inc. | -3.83% | 1.85% | -8.24% | 14.14% | 8.20% | |
| Cadence Design Systems Inc. | 39.84% | 11.17% | 26.65% | 4.43% | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | -28.51% | -35.73% | 17.56% | 173.39% | — | |
| Fair Isaac Corp. | 6.46% | 12.11% | -3.66% | -6.17% | -0.02% | |
| Intuit Inc. | 3.35% | -1.74% | 85.68% | 139.73% | -1.39% | |
| Microsoft Corp. | 52.18% | 22.96% | 42.27% | 40.52% | — | |
| Oracle Corp. | 4.30% | 51.77% | 9.90% | 5.62% | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | 89.91% | 137.01% | -124.73% | 85.21% | 69.06% | |
| Salesforce Inc. | -2.46% | -2.30% | 57.74% | 10.87% | — | |
| ServiceNow Inc. | 22.91% | 61.79% | 12.89% | 34.89% | — | |
| Synopsys Inc. | 7.85% | 13.85% | 5.01% | 0.36% | 8.40% | |
| Workday Inc. | 28.44% | -11.24% | 55.93% | -15.99% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 26.34% | 18.45% | 29.41% | 16.74% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 21.41% | 8.97% | 18.09% | 19.19% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 122,370 – 54,810 = 67,560
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 67,560 – 65,698 = 1,862
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,862 ÷ [(67,560 + 65,698) ÷ 2] = 2.79%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibit a consistent upward trend over the reported periods. Starting from US$ 63,143 million at the end of 2021, the figure increased gradually to US$ 67,560 million by the end of 2024. This reflects a steady expansion of the company's net operating asset base over the four-year horizon.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals show a significant change in magnitude and direction over time. There was a negative value of US$ -4,847 million in 2021, which shifted to positive values from 2022 onward, reaching US$ 1,862 million at the end of 2024. This movement from negative to positive accruals suggests a notable alteration in the components impacting accrual accounting, potentially indicating changes in earnings quality or accounting practices during the period.
- Balance-sheet-based Accruals Ratio
- This ratio, expressed as a percentage, moves from a negative -7.39% in 2021 to a positive 2.79% in 2024. The transition from a negative to positive accruals ratio over the years aligns with the pattern observed in the aggregate accruals, reinforcing the indication of shifting accruals behavior. The gradual increase in this ratio may imply a reduction in earnings quality risk or a modification in the underlying accounting assumptions.
Cash-Flow-Statement-Based Accruals Ratio
International Business Machines Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income attributable to IBM | 6,023) | 7,502) | 1,639) | 5,743) | 5,590) | |
| Less: Net cash provided by operating activities | 13,445) | 13,931) | 10,435) | 12,796) | 18,197) | |
| Less: Net cash used in investing activities | (4,937) | (7,070) | (4,202) | (5,975) | (3,028) | |
| Cash-flow-statement-based aggregate accruals | (2,485) | 641) | (4,594) | (1,078) | (9,579) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -3.73% | 0.99% | -7.22% | -1.64% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | 24.31% | -0.19% | 11.87% | 11.80% | -13.65% | |
| Adobe Inc. | -21.90% | -21.73% | -19.93% | 9.21% | -0.48% | |
| Cadence Design Systems Inc. | 17.36% | 3.78% | 15.03% | -5.75% | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 30.92% | 53.36% | -34.44% | -28.18% | — | |
| Fair Isaac Corp. | -8.60% | -2.41% | -13.92% | -17.25% | -10.25% | |
| Intuit Inc. | -8.44% | -8.74% | 25.60% | 58.72% | -34.22% | |
| Microsoft Corp. | 30.89% | 5.22% | 13.42% | 17.68% | — | |
| Oracle Corp. | -1.01% | 42.79% | -30.58% | 25.81% | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | 33.84% | -37.95% | -196.64% | -68.30% | -488.47% | |
| Salesforce Inc. | -8.44% | -8.49% | 21.96% | 10.57% | — | |
| ServiceNow Inc. | -7.12% | 15.44% | 8.80% | -21.14% | — | |
| Synopsys Inc. | -7.64% | 0.20% | -4.64% | -4.88% | 0.92% | |
| Workday Inc. | 34.56% | 18.64% | -0.65% | -18.51% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 12.10% | 7.40% | 1.94% | 11.13% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.30% | 1.47% | 2.90% | 8.62% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -2,485 ÷ [(67,560 + 65,698) ÷ 2] = -3.73%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets have shown a consistent increasing trend over the analyzed period. Starting at 63,143 million US dollars at the end of 2021, the value rose steadily each year, reaching 67,560 million by the end of 2024. This upward movement indicates ongoing investment or expansion in operating resources over the four years.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility across the period. Initially, the figures show a negative value of -1,078 million US dollars in 2021, which worsened significantly to -4,594 million in 2022. In 2023, there was a notable reversal with a positive figure of 641 million, suggesting a reduction or reversal of prior accruals. However, in 2024, the accruals declined again to a negative value of -2,485 million, reflecting fluctuating accrual management and potentially varying earnings quality during these years.
- Cash-Flow-Statement-Based Accruals Ratio
- This ratio, expressed as a percentage, mirrors the pattern of aggregate accruals but in relative terms. It started at -1.64% in 2021, deteriorated to -7.22% in 2022, indicating a higher magnitude of accruals relative to net operating assets. In 2023, the ratio turned positive at 0.99%, followed by a decline again to -3.73% in 2024. The fluctuating ratio suggests inconsistency in accrual-related adjustments as a proportion of operating assets, which may impact earnings quality and should be monitored closely.