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
Johnson Controls International plc, balance sheet computation of aggregate accruals
US$ in millions
| Sep 30, 2023 | Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 42,242) | 42,158) | 41,890) | 40,815) | 42,287) | 48,797) | |
| Less: Cash and cash equivalents | 835) | 2,031) | 1,336) | 1,951) | 2,805) | 200) | |
| Operating assets | 41,407) | 40,127) | 40,554) | 38,864) | 39,482) | 48,597) | |
| Operating Liabilities | |||||||
| Total liabilities | 24,548) | 24,756) | 23,137) | 22,282) | 21,458) | 26,339) | |
| Less: Short-term debt | 385) | 669) | 8) | 31) | 10) | 1,315) | |
| Less: Current portion of long-term debt | 645) | 865) | 226) | 262) | 501) | 26) | |
| Less: Long-term debt, less current portion | 7,818) | 7,426) | 7,506) | 7,526) | 6,708) | 9,654) | |
| Operating liabilities | 15,700) | 15,796) | 15,397) | 14,463) | 14,239) | 15,344) | |
| Net operating assets1 | 25,707) | 24,331) | 25,157) | 24,401) | 25,243) | 33,253) | |
| Balance-sheet-based aggregate accruals2 | 1,376) | (826) | 756) | (842) | (8,010) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 5.50% | -3.34% | 3.05% | -3.39% | -27.39% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Boeing Co. | -22.39% | -12.09% | 30.23% | — | — | — | |
| Caterpillar Inc. | 9.40% | 1.82% | 4.22% | — | — | — | |
| Eaton Corp. plc | 2.18% | 2.87% | 10.92% | — | — | — | |
| GE Aerospace | -50.58% | -7.82% | -33.29% | — | — | — | |
| Honeywell International Inc. | 7.21% | -1.99% | 9.04% | — | — | — | |
| Lockheed Martin Corp. | 2.60% | 15.67% | 23.38% | — | — | — | |
| RTX Corp. | -1.23% | 1.57% | 1.48% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Capital Goods | -5.90% | -0.33% | -0.06% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Industrials | -1.04% | 0.29% | 3.43% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 41,407 – 15,700 = 25,707
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 25,707 – 24,331 = 1,376
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,376 ÷ [(25,707 + 24,331) ÷ 2] = 5.50%
4 Click competitor name to see calculations.
- Net Operating Assets
- Over the five-year period, net operating assets fluctuated within a relatively narrow range, beginning at approximately 25,243 million US dollars in 2019 and experiencing minor declines in 2020 and 2022 to around 24,401 and 24,331 million respectively. In 2021 and 2023, the figure rose again, reaching a peak of 25,707 million US dollars in 2023. This pattern indicates moderate stability in the company's operating asset base with slight growth noted in the most recent year.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals showed notable volatility. In 2019, a significant negative value of -8,010 million US dollars was recorded, representing a large decrease in accruals. This sharply reversed to a much smaller negative figure of -842 million in 2020, followed by a positive value of 756 million in 2021. The value reverted back to a negative -826 million in 2022 before increasing to a positive 1,376 million in 2023. The substantial swings and alternating signs suggest variability in accrual management or in underlying operational adjustments across these years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrored the variability observed in aggregate accruals. It began strongly negative at -27.39% in 2019, indicating high negative accruals relative to assets. This ratio approached neutrality in 2020 at -3.39%, crossed into positive territory at 3.05% in 2021, dipped slightly back to -3.34% in 2022, and then rose significantly to 5.5% in 2023. The oscillating trend in this ratio reflects inconsistent accrual patterns, suggesting shifts possibly in earnings quality or accounting estimates over time.
Cash-Flow-Statement-Based Accruals Ratio
Johnson Controls International plc, cash flow statement computation of aggregate accruals
US$ in millions
| Sep 30, 2023 | Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to Johnson Controls | 1,849) | 1,532) | 1,637) | 631) | 5,674) | 2,162) | |
| Less: Cash provided by operating activities from continuing operations | 2,221) | 1,990) | 2,551) | 2,479) | 1,743) | 2,513) | |
| Less: Cash (used) provided by investing activities from continuing operations | (1,184) | (693) | (1,090) | (258) | (533) | 1,215) | |
| Cash-flow-statement-based aggregate accruals | 812) | 235) | 176) | (1,590) | 4,464) | (1,566) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 3.25% | 0.95% | 0.71% | -6.41% | 15.26% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Boeing Co. | -26.69% | -50.32% | -43.09% | — | — | — | |
| Caterpillar Inc. | 6.90% | 3.26% | 5.38% | — | — | — | |
| Eaton Corp. plc | 8.52% | 4.55% | 7.52% | — | — | — | |
| GE Aerospace | -8.42% | -15.92% | -53.22% | — | — | — | |
| Honeywell International Inc. | 5.80% | -0.79% | 2.16% | — | — | — | |
| Lockheed Martin Corp. | 3.08% | -1.36% | -10.24% | — | — | — | |
| RTX Corp. | -1.66% | 0.87% | -1.96% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Capital Goods | -0.94% | -5.98% | -13.86% | -3.12% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Industrials | 1.67% | -2.31% | -8.91% | -5.18% | — | — | |
Based on: 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 812 ÷ [(25,707 + 24,331) ÷ 2] = 3.25%
2 Click competitor name to see calculations.
The data reveals several notable trends concerning the company's financial quality measures over the five-year period from 2019 through 2023.
- Net Operating Assets
- This metric exhibits relative stability, fluctuating within a narrow range between approximately 24,400 million and 25,700 million US dollars. There is a slight decline from 25,243 million in 2019 to 24,401 million in 2020, followed by a moderate rise and subsequent minor decreases, culminating in a peak of 25,707 million in 2023. Overall, net operating assets remain fairly consistent, suggesting steady investment in operational resources without significant expansion or contraction.
- Cash-Flow-Statement-Based Aggregate Accruals
- The accruals show considerable volatility during the period. Beginning with a high positive value of 4,464 million US dollars in 2019, there is a sharp decrease into negative territory in 2020 (-1,590 million). The following years show a recovery trend with progressively increasing positive values: 176 million in 2021, 235 million in 2022, and 812 million in 2023. This pattern may indicate fluctuations in earnings quality or timing differences between cash flows and accounting earnings, with 2020 standing out as an anomaly possibly linked to extraordinary circumstances.
- Cash-Flow-Statement-Based Accruals Ratio
- This ratio mirrors the aggregate accruals movement, confirming the volatility observed. At 15.26% in 2019, the ratio sharply drops to -6.41% in 2020, marking a significant reversal. Thereafter, it recovers modestly to near zero in 2021 (0.71%) and 2022 (0.95%), before increasing to 3.25% in 2023. The swings in this ratio further underscore the variability in accruals relative to net operating assets and may reflect transient changes in earnings quality or cash flow timing.
In summary, the net operating assets remain generally stable, indicating consistent operational scale. However, the accruals and their ratio display marked fluctuations, particularly in 2020, suggesting episodic changes in accrual accounting components which could affect the reliability or predictability of earnings during that year and slightly thereafter. The gradual positive trend post-2020 may imply an improving alignment between cash flows and reported earnings quality over the most recent periods.