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
Kinder Morgan Inc., 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 | 74,157) | 78,866) | 79,055) | 80,305) | 84,104) | |
| Less: Cash and cash equivalents | 185) | 3,280) | 264) | 684) | 229) | |
| Less: Restricted deposits | 24) | 51) | 62) | 103) | 60) | |
| Less: Marketable securities at fair value | 925) | —) | —) | —) | —) | |
| Operating assets | 73,023) | 75,535) | 78,729) | 79,518) | 83,815) | |
| Operating Liabilities | ||||||
| Total liabilities | 39,268) | 43,669) | 43,931) | 45,503) | 48,701) | |
| Less: Current portion of debt | 2,477) | 3,388) | 2,828) | 2,696) | 821) | |
| Less: Long-term debt, excluding current portion | 31,915) | 33,936) | 35,015) | 37,354) | 42,406) | |
| Operating liabilities | 4,876) | 6,345) | 6,088) | 5,453) | 5,474) | |
| Net operating assets1 | 68,147) | 69,190) | 72,641) | 74,065) | 78,341) | |
| Balance-sheet-based aggregate accruals2 | (1,043) | (3,451) | (1,424) | (4,276) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -1.52% | -4.87% | -1.94% | -5.61% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 73,023 – 4,876 = 68,147
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 68,147 – 69,190 = -1,043
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,043 ÷ [(68,147 + 69,190) ÷ 2] = -1.52%
4 Click competitor name to see calculations.
An analysis of financial reporting quality reveals a consistent pattern of negative balance-sheet-based aggregate accruals and a corresponding negative accruals ratio from 2016 through 2019. During this period, net operating assets exhibited a steady downward trend, declining from 74,065 million US dollars in 2016 to 68,147 million US dollars by the end of 2019.
- Net Operating Assets Trend
- A persistent contraction in net operating assets is observed, with a cumulative decrease of approximately 7.9% over the four-year window. This steady decline indicates a reduction in the scale of the operating asset base.
- Aggregate Accruals Performance
- Balance-sheet-based aggregate accruals remained negative throughout the entire period. While the magnitude fluctuated—reaching its most negative point of -4,276 million US dollars in 2016 and its least negative point of -1,043 million US dollars in 2019—the consistent negative polarity indicates that cash flows from operations exceeded reported accrual earnings.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio mirrored the volatility of the aggregate accruals, oscillating between -1.52% in 2019 and -5.61% in 2016. The sustained negative values for this ratio suggest conservative accounting practices, as reported earnings are not being inflated by non-cash accruals. A notable spike in the negative ratio occurred in 2018, reaching -4.87%, before recovering to -1.52% in 2019.
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Cash-Flow-Statement-Based Accruals Ratio
Kinder Morgan Inc., 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 Kinder Morgan, Inc. | 2,190) | 1,609) | 183) | 708) | 253) | |
| Less: Net cash provided by operating activities | 4,748) | 5,043) | 4,601) | 4,787) | 5,303) | |
| Less: Net cash used in investing activities | (1,714) | (68) | (3,362) | (1,705) | (5,706) | |
| Cash-flow-statement-based aggregate accruals | (844) | (3,366) | (1,056) | (2,374) | 656) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.23% | -4.75% | -1.44% | -3.12% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -844 ÷ [(68,147 + 69,190) ÷ 2] = -1.23%
2 Click competitor name to see calculations.
An analysis of financial reporting quality from 2016 to 2019 reveals a consistent pattern of negative cash-flow-statement-based aggregate accruals. This indicates that cash flows from operations have routinely exceeded accrual-based earnings, a condition typically associated with high earnings quality and conservative accounting practices.
- Net Operating Assets
- A steady downward trend in net operating assets is observed, declining from 74,065 million USD in 2016 to 68,147 million USD in 2019. This gradual reduction in the operating asset base provides the denominator for the accruals ratio analysis.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals remained negative throughout the period, although the magnitude fluctuated. The most significant negative value was recorded in 2018 at -3,366 million USD, while 2019 saw a substantial reduction in the magnitude of negative accruals to -844 million USD.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio remained negative over the four-year span, suggesting that earnings were consistently backed by cash flows. The ratio moved from -3.12% in 2016 to a peak negative value of -4.75% in 2018, before normalizing to -1.23% in 2019. The fluctuations in this ratio suggest varying degrees of divergence between cash flow and accrual accounting, with 2018 marking the period of highest divergence relative to net operating assets.
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