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
LyondellBasell Industries N.V., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 28,278) | 26,206) | 23,442) | 22,757) | 24,283) | |
| Less: Cash and cash equivalents | 332) | 1,523) | 875) | 924) | 1,031) | |
| Less: Restricted cash | 69) | 5) | 3) | 7) | 2) | |
| Less: Short-term investments | 892) | 1,307) | 1,147) | 1,064) | 1,593) | |
| Operating assets | 26,985) | 23,371) | 21,417) | 20,762) | 21,657) | |
| Operating Liabilities | ||||||
| Total liabilities | 17,882) | 17,256) | 17,369) | 16,183) | 15,939) | |
| Less: Current maturities of long-term debt | 5) | 2) | 2) | 4) | 4) | |
| Less: Short-term debt | 885) | 68) | 594) | 353) | 346) | |
| Less: Long-term debt, excluding current maturities | 8,497) | 8,549) | 8,385) | 7,671) | 6,757) | |
| Operating liabilities | 8,495) | 8,637) | 8,388) | 8,155) | 8,832) | |
| Net operating assets1 | 18,490) | 14,734) | 13,029) | 12,607) | 12,825) | |
| Balance-sheet-based aggregate accruals2 | 3,756) | 1,705) | 422) | (218) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 22.61% | 12.28% | 3.29% | -1.71% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 26,985 – 8,495 = 18,490
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= 18,490 – 14,734 = 3,756
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,756 ÷ [(18,490 + 14,734) ÷ 2] = 22.61%
4 Click competitor name to see calculations.
- Net operating assets
- The net operating assets have shown a consistent upward trend over the four-year period, increasing from 12,607 million US dollars in 2015 to 18,490 million US dollars in 2018. This represents a growth of approximately 46.7%, indicating an expansion in the asset base utilized for the company's operations.
- Balance-sheet-based aggregate accruals
- The balance-sheet-based aggregate accruals have exhibited a notable shift from a negative value of -218 million US dollars in 2015 to a positive value, reaching 3,756 million US dollars in 2018. This increase suggests a growing level of accruals on the balance sheet, which could imply changes in earnings management practices or shifts in working capital components.
- Balance-sheet-based accruals ratio
- The accruals ratio has increased markedly from -1.71% in 2015 to 22.61% in 2018. The negative ratio in 2015 indicates that accruals were reducing reported earnings relative to cash flows at that time, whereas the positive and increasing ratios in the subsequent years signify a buildup of accruals relative to net operating assets. The substantial rise to over 22% by 2018 may signal higher financial reporting discretion or a change in operational dynamics affecting accrual accounts.
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Cash-Flow-Statement-Based Accruals Ratio
LyondellBasell Industries N.V., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Net income attributable to the Company shareholders | 4,688) | 4,879) | 3,836) | 4,476) | 4,174) | |
| Less: Net cash provided by operating activities | 5,471) | 5,206) | 5,606) | 5,842) | 6,048) | |
| Less: Net cash used in investing activities | (3,559) | (1,756) | (2,297) | (1,051) | (3,531) | |
| Cash-flow-statement-based aggregate accruals | 2,776) | 1,429) | 527) | (315) | 1,657) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 16.71% | 10.29% | 4.11% | -2.48% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,776 ÷ [(18,490 + 14,734) ÷ 2] = 16.71%
2 Click competitor name to see calculations.
The data reveals notable trends in the financial reporting quality measures over the period from 2015 to 2018.
- Net Operating Assets
- There is a consistent increase in net operating assets over the four-year period, rising from 12,607 million US dollars at the end of 2015 to 18,490 million US dollars by the end of 2018. This represents a substantial growth, indicating expansion in operating resources or investments over time.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals measure exhibits a significant upward trend. Starting with a negative figure of -315 million US dollars at the end of 2015, indicative of possibly conservative accrual estimates or adjustments, it turns positive in 2016 at 527 million. The value then sharply increases to 1,429 million in 2017 and further to 2,776 million in 2018. This escalating pattern suggests growing differences between net income and cash flows, which might reflect increasing accrual-related activities or changes in working capital management.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio also follows an upward trajectory, starting from a negative 2.48% in 2015 and increasing to 4.11% in 2016. It continues to rise significantly to 10.29% in 2017 and reaches 16.71% in 2018. This rising ratio indicates that accruals are making up a larger proportion of net operating assets over time, which may warrant further analysis regarding earnings quality and the sustainability of reported earnings.
Overall, the trends indicate a growing scale of operations accompanied by increasingly large accrual components in cash flow reporting. While growth in net operating assets can be positive, the steep rise in both aggregate accruals and the accruals ratio suggests a shift in the composition of earnings and cash flows that may affect the interpretation of financial performance and quality. Such developments may call for closer monitoring of accrual quality to assess potential risks related to earnings management or the underlying financial health of operations.
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