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.
Between 2015 and 2018, a consistent upward trend is observed in both net operating assets and the balance-sheet-based accruals ratio. While net operating assets grew steadily over the four-year period, the aggregate accruals increased at a disproportionately faster rate, leading to a substantial rise in the accruals ratio.
- Net Operating Assets
- Net operating assets demonstrated continuous growth, increasing from 12,607 million US dollars in 2015 to 18,490 million US dollars by 2018. The most pronounced expansion occurred between 2017 and 2018, where assets increased by approximately 25% in a single fiscal year.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals shifted from a negative position of -218 million US dollars in 2015 to a positive 3,756 million US dollars by 2018. This progression indicates a fundamental shift in the relationship between reported earnings and cash flows, with accruals growing from a negative base to a significant positive value over the observed period.
- Balance-sheet-based Accruals Ratio
- The accruals ratio experienced a sharp escalation, moving from -1.71% in 2015 to 22.61% in 2018. The transition from a negative ratio to a double-digit positive percentage suggests a diminishing proportion of cash-based earnings relative to accrual-based earnings. The acceleration is particularly evident between 2016 and 2018, where the ratio grew from 3.29% to 22.61%, signaling a potential decrease in the quality of financial reporting as accruals represent a larger share of the net operating assets.
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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.
An analysis of the financial reporting quality from 2015 to 2018 reveals a consistent and accelerating increase in both aggregate accruals and the corresponding accruals ratio. This trend indicates a widening gap between reported accounting earnings and actual cash flows generated from operations.
- Net Operating Assets
- Net operating assets exhibited a steady upward trajectory throughout the period, rising from 12,607 million USD in 2015 to 18,490 million USD in 2018. The most significant expansion occurred between 2017 and 2018, where assets increased by approximately 25%.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals shifted from a negative value of -315 million USD in 2015 to a substantial positive value of 2,776 million USD by 2018. This progression represents a continuous increase in non-cash earnings components over the four-year window.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio demonstrates a sharp positive trend, moving from -2.48% in 2015 to 16.71% in 2018. The ratio transitioned from a negative position, which typically suggests cash flows exceeding earnings, to a high positive position, suggesting that a larger portion of reported earnings is comprised of accruals rather than cash.
The simultaneous increase in net operating assets and the accruals ratio suggests a potential decline in the quality of earnings. Because the accruals ratio grew more rapidly than the asset base, the reliance on non-cash accounting entries to drive reported performance increased significantly by the end of the observed period.
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