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
Mastercard Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 38,724) | 37,669) | 33,584) | 29,236) | 24,860) | |
| Less: Cash and cash equivalents | 7,008) | 7,421) | 10,113) | 6,988) | 6,682) | |
| Less: Restricted cash for litigation settlement | 589) | 586) | 586) | 584) | 553) | |
| Less: Investments | 400) | 473) | 483) | 688) | 1,696) | |
| Less: Restricted security deposits held for customers | 1,568) | 1,873) | 1,696) | 1,370) | 1,080) | |
| Operating assets | 29,159) | 27,316) | 20,706) | 19,606) | 14,849) | |
| Operating Liabilities | ||||||
| Total liabilities | 32,347) | 30,257) | 27,067) | 23,245) | 19,371) | |
| Less: Short-term debt | 274) | 792) | 649) | —) | 500) | |
| Less: Long-term debt, excluding current portion | 13,749) | 13,109) | 12,023) | 8,527) | 5,834) | |
| Operating liabilities | 18,324) | 16,356) | 14,395) | 14,718) | 13,037) | |
| Net operating assets1 | 10,835) | 10,960) | 6,311) | 4,888) | 1,812) | |
| Balance-sheet-based aggregate accruals2 | (125) | 4,649) | 1,423) | 3,076) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -1.15% | 53.84% | 25.41% | 91.82% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 21.70% | 27.93% | 3.73% | — | — | |
| Adobe Inc. | -8.24% | 14.14% | 8.20% | — | — | |
| Cadence Design Systems Inc. | 26.65% | 4.43% | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 17.56% | 173.39% | — | — | — | |
| Fair Isaac Corp. | -3.66% | -6.17% | -0.02% | — | — | |
| International Business Machines Corp. | 1.55% | -7.39% | — | — | — | |
| Intuit Inc. | 85.68% | 139.73% | — | — | — | |
| Microsoft Corp. | 42.27% | 40.52% | — | — | — | |
| Oracle Corp. | 9.90% | 5.62% | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | 85.21% | — | — | — | |
| Salesforce Inc. | 57.74% | 10.87% | — | — | — | |
| ServiceNow Inc. | 12.89% | 34.89% | — | — | — | |
| Synopsys Inc. | 5.01% | 0.36% | 8.40% | — | — | |
| Workday Inc. | 55.93% | -15.99% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 29.41% | 16.74% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 18.09% | 19.19% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 29,159 – 18,324 = 10,835
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 10,835 – 10,960 = -125
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -125 ÷ [(10,835 + 10,960) ÷ 2] = -1.15%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a rising trend from 2019 to 2021, increasing from 4,888 million US dollars to 10,960 million US dollars. However, in 2022, there was a slight decline to 10,835 million US dollars, indicating a marginal reduction after a period of significant growth.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals demonstrated considerable volatility over the examined period. Starting at 3,076 million US dollars in 2019, the value sharply decreased to 1,423 million in 2020, surged to 4,649 million in 2021, and ended with a negative figure of -125 million in 2022. This fluctuation suggests variable accrual practices or changes in underlying operational factors influencing accruals.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrored the volatility seen in aggregate accruals. It declined significantly from 91.82% in 2019 to 25.41% in 2020, rose again to 53.84% in 2021, and ultimately dropped to a slightly negative ratio of -1.15% in 2022. The movement into negative territory in 2022 is notable, indicating that accruals effectively offset net operating assets during this period.
Cash-Flow-Statement-Based Accruals Ratio
Mastercard Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income | 9,930) | 8,687) | 6,411) | 8,118) | 5,859) | |
| Less: Net cash provided by operating activities | 11,195) | 9,463) | 7,224) | 8,183) | 6,223) | |
| Less: Net cash used in investing activities | (1,470) | (5,272) | (1,879) | (1,640) | (506) | |
| Cash-flow-statement-based aggregate accruals | 205) | 4,496) | 1,066) | 1,575) | 142) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.88% | 52.06% | 19.04% | 47.01% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | 11.87% | 11.80% | -13.65% | — | — | |
| Adobe Inc. | -19.93% | 9.21% | -0.48% | — | — | |
| Cadence Design Systems Inc. | 15.03% | -5.75% | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | -34.44% | -28.18% | — | — | — | |
| Fair Isaac Corp. | -13.92% | -17.25% | -10.25% | — | — | |
| International Business Machines Corp. | -7.22% | -1.64% | — | — | — | |
| Intuit Inc. | 25.60% | 58.72% | — | — | — | |
| Microsoft Corp. | 13.42% | 17.68% | — | — | — | |
| Oracle Corp. | -30.58% | 25.81% | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | -68.30% | — | — | — | |
| Salesforce Inc. | 21.96% | 10.57% | — | — | — | |
| ServiceNow Inc. | 8.80% | -21.14% | — | — | — | |
| Synopsys Inc. | -4.64% | -4.88% | 0.92% | — | — | |
| Workday Inc. | -0.65% | -18.51% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 1.94% | 11.13% | -27.89% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 2.90% | 8.62% | -15.22% | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 205 ÷ [(10,835 + 10,960) ÷ 2] = 1.88%
2 Click competitor name to see calculations.
The data demonstrates a notable evolution in the company's financial reporting quality metrics over the four-year period from December 31, 2019, to December 31, 2022.
- Net Operating Assets
- There is an overall increasing trend in net operating assets, rising from US$4,888 million in 2019 to US$10,835 million in 2022. The most significant increase occurred between 2020 and 2021, where the figure surged from US$6,311 million to US$10,960 million. In 2022, the value slightly decreased by 1.15% to US$10,835 million, indicating a leveling off after substantial growth.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals display considerable volatility. Starting at US$1,575 million in 2019, there is a decline to US$1,066 million in 2020, followed by a sharp increase to US$4,496 million in 2021. In 2022, aggregate accruals drop dramatically to US$205 million, the lowest level in the four-year period. This pattern implies fluctuations in non-cash components affecting the cash flow statement, with a marked reduction in accruals impact by the end of the period.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio parallels the behavior of aggregate accruals, indicating variability in the quality of earnings relative to cash flows. It starts high at 47.01% in 2019, decreases to 19.04% in 2020, rises sharply again to 52.06% in 2021, and then plunges to a minimal 1.88% in 2022. The high ratio in 2021 may suggest lower earnings quality due to significant non-cash accrual components, whereas the very low ratio in 2022 implies improved earnings quality, with cash flows more closely aligning with reported earnings.
Overall, the data reveals a pattern of increasing net operating assets alongside volatile accrual-based measures, culminating in a strong improvement in earnings quality by 2022, as indicated by the substantial reduction in both aggregate accruals and the accruals ratio.