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
McKesson Corp., balance sheet computation of aggregate accruals
US$ in millions
| Mar 31, 2016 | Mar 31, 2015 | Mar 31, 2014 | Mar 31, 2013 | Mar 31, 2012 | Mar 31, 2011 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 56,563) | 53,870) | 51,759) | 34,786) | 33,093) | 30,886) | |
| Less: Cash and cash equivalents | 4,048) | 5,341) | 4,193) | 2,456) | 3,149) | 3,612) | |
| Operating assets | 52,515) | 48,529) | 47,566) | 32,330) | 29,944) | 27,274) | |
| Operating Liabilities | |||||||
| Total liabilities | 46,149) | 44,399) | 41,441) | 27,716) | 26,262) | 23,666) | |
| Less: Short-term borrowings | 7) | 135) | 346) | —) | 400) | —) | |
| Less: Current portion of long-term debt | 1,612) | 1,529) | 1,424) | 352) | 508) | 417) | |
| Less: Long-term debt, excluding current portion | 6,535) | 8,180) | 8,949) | 4,521) | 3,072) | 3,587) | |
| Operating liabilities | 37,995) | 34,555) | 30,722) | 22,843) | 22,282) | 19,662) | |
| Net operating assets1 | 14,520) | 13,974) | 16,844) | 9,487) | 7,662) | 7,612) | |
| Balance-sheet-based aggregate accruals2 | 546) | (2,870) | 7,357) | 1,825) | 50) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 3.83% | -18.63% | 55.88% | 21.28% | 0.65% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Abbott Laboratories | — | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
1 2016 Calculation
Net operating assets = Operating assets – Operating liabilities
= 52,515 – 37,995 = 14,520
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= 14,520 – 13,974 = 546
3 2016 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 546 ÷ [(14,520 + 13,974) ÷ 2] = 3.83%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals from 2012 to 2016 reveals a period of substantial volatility in financial reporting quality. The observed trend is characterized by a sharp escalation in accruals peaking in 2014, followed by a severe reversal in 2015 and a subsequent stabilization in 2016.
- Net Operating Assets Evolution
- Net operating assets exhibited a strong upward trajectory from 7,662 million USD in 2012 to a peak of 16,844 million USD in 2014. This expansion of the asset base was followed by a contraction to 13,974 million USD in 2015 and a slight recovery to 14,520 million USD by the end of the 2016 period.
- Aggregate Accruals Variance
- Balance-sheet-based aggregate accruals remained minimal in 2012 at 50 million USD but increased aggressively to 7,357 million USD by 2014. A dramatic shift occurred in 2015, during which accruals transitioned to a negative value of -2,870 million USD. By 2016, the figure normalized to a modest positive balance of 546 million USD.
- Accruals Ratio Interpretation
- The accruals ratio showed extreme fluctuations, starting at a negligible 0.65% in 2012 and surging to 55.88% in 2014. This peak suggests a significant divergence between reported earnings and actual cash flows. This trend reversed sharply in 2015 to -18.63%, indicating a period where cash flows exceeded accrual-based earnings. The ratio returned to a low positive level of 3.83% in 2016, suggesting a stabilization of reporting quality and a reduction in the gap between accruals and operating assets.
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Cash-Flow-Statement-Based Accruals Ratio
McKesson Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Mar 31, 2016 | Mar 31, 2015 | Mar 31, 2014 | Mar 31, 2013 | Mar 31, 2012 | Mar 31, 2011 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to McKesson Corporation | 2,258) | 1,476) | 1,263) | 1,338) | 1,403) | 1,202) | |
| Less: Net cash provided by operating activities | 3,672) | 3,112) | 3,136) | 2,483) | 2,950) | 2,338) | |
| Less: Net cash used in investing activities | (1,557) | (677) | (5,046) | (2,209) | (1,502) | (624) | |
| Cash-flow-statement-based aggregate accruals | 143) | (959) | 3,173) | 1,064) | (45) | (512) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 1.00% | -6.22% | 24.10% | 12.41% | -0.59% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Abbott Laboratories | — | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
1 2016 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 143 ÷ [(14,520 + 13,974) ÷ 2] = 1.00%
2 Click competitor name to see calculations.
The analysis of aggregate accruals from 2012 to 2016 reveals significant volatility in the relationship between reported earnings and cash flows, characterized by a prominent peak in 2014 followed by a sharp reversal in 2015.
- Net Operating Assets
- Net operating assets exhibited an overall upward trajectory, increasing from US$ 7,662 million in 2012 to US$ 14,520 million by 2016. A substantial surge was observed in 2014, with assets reaching a peak of US$ 16,844 million, which represented a significant expansion of the balance sheet before a moderate correction in 2015.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals demonstrated extreme fluctuations during the period. After starting at a near-neutral US$ -45 million in 2012, accruals rose sharply to US$ 1,064 million in 2013 and peaked at US$ 3,173 million in 2014. This trend reversed abruptly in 2015, with accruals falling to US$ -959 million, before stabilizing at US$ 143 million in 2016.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals, shifting from -0.59% in 2012 to a peak of 24.10% in 2014. This peak indicates a period where earnings were significantly higher than cash flows from operations, often a signal of decreased earnings quality or aggressive accounting for asset growth. The subsequent plunge to -6.22% in 2015 and the return to 1.00% in 2016 suggest a normalization process, where the gap between accrual-based accounting and cash flow was largely closed.
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