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
Monsanto Co., balance sheet computation of aggregate accruals
US$ in millions
| Aug 31, 2017 | Aug 31, 2016 | Aug 31, 2015 | Aug 31, 2014 | Aug 31, 2013 | Aug 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 21,333) | 19,736) | 21,920) | 21,981) | 20,664) | 20,224) | |
| Less: Cash and cash equivalents | 1,856) | 1,676) | 3,701) | 2,367) | 3,668) | 3,283) | |
| Less: Short-term investments | 8) | 60) | 47) | 40) | 254) | 302) | |
| Operating assets | 19,469) | 18,000) | 18,172) | 19,574) | 16,742) | 16,639) | |
| Operating Liabilities | |||||||
| Total liabilities | 14,875) | 15,191) | 14,915) | 14,067) | 7,936) | 8,188) | |
| Less: Short-term debt, including current portion of long-term debt | 870) | 1,587) | 615) | 233) | 51) | 36) | |
| Less: Long-term debt, excluding current portion | 7,254) | 7,453) | 8,429) | 7,528) | 2,061) | 2,038) | |
| Operating liabilities | 6,751) | 6,151) | 5,871) | 6,306) | 5,824) | 6,114) | |
| Net operating assets1 | 12,718) | 11,849) | 12,301) | 13,268) | 10,918) | 10,525) | |
| Balance-sheet-based aggregate accruals2 | 869) | (452) | (967) | 2,350) | 393) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 7.07% | -3.74% | -7.56% | 19.43% | 3.67% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| lululemon athletica inc. | — | — | — | — | — | — | |
| Nike Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31), 10-K (reporting date: 2013-08-31), 10-K (reporting date: 2012-08-31).
1 2017 Calculation
Net operating assets = Operating assets – Operating liabilities
= 19,469 – 6,751 = 12,718
2 2017 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2017 – Net operating assets2016
= 12,718 – 11,849 = 869
3 2017 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 869 ÷ [(12,718 + 11,849) ÷ 2] = 7.07%
4 Click competitor name to see calculations.
The analysis of the annual financial reporting quality measure data reveals several noteworthy trends over the five-year period ending August 31, 2017.
- Net Operating Assets
- The net operating assets experienced a general upward trend from 2013 through 2014, increasing from US$10,918 million to US$13,268 million. Subsequently, there was a decline in 2015 and 2016, with values falling to US$12,301 million and US$11,849 million respectively. However, in 2017, the value rebounded to US$12,718 million, indicating partial recovery but still below the 2014 peak.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals data showed considerable volatility. In 2013, the accruals stood at US$393 million, then sharply increased to US$2,350 million in 2014, marking a significant rise. This was followed by a reversal in 2015 and 2016, where aggregate accruals shifted to negative values of -US$967 million and -US$452 million, respectively. In 2017, the accruals returned to a positive figure of US$869 million. This erratic pattern suggests fluctuations in the recognition of revenues and expenses affecting the accruals component of the financial reports.
- Balance-sheet-based Accruals Ratio
- The accruals ratio reflected similar volatility to the aggregate accruals data. Beginning at 3.67% in 2013, it spiked dramatically to 19.43% in 2014, indicating a high level of accruals relative to net operating assets. The ratio then sharply declined to -7.56% and -3.74% in 2015 and 2016 correspondingly, signifying negative accruals during those years. In 2017, it shifted back to a positive value of 7.07%, though this was much lower than the peak seen in 2014. The wide fluctuations in the accruals ratio highlight variability in the company's earnings quality and suggest inconsistent application or timing of accruals over the period analyzed.
Overall, the data indicates that while net operating assets showed moderate growth and partial recovery after a downward trend, the accrual measures exhibited substantial variability. The spikes and subsequent reversals in both aggregate accruals and the accruals ratio point to fluctuations in earnings quality, which may warrant further investigation into the factors driving these changes, including changes in accounting policies, operational performance, or other external influences.
Cash-Flow-Statement-Based Accruals Ratio
Monsanto Co., cash flow statement computation of aggregate accruals
US$ in millions
| Aug 31, 2017 | Aug 31, 2016 | Aug 31, 2015 | Aug 31, 2014 | Aug 31, 2013 | Aug 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to Monsanto Company | 2,260) | 1,336) | 2,314) | 2,740) | 2,482) | 2,045) | |
| Less: Net cash provided by operating activities | 3,226) | 2,588) | 3,108) | 3,054) | 2,740) | 3,051) | |
| Less: Net cash required by investing activities | (1,107) | (864) | (1,019) | (2,095) | (777) | (1,034) | |
| Cash-flow-statement-based aggregate accruals | 141) | (388) | 225) | 1,781) | 519) | 28) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 1.15% | -3.21% | 1.76% | 14.73% | 4.84% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| lululemon athletica inc. | — | — | — | — | — | — | |
| Nike Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31), 10-K (reporting date: 2013-08-31), 10-K (reporting date: 2012-08-31).
1 2017 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 141 ÷ [(12,718 + 11,849) ÷ 2] = 1.15%
2 Click competitor name to see calculations.
- Net Operating Assets
- Net operating assets exhibited an overall upward trend from 2013 to 2017. Starting at 10,918 million USD in 2013, the figure increased significantly to 13,268 million USD in 2014. This was followed by a slight decline over the next two years to 12,301 million USD in 2015 and 11,849 million USD in 2016. In 2017, net operating assets rebounded, rising again to 12,718 million USD. This pattern indicates some volatility but a general increase in the scale of operating assets over the period analyzed.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals showed considerable fluctuations over the years. In 2013, accruals were recorded at 519 million USD, peaking sharply at 1,781 million USD in 2014. After this substantial increase, the figure dropped to 225 million USD in 2015, then shifted to a negative value of -388 million USD in 2016, indicating a potential reversal or adjustment in accrual accounting. The following year, accruals returned to a positive value of 141 million USD in 2017. Such variability suggests changing accrual practices or irregularities in the timing of revenue and expense recognition.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the pattern observed in aggregate accruals, with notable variability throughout the period. This ratio started at 4.84% in 2013, increased sharply to 14.73% in 2014, reflecting a high level of accruals relative to net operating assets. Subsequently, the ratio decreased to 1.76% in 2015 and turned negative at -3.21% in 2016, consistent with the negative aggregate accruals that year. In 2017, the ratio rose again to 1.15%, indicating a return to positive accrual levels but at a lower magnitude than in previous years. The fluctuations in this ratio highlight periods of significant shifts in the accrual components of earnings relative to the size of net operating assets.