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 financial reporting quality, as measured by balance-sheet-based accruals, exhibits significant volatility between 2013 and 2017. While the underlying base of net operating assets remained relatively stable, the aggregate accruals underwent substantial fluctuations, resulting in a highly variable accruals ratio that suggests inconsistent alignments between earnings and cash flows over the period.
- Net Operating Assets Trend
- Net operating assets increased from 10,918 million USD in 2013 to a peak of 13,268 million USD in 2014. Following this peak, a downward trend was observed through 2016, where values reached 11,849 million USD, before an upward correction to 12,718 million USD occurred in 2017.
- Aggregate Accruals Volatility
- Aggregate accruals demonstrated extreme variance, rising sharply from 393 million USD in 2013 to 2,350 million USD in 2014. This was followed by a significant reversal into negative territory, reaching -967 million USD in 2015 and -452 million USD in 2016. By 2017, the figure returned to a positive position of 869 million USD.
- Accruals Ratio Analysis
- The accruals ratio reflects the instability of the aggregate accruals relative to net operating assets. A significant spike to 19.43% was recorded in 2014, indicating a period where accruals represented a substantial portion of operating assets, which can be a signal of lower earnings quality. This was followed by a transition to negative ratios in 2015 (-7.56%) and 2016 (-3.74%), signifying that cash flows exceeded accrual-based earnings during those years. The ratio subsequently returned to 7.07% in 2017, marking a return to positive aggregate accruals.
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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.
The analysis of financial reporting quality via cash-flow-statement-based accruals reveals a period of significant volatility between 2013 and 2017. The divergence between reported earnings and actual cash flows fluctuated considerably, peaking in 2014 before declining and turning negative in 2016.
- Net Operating Assets Trend
- Net operating assets exhibited moderate fluctuations, rising from US$ 10,918 million in 2013 to a peak of US$ 13,268 million in 2014. This was followed by a two-year decline to US$ 11,849 million in 2016, before recovering to US$ 12,718 million by August 31, 2017.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals showed substantial variance. A sharp increase occurred in 2014, where accruals reached US$ 1,781 million. This figure dropped precipitously to US$ 225 million in 2015 and transitioned to a negative value of US$ -388 million in 2016, indicating that cash flows exceeded accrual-based earnings during that period. By 2017, accruals returned to a positive value of US$ 141 million.
- Accruals Ratio Interpretation
- The accruals ratio mirrors the volatility of the aggregate accruals. The ratio peaked at 14.73% in 2014, suggesting a higher reliance on non-cash earnings relative to net operating assets. A significant reversal is observed in 2016, with the ratio falling to -3.21%, which typically signifies higher earnings quality as cash flow outperformed reported accounting profits. The ratio stabilized at 1.15% in 2017, indicating a return to a low level of positive accruals.
Overall, the data indicates a period of instability in reporting quality, characterized by a spike in accruals in 2014 followed by a corrective trend toward negative accruals in 2016, eventually settling into a low positive range by the end of the observed period.
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