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
Mosaic Co., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 22,036,400) | 19,789,800) | 19,298,500) | 20,119,200) | 18,633,400) | |
| Less: Cash and cash equivalents | 769,500) | 574,000) | 519,100) | 847,700) | 2,153,500) | |
| Operating assets | 21,266,900) | 19,215,800) | 18,779,400) | 19,271,500) | 16,479,900) | |
| Operating Liabilities | ||||||
| Total liabilities | 11,287,900) | 10,034,600) | 9,930,900) | 9,514,500) | 8,994,300) | |
| Less: Short-term debt | 302,800) | 100) | 41,600) | 11,500) | 6,100) | |
| Less: Current maturities of long-term debt | 596,600) | 504,200) | 47,200) | 26,000) | 343,500) | |
| Less: Structured accounts payable arrangements | 743,700) | 640,000) | 740,600) | 572,800) | 386,200) | |
| Less: Long-term debt, less current maturities | 3,382,200) | 4,073,800) | 4,525,500) | 4,491,500) | 4,878,100) | |
| Operating liabilities | 6,262,600) | 4,816,500) | 4,576,000) | 4,412,700) | 3,380,400) | |
| Net operating assets1 | 15,004,300) | 14,399,300) | 14,203,400) | 14,858,800) | 13,099,500) | |
| Balance-sheet-based aggregate accruals2 | 605,000) | 195,900) | (655,400) | 1,759,300) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.12% | 1.37% | -4.51% | 12.59% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | 200.00% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 21,266,900 – 6,262,600 = 15,004,300
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 15,004,300 – 14,399,300 = 605,000
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 605,000 ÷ [(15,004,300 + 14,399,300) ÷ 2] = 4.12%
4 Click competitor name to see calculations.
The financial data indicates a period of volatility in the accrual components of the balance sheet, contrasted by relatively stable net operating assets. While net operating assets fluctuated slightly, ending the period at $15.0 billion in 2021, the aggregate accruals experienced significant swings in both direction and magnitude.
- Aggregate Accruals Trend
- Balance-sheet-based aggregate accruals shifted from a high of $1.76 billion in 2018 to a negative $655.4 million in 2019. This reversal represents a substantial correction in accrual balances. Following this trough, accruals returned to positive territory, increasing to $195.9 million in 2020 and further rising to $605.0 million by the end of 2021.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio mirrored the volatility of the absolute accrual values. A peak ratio of 12.59% in 2018 suggests that a significant portion of earnings was comprised of non-cash accruals. The subsequent drop to -4.51% in 2019 indicates a reversal of prior accruals or that cash flow exceeded reported accounting earnings. From 2020 to 2021, the ratio stabilized at lower positive levels of 1.37% and 4.12%, respectively.
The overall trajectory of the accruals ratio suggests a shift in the quality of reported earnings. The reduction from the 2018 peak to the 2021 level indicates a closer alignment between reported net income and actual cash flow, reducing the reliance on balance-sheet accruals to drive earnings figures compared to the beginning of the analyzed period.
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Cash-Flow-Statement-Based Accruals Ratio
Mosaic Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net earnings (loss) attributable to Mosaic | 1,630,600) | 666,100) | (1,067,400) | 470,000) | (107,200) | |
| Less: Net cash provided by operating activities | 2,187,000) | 1,582,600) | 1,095,400) | 1,409,800) | 935,500) | |
| Less: Net cash used in investing activities | (1,322,300) | (1,189,500) | (1,360,900) | (1,944,700) | (667,800) | |
| Cash-flow-statement-based aggregate accruals | 765,900) | 273,000) | (801,900) | 1,004,900) | (374,900) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 5.21% | 1.91% | -5.52% | 7.19% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | -8.12% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | -9.09% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 765,900 ÷ [(15,004,300 + 14,399,300) ÷ 2] = 5.21%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2018 to 2021 reveals significant volatility in the relationship between reported earnings and cash flows. While the asset base remained relatively stable, the aggregate accruals experienced sharp fluctuations, resulting in a highly variable accruals ratio that suggests periodic shifts in earnings quality.
- Net Operating Assets Trend
- Net operating assets exhibited relative stability over the four-year period, beginning at 14,858,800 thousand US dollars in 2018, dipping slightly to 14,203,400 thousand US dollars in 2019, and subsequently recovering to 15,004,300 thousand US dollars by 2021. This indicates a consistent operational scale, providing a stable denominator for the accruals ratio.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals demonstrated substantial volatility. A high positive value of 1,004,900 thousand US dollars in 2018 transitioned into a significant negative value of -801,900 thousand US dollars in 2019. This trend reversed in 2020 and 2021, with accruals returning to positive territory at 273,000 thousand US dollars and 765,900 thousand US dollars, respectively.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals. The ratio started at 7.19% in 2018, plummeted to -5.52% in 2019, and then rose steadily to 1.91% in 2020 and 5.21% in 2021. The negative ratio in 2019 indicates a period where cash flows from operations exceeded reported accrual-based earnings, whereas the positive ratios in 2018 and 2021 signify that reported earnings were higher than the corresponding cash flows.
The progression of the accruals ratio suggests a cyclical pattern in the timing of cash realizations relative to revenue recognition. The sharp swing from a positive 7.19% to a negative 5.52% within a single year represents a significant shift in the composition of earnings, followed by a gradual return toward the baseline observed at the start of the period.
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