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
National Oilwell Varco Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 26,725) | 33,562) | 34,812) | 31,484) | 25,515) | |
| Less: Cash and cash equivalents | 2,080) | 3,536) | 3,436) | 3,319) | 3,535) | |
| Operating assets | 24,645) | 30,026) | 31,376) | 28,165) | 21,980) | |
| Operating Liabilities | ||||||
| Total liabilities | 10,265) | 12,790) | 12,482) | 11,128) | 7,787) | |
| Less: Current portion of long-term debt and short-term borrowings | 2) | 152) | 1) | 1) | 351) | |
| Less: Long-term debt, excluding current portion | 3,928) | 3,014) | 3,149) | 3,148) | 159) | |
| Operating liabilities | 6,335) | 9,624) | 9,332) | 7,979) | 7,277) | |
| Net operating assets1 | 18,310) | 20,402) | 22,044) | 20,186) | 14,703) | |
| Balance-sheet-based aggregate accruals2 | (2,092) | (1,642) | 1,858) | 5,483) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -10.81% | -7.74% | 8.80% | 31.43% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| SLB N.V. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= 24,645 – 6,335 = 18,310
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 18,310 – 20,402 = -2,092
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -2,092 ÷ [(18,310 + 20,402) ÷ 2] = -10.81%
4 Click competitor name to see calculations.
The financial data exhibits a significant and consistent decline in the balance-sheet-based accruals ratio over the four-year period from 2012 to 2015. This trend indicates a fundamental shift in the relationship between reported earnings and cash flow relative to the company's net operating assets, moving from a state of high positive accruals to negative accruals.
- Net Operating Assets Trend
- Net operating assets experienced an initial increase, rising from US$ 20,186 million in 2012 to a peak of US$ 22,044 million in 2013. This was followed by a steady contraction, declining to US$ 20,402 million in 2014 and further to US$ 18,310 million by the end of 2015.
- Aggregate Accruals Performance
- Balance-sheet-based aggregate accruals showed a sharp downward trajectory. Starting at US$ 5,483 million in 2012, the figure dropped substantially to US$ 1,858 million in 2013. The accruals transitioned into negative territory in 2014 at -US$ 1,642 million and continued to decline further to -US$ 2,092 million in 2015.
- Accruals Ratio Analysis
- The accruals ratio mirrors the trend of aggregate accruals, beginning at a high of 31.43% in 2012, which suggests a significant portion of earnings was not backed by cash flows. This ratio compressed rapidly to 8.80% in 2013 before turning negative, reaching -7.74% in 2014 and -10.81% in 2015. This reversal suggests that by 2014 and 2015, cash flows from operations exceeded accrual-based earnings relative to the asset base, typically signifying an increase in the quality of reported earnings from a cash-flow perspective.
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Cash-Flow-Statement-Based Accruals Ratio
National Oilwell Varco Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Company | (769) | 2,502) | 2,327) | 2,491) | 1,994) | |
| Less: Net cash provided by operating activities | 1,332) | 2,525) | 3,397) | 620) | 2,143) | |
| Less: Net cash used in investing activities | (514) | (1,092) | (2,964) | (3,428) | (1,458) | |
| Cash-flow-statement-based aggregate accruals | (1,587) | 1,069) | 1,894) | 5,299) | 1,309) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -8.20% | 5.04% | 8.97% | 30.38% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| SLB N.V. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,587 ÷ [(18,310 + 20,402) ÷ 2] = -8.20%
2 Click competitor name to see calculations.
Between 2012 and 2015, a consistent reduction in the cash-flow-statement-based accruals ratio is evident, shifting from a high positive percentage to a negative value. This trajectory indicates a significant change in the relationship between accrual-based earnings and actual cash flows over the analyzed period.
- Net Operating Assets
- An initial increase was recorded from 20,186 million USD in 2012 to a peak of 22,044 million USD in 2013. Subsequently, a downward trend occurred, with assets decreasing to 20,402 million USD in 2014 and further contracting to 18,310 million USD by the end of 2015.
- Cash-flow-statement-based Aggregate Accruals
- A substantial and steady decline is observed, moving from 5,299 million USD in 2012 to 1,894 million USD in 2013, 1,069 million USD in 2014, and finally reaching -1,587 million USD in 2015. The shift to a negative value in 2015 indicates a reversal where cash flows from operations surpassed accrual-based earnings.
- Cash-flow-statement-based Accruals Ratio
- The ratio exhibits a precipitous drop from 30.38% in 2012 to -8.20% in 2015. This trend suggests a shift in financial reporting quality; the initial high positive ratio indicates a significant gap where accruals heavily supported reported earnings, whereas the eventual negative ratio implies that reported earnings were lower than the actual cash generated, typically suggesting higher earnings quality or a period of asset liquidation.
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