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.
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Balance-Sheet-Based Accruals Ratio
Newmont Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Time deposits and other investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current finance lease and other financing obligations | ||||||
| Less: Current debt | ||||||
| Less: Non-current debt | ||||||
| Less: Non-current finance lease and other financing obligations | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Freeport-McMoRan Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= – =
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed a declining trend from 24,751 million US dollars at the end of 2020 to 21,908 million US dollars by the end of 2022. However, in 2023, there was a significant increase to 35,616 million US dollars. This suggests a notable expansion in the company's operating asset base in 2023 following a period of contraction.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals were negative in 2020, 2021, and 2022, indicating a consistent level of accruals reducing net income relative to cash flows during these years. The values improved from -2,020 million US dollars in 2020 to -1,181 million US dollars in 2022, showing a decreasing magnitude of accruals over this period. In 2023, however, there was a sudden and substantial rise in aggregate accruals to 13,708 million US dollars, marking a significant reversal and indicating potential changes in earnings quality or accounting practices.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio followed a similar pattern to aggregate accruals. It was negative and decreasing in absolute terms from -7.84% in 2020 to -5.25% in 2022, consistent with the trend towards lower accruals relative to net operating assets. In 2023, the ratio sharply increased to 47.66%, reflecting a large increase in accruals relative to the net operating assets. This sharp rise could indicate a considerable shift in financial reporting quality or operational dynamics.
- Overall Analysis
- Over the four-year period, there was a clear pattern of decreasing net operating assets and decreasing absolute accruals from 2020 to 2022, which typically suggests improving earnings quality. However, the year 2023 stands out with a large increase in net operating assets coinciding with a dramatic rise in both aggregate accruals and the accruals ratio. This sharp change could warrant further investigation into the causes, as it may reflect significant operational changes, accounting policy shifts, or other underlying factors affecting financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Newmont Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Newmont stockholders | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) provided by investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Freeport-McMoRan Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
The data indicates notable fluctuations in the financial reporting quality metrics over the four-year period ending in 2023. The analysis reveals the following key trends and observations:
- Net Operating Assets
- The net operating assets demonstrate a downward trend from 2020 to 2022, decreasing from 24,751 million US dollars in 2020 to 21,908 million US dollars in 2022. However, a pronounced increase occurs in 2023, with net operating assets rising sharply to 35,616 million US dollars. This considerable growth after two years of decline suggests a significant change in asset base or operating asset composition in the latest year.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibit a decreasing absolute value magnitude from -2,227 million US dollars in 2020 to -644 million US dollars in 2022, indicating a reduction in accruals over the first three years. This trend reverses dramatically in 2023, with aggregate accruals plunging to -4,246 million US dollars, the largest negative value within the observed period, suggesting increased potential earnings management or timing differences between cash flows and accruals in that year.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, moves consistently upwards from -8.64% in 2020 to -2.86% in 2022, which reflects a declining magnitude of accruals relative to net operating assets, implying improved accrual quality or reduced earnings manipulation potential across this interval. In contrast, 2023 records a sharp reversal, with the ratio worsening significantly to -14.76%, indicating a substantial increase in accruals relative to net operating assets. This shift could raise concerns about the quality and sustainability of reported earnings for that year.
Overall, the data reveals an initial phase of improving financial reporting quality indicators through 2022, characterized by declining accruals and a reduction in the accrual ratio. However, 2023 presents a marked deterioration in these measures, accompanied by a substantial increase in net operating assets and cash-flow-based accruals. This reversal may warrant further investigation into the underlying factors driving the increased accruals and asset changes to assess their impact on earnings quality and financial transparency.