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
Norfolk Southern Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 38,493) | 37,962) | 37,923) | 36,239) | 35,711) | |
| Less: Cash and cash equivalents | 839) | 1,115) | 580) | 358) | 690) | |
| Operating assets | 37,654) | 36,847) | 37,343) | 35,881) | 35,021) | |
| Operating Liabilities | ||||||
| Total liabilities | 24,852) | 23,171) | 22,739) | 20,877) | 19,352) | |
| Less: Short-term debt | —) | —) | —) | —) | 100) | |
| Less: Current maturities of long-term debt | 553) | 579) | 316) | 585) | 600) | |
| Less: Long-term debt, excluding current maturities | 13,287) | 12,102) | 11,880) | 10,560) | 9,136) | |
| Operating liabilities | 11,012) | 10,490) | 10,543) | 9,732) | 9,516) | |
| Net operating assets1 | 26,642) | 26,357) | 26,800) | 26,149) | 25,505) | |
| Balance-sheet-based aggregate accruals2 | 285) | (443) | 651) | 644) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 1.08% | -1.67% | 2.46% | 2.49% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| FedEx Corp. | 6.93% | 7.01% | — | — | — | |
| Uber Technologies Inc. | 31.28% | — | — | — | — | |
| Union Pacific Corp. | 2.46% | — | — | — | — | |
| United Airlines Holdings Inc. | -2.74% | — | — | — | — | |
| United Parcel Service Inc. | 29.53% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | 10.61% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 3.43% | 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
= 37,654 – 11,012 = 26,642
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 26,642 – 26,357 = 285
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 285 ÷ [(26,642 + 26,357) ÷ 2] = 1.08%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed relative stability over the analyzed period. Beginning at US$26,149 million at the end of 2018, the figure increased slightly to US$26,800 million in 2019. A slight decline followed in 2020 to US$26,357 million, before a modest rise again to US$26,642 million in 2021. Overall, these fluctuations are minor, indicating a stable investment in operating assets across the four years.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibited considerable variability. In 2018 and 2019, these accruals were positive, recording US$644 million and US$651 million respectively, indicating accruals added to reported earnings. However, a significant reversal occurred in 2020, when aggregate accruals turned negative (-US$443 million), suggesting accruals reduced earnings in that year. In 2021, accruals returned to a positive value of US$285 million, although less than the levels observed in 2018 and 2019. This volatility highlights changes in the underlying accounting practices or economic conditions affecting accrual components.
- Balance-sheet-based Accruals Ratio
- Consistent with the aggregate accruals pattern, the accruals ratio demonstrated a notable shift. Initially, it was around 2.49% and 2.46% in 2018 and 2019 respectively, reflecting moderate positive accrual adjustments relative to net operating assets. In 2020, this ratio reversed to -1.67%, indicating a significant decrease in accrual-based earnings relative to operating assets. In 2021, the ratio moderated to 1.08%, showing a partial recovery but not reaching the prior positive levels. The fluctuations in this ratio further illustrate the variability in accounting accruals and suggest potential impacts on earnings quality in the analyzed period.
Cash-Flow-Statement-Based Accruals Ratio
Norfolk Southern Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income | 3,005) | 2,013) | 2,722) | 2,666) | 5,404) | |
| Less: Net cash provided by operating activities | 4,255) | 3,637) | 3,892) | 3,726) | 3,253) | |
| Less: Net cash used in investing activities | (1,222) | (1,175) | (1,764) | (1,658) | (1,481) | |
| Cash-flow-statement-based aggregate accruals | (28) | (449) | 594) | 598) | 3,632) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -0.11% | -1.69% | 2.24% | 2.32% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| FedEx Corp. | 3.01% | 5.95% | — | — | — | |
| Uber Technologies Inc. | 6.66% | — | — | — | — | |
| Union Pacific Corp. | 0.47% | — | — | — | — | |
| United Airlines Holdings Inc. | -10.59% | — | — | — | — | |
| United Parcel Service Inc. | 7.63% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | 1.28% | -9.67% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -8.91% | -5.18% | — | — | — | |
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 × -28 ÷ [(26,642 + 26,357) ÷ 2] = -0.11%
2 Click competitor name to see calculations.
The data reveals trends related to net operating assets and the quality of accruals as reflected in cash-flow-statement-based figures over the four-year period ending December 31, 2021.
- Net Operating Assets
-
The net operating assets show relative stability across the years, starting at approximately 26,149 million US dollars at the end of 2018 and experiencing minor fluctuations. The value increased to 26,800 million in 2019, decreased slightly to 26,357 million in 2020, and somewhat increased again to 26,642 million by the end of 2021. Overall, the net operating assets demonstrate a stable asset base with marginal variations year to year.
- Cash-flow-statement-based Aggregate Accruals
-
This metric shows more pronounced variability, with positive aggregate accruals reported in 2018 and 2019 (598 million and 594 million US dollars respectively), followed by a significant shift to negative values in 2020 (-449 million) and a near-neutral negative figure in 2021 (-28 million). This trend suggests a considerable improvement in the quality of earnings, as negative aggregate accruals generally indicate more conservative accounting with accruals reversing or less reliant on non-cash earnings.
- Cash-flow-statement-based Accruals Ratio
-
The accruals ratio aligns with the aggregate accruals movement, declining from positive values of 2.32% in 2018 and 2.24% in 2019 to -1.69% in 2020 and -0.11% in 2021. This pivot from positive to negative ratios reflects a transition in the company's earnings quality, indicating a reduction in accrual components relative to net operating assets. The ratio approaching zero in 2021 emphasizes further stabilization in the quality of accrual earnings, nearing a state where cash flows and earnings are more closely aligned.
In summary, net operating assets remained relatively constant, while cash-flow-based accrual measures exhibited a clear shift from positive to negative territory during the period. This transition may suggest enhanced earnings quality and improved financial reporting reliability in recent years.