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
ONEOK Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 24,379,094) | 23,621,613) | 23,078,754) | 21,812,121) | 18,231,671) | |
| Less: Cash and cash equivalents | 220,227) | 146,391) | 524,496) | 20,958) | 11,975) | |
| Operating assets | 24,158,867) | 23,475,222) | 22,554,258) | 21,791,163) | 18,219,696) | |
| Operating Liabilities | ||||||
| Total liabilities | 17,885,209) | 17,606,450) | 17,036,356) | 15,586,170) | 11,652,128) | |
| Less: Current maturities of long-term debt | 925,000) | 895,814) | 7,650) | 7,650) | 507,650) | |
| Less: Short-term borrowings | —) | —) | —) | 220,000) | —) | |
| Less: Current finance lease liability | 2,954) | 2,584) | 2,153) | 1,949) | 1,765) | |
| Less: Long-term debt, excluding current maturities | 12,695,834) | 12,747,636) | 14,228,421) | 12,479,757) | 8,873,334) | |
| Less: Noncurrent finance lease liability | 19,299) | 21,082) | 22,143) | 24,296) | 26,244) | |
| Operating liabilities | 4,242,122) | 3,939,334) | 2,775,989) | 2,852,518) | 2,243,135) | |
| Net operating assets1 | 19,916,745) | 19,535,888) | 19,778,269) | 18,938,645) | 15,976,561) | |
| Balance-sheet-based aggregate accruals2 | 380,857) | (242,381) | 839,624) | 2,962,084) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 1.93% | -1.23% | 4.34% | 16.97% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | 0.03% | — | — | — | — | |
| ConocoPhillips | -5.86% | — | — | — | — | |
| ExxonMobil Holdings Corp. | -1.19% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -1.34% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | -1.05% | 200.00% | — | — | — | |
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 24,158,867 – 4,242,122 = 19,916,745
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 19,916,745 – 19,535,888 = 380,857
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 380,857 ÷ [(19,916,745 + 19,535,888) ÷ 2] = 1.93%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals ratio reveals a significant downward trend in the magnitude of aggregate accruals relative to net operating assets from 2019 through 2022.
- Accruals Ratio Trend
- The balance-sheet-based accruals ratio experienced a sharp contraction, falling from 16.97% in 2019 to 4.34% in 2020. This decline continued into 2021, where the ratio reached a negative value of -1.23%, before returning to a slightly positive 1.93% in 2022. This progression indicates a substantial reduction in the divergence between reported accounting earnings and cash flows over the observed period.
- Aggregate Accruals Volatility
- The absolute value of balance-sheet-based aggregate accruals decreased from a peak of US$ 2,962,084 thousand in 2019 to a trough of negative US$ 242,381 thousand in 2021. The subsequent increase to US$ 380,857 thousand in 2022 suggests that accrual levels stabilized at a significantly lower threshold than those present at the beginning of the analysis period.
- Net Operating Assets Stability
- Net operating assets remained relatively consistent throughout the four-year window, ranging from a low of US$ 18,938,645 thousand in 2019 to a high of US$ 19,916,745 thousand in 2022. Since the net operating assets remained stable, the volatility observed in the accruals ratio is driven almost exclusively by changes in the aggregate accruals.
The convergence of the accruals ratio toward zero suggests an improvement in financial reporting quality, as reported earnings became more closely aligned with cash-based movements by the end of 2022 compared to the high accrual levels observed in 2019.
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Cash-Flow-Statement-Based Accruals Ratio
ONEOK Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to ONEOK | 1,722,221) | 1,499,706) | 612,809) | 1,278,577) | 1,151,703) | |
| Less: Cash provided by operating activities | 2,905,955) | 2,546,272) | 1,899,068) | 1,946,779) | 2,186,719) | |
| Less: Cash used in investing activities | (1,139,236) | (665,292) | (2,270,529) | (3,768,758) | (2,114,888) | |
| Cash-flow-statement-based aggregate accruals | (44,498) | (381,274) | 984,270) | 3,100,556) | 1,079,872) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -0.23% | -1.94% | 5.08% | 17.76% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | -1.22% | — | — | — | — | |
| ConocoPhillips | -1.56% | — | — | — | — | |
| ExxonMobil Holdings Corp. | -2.93% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -2.11% | -10.40% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | -1.75% | -10.60% | — | — | — | |
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -44,498 ÷ [(19,916,745 + 19,535,888) ÷ 2] = -0.23%
2 Click competitor name to see calculations.
Between 2019 and 2022, the cash-flow-statement-based accruals ratio exhibited a consistent and significant downward trend, transitioning from a high positive percentage to a slightly negative value. This trajectory indicates a fundamental shift in the relationship between reported accounting earnings and actual cash flows, suggesting an improvement in the quality of financial reporting over the analyzed period.
- Net Operating Assets
- Net operating assets remained relatively stable throughout the four-year period, oscillating within a narrow range between approximately 18.9 billion and 19.9 billion US dollars. The lack of substantial volatility in the asset base ensures that the changes observed in the accruals ratio are driven by changes in accruals rather than significant fluctuations in the denominator of the ratio.
- Cash-Flow-Statement-Based Aggregate Accruals
- A sharp decline in aggregate accruals is observed, falling from 3.1 billion US dollars in 2019 to negative 44.5 million US dollars by 2022. The most dramatic reduction occurred between 2019 and 2021, where the value shifted from a substantial positive balance to a negative balance, indicating that cash flows from operations began to exceed reported accrual-based earnings.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio decreased from 17.76% in 2019 to 5.08% in 2020, eventually turning negative at -1.94% in 2021 and -0.23% in 2022. In financial analysis, a high positive ratio often suggests that earnings are heavily driven by non-cash accruals, which can be a signal of lower earnings quality. The transition toward a zero or negative ratio suggests a more conservative accounting profile and a higher degree of cash backing for the reported earnings.
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