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
Phillips 66, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 58,720) | 54,302) | 54,371) | 51,653) | 48,580) | |
| Less: Cash and cash equivalents | 1,614) | 3,019) | 3,119) | 2,711) | 3,074) | |
| Operating assets | 57,106) | 51,283) | 51,252) | 48,942) | 45,506) | |
| Operating Liabilities | ||||||
| Total liabilities | 31,551) | 27,149) | 26,943) | 27,928) | 24,642) | |
| Less: Short-term debt | 547) | 67) | 41) | 550) | 44) | |
| Less: Long-term debt | 11,216) | 11,093) | 10,069) | 9,588) | 8,843) | |
| Operating liabilities | 19,788) | 15,989) | 16,833) | 17,790) | 15,755) | |
| Net operating assets1 | 37,318) | 35,294) | 34,419) | 31,152) | 29,751) | |
| Balance-sheet-based aggregate accruals2 | 2,024) | 875) | 3,267) | 1,401) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.57% | 2.51% | 9.96% | 4.60% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 57,106 – 19,788 = 37,318
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 37,318 – 35,294 = 2,024
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,024 ÷ [(37,318 + 35,294) ÷ 2] = 5.57%
4 Click competitor name to see calculations.
The analysis of reporting quality metrics reveals a divergence between the steady expansion of the operating asset base and the volatility of the accruals ratio. While net operating assets grew consistently over the four-year period, the accruals ratio demonstrated substantial fluctuations, indicating varying levels of non-cash components relative to the total operating asset base.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which increased from US$ 31,152 million in 2016 to US$ 37,318 million in 2019. This steady growth suggests a continuous expansion of the operational scale over the analyzed period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant instability. The figure rose from US$ 1,401 million in 2016 to a peak of US$ 3,267 million in 2017, followed by a sharp decline to US$ 875 million in 2018, and a subsequent increase to US$ 2,024 million in 2019.
- Balance-Sheet-Based Accruals Ratio Analysis
- The accruals ratio followed the volatile pattern of the aggregate accruals, reaching a maximum of 9.96% in 2017 and a minimum of 2.51% in 2018, before settling at 5.57% in 2019. The peak in 2017 indicates a higher proportion of non-cash earnings relative to net operating assets, whereas the low in 2018 suggests a period where reported earnings were more closely aligned with cash flows. The fluctuations indicate that the quality of earnings, as measured by the accruals ratio, was inconsistent throughout the period.
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Cash-Flow-Statement-Based Accruals Ratio
Phillips 66, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Phillips 66 | 3,076) | 5,595) | 5,106) | 1,555) | 4,227) | |
| Less: Net cash provided by operating activities | 4,808) | 7,573) | 3,648) | 2,963) | 5,713) | |
| Less: Net cash used in investing activities | (3,688) | (2,471) | (1,146) | (3,158) | (5,738) | |
| Cash-flow-statement-based aggregate accruals | 1,956) | 493) | 2,604) | 1,750) | 4,252) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 5.39% | 1.41% | 7.94% | 5.75% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,956 ÷ [(37,318 + 35,294) ÷ 2] = 5.39%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2016 to 2019 reveals a consistent expansion of the operational asset base coupled with significant volatility in accruals. While the scale of operations grew steadily, the relationship between reported earnings and cash flows fluctuated considerably over the four-year period.
- Net Operating Assets
- A continuous upward trend is observed in net operating assets, which increased from 31,152 million US dollars in 2016 to 37,318 million US dollars in 2019. This growth indicates a steady expansion of the company's investment in its operating infrastructure.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals demonstrated high volatility, rising from 1,750 million US dollars in 2016 to a peak of 2,604 million US dollars in 2017. This was followed by a sharp contraction to 493 million US dollars in 2018, before rebounding to 1,956 million US dollars in 2019.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the volatility of aggregate accruals, peaking at 7.94% in 2017. A significant reduction is noted in 2018, where the ratio dropped to 1.41%, suggesting that earnings were more closely aligned with cash flows during that year. The ratio subsequently increased to 5.39% in 2019, indicating a return to moderate levels of non-cash earnings relative to net operating assets.
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