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. | — | — | — | — | — | |
| Occidental Petroleum 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.
- Net Operating Assets
- The net operating assets show a consistent upward trend throughout the analyzed period. Starting at 31,152 million US dollars at the end of 2016, the figure increases each year, reaching 37,318 million US dollars by the end of 2019. This reflects a gradual expansion in the company's core operating asset base over the four years.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals demonstrate significant fluctuations across the observed years. Beginning at 1,401 million US dollars in 2016, they surge dramatically to 3,267 million in 2017. Subsequently, there is a sharp decline to 875 million in 2018, followed by another increase to 2,024 million in 2019. This volatility indicates variable adjustments in accrual accounting components year over year.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, which normalizes the aggregate accruals relative to net operating assets, mirrors the volatility seen in aggregate accruals. The ratio rises from 4.6% in 2016 to a peak of 9.96% in 2017, then declines substantially to 2.51% in 2018, before increasing again to 5.57% in 2019. This pattern suggests notable variability in earnings quality or in the underlying accrual estimates across the years.
- Overall Insights
- While the net operating assets steadily grow, indicating expansion or increased investment in operating capital, the balance-sheet-based accruals and their relative ratio exhibit considerable fluctuations. Such variability in accruals could imply changes in earnings management practices, the timing of expense recognition, or other accounting adjustments that impact reported financial quality. The peak in accruals ratio in 2017 followed by a sharp drop in 2018 may warrant further investigation to understand the drivers behind these changes and their impact on financial statement reliability.
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. | — | — | — | — | — | |
| Occidental Petroleum 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.
- Net operating assets
- The net operating assets show a consistent upward trend from 31,152 million US dollars in 2016 to 37,318 million US dollars in 2019. This increase indicates growth in the company's operating asset base over the four-year period.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals exhibit significant variability. They increased sharply from 1,750 million US dollars in 2016 to 2,604 million US dollars in 2017, then dropped substantially to 493 million US dollars in 2018. However, they surged again to 1,956 million US dollars in 2019, suggesting fluctuations in the accruals component during these years.
- Cash-flow-statement-based accruals ratio
- The accruals ratio follows a similar fluctuating pattern. It rose from 5.75% in 2016 to a peak of 7.94% in 2017, dropped significantly to 1.41% in 2018, and increased once more to 5.39% by 2019. These variations imply changes in the proportion of accruals relative to net operating assets, which may affect the quality of earnings and financial reporting consistency.