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
Procter & Gamble Co., balance sheet computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2026-06-30), 10-K (reporting date: 2025-06-30), 10-K (reporting date: 2024-06-30), 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30).
1 2026 Calculation
Net operating assets = Operating assets – Operating liabilities
= 116,579 – 38,072 = 78,507
2 2026 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2026 – Net operating assets2025
= 78,507 – 77,237 = 1,270
3 2026 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,270 ÷ [(78,507 + 77,237) ÷ 2] = 1.63%
The financial data indicates a steady growth in net operating assets paired with significant volatility in balance-sheet-based aggregate accruals over the five-year period from 2022 to 2026.
- Net Operating Assets Trend
- Net operating assets exhibited a consistent upward trajectory, increasing from US$ 71,133 million in 2022 to US$ 78,507 million by 2026. This steady growth suggests a gradual and continuous expansion of the operational asset base.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrated substantial fluctuations. Following a moderate decline between 2022 and 2023, a sharp contraction occurred in 2024, where accruals dropped to US$ 111 million. This was followed by a significant surge to a period peak of US$ 3,700 million in 2025, before retreating to US$ 1,270 million in 2026.
- Accruals Ratio Analysis
- The accruals ratio mirrors the volatility observed in the aggregate accruals. The ratio decreased from 3.98% in 2022 to a near-zero level of 0.15% in 2024, indicating a period where reported earnings were very closely aligned with cash flows. The ratio subsequently peaked at 4.91% in 2025, reflecting a higher proportion of non-cash components in the earnings reported for that period, before declining to 1.63% in 2026.
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Cash-Flow-Statement-Based Accruals Ratio
Procter & Gamble Co., cash flow statement computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2026-06-30), 10-K (reporting date: 2025-06-30), 10-K (reporting date: 2024-06-30), 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30).
1 2026 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,114 ÷ [(78,507 + 77,237) ÷ 2] = 1.43%
An analysis of the financial reporting quality reveals a period of steady growth in net operating assets coupled with volatility in aggregate accruals. The overall trend suggests that while the asset base expanded consistently, the relationship between accrual-based earnings and cash flows fluctuated, reaching a notable inversion in the 2024 fiscal year.
- Net Operating Assets Trend
- Net operating assets demonstrated a continuous upward trajectory, increasing from 71,133 million USD in June 2022 to 78,507 million USD by June 2026. This steady growth indicates a consistent expansion of the operating resource base over the five-year period.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibited significant variance over the period. Starting at 2,443 million USD in 2022, values decreased to 1,305 million USD in 2023, before shifting to a negative value of -1,463 million USD in 2024. A recovery followed in 2025 with a rise to 1,975 million USD, eventually settling at 1,114 million USD in 2026. This volatility suggests periodic shifts in the timing of revenue and expense recognition relative to cash movements.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals. The ratio declined from 3.50% in 2022 to 1.81% in 2023, and further dropped to -1.99% in 2024. The negative ratio in 2024 implies that cash flows from operations exceeded accrual earnings for that period. The ratio subsequently returned to positive territory, recording 2.62% in 2025 and 1.43% in 2026. The generally low magnitude of these ratios indicates that accruals do not constitute a disproportionate share of earnings, which is typically characteristic of stable reporting quality.
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