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
Time Warner Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 69,209) | 65,966) | 63,848) | 63,259) | 67,994) | |
| Less: Cash and equivalents | 2,621) | 1,539) | 2,155) | 2,618) | 1,862) | |
| Operating assets | 66,588) | 64,427) | 61,693) | 60,641) | 66,132) | |
| Operating Liabilities | ||||||
| Total liabilities | 40,798) | 41,600) | 40,200) | 38,783) | 38,090) | |
| Less: Debt due within one year | 5,450) | 1,947) | 198) | 1,118) | 66) | |
| Less: Long-term debt, excluding due within one year | 18,294) | 22,392) | 23,594) | 21,376) | 20,099) | |
| Operating liabilities | 17,054) | 17,261) | 16,408) | 16,289) | 17,925) | |
| Net operating assets1 | 49,534) | 47,166) | 45,285) | 44,352) | 48,207) | |
| Balance-sheet-based aggregate accruals2 | 2,368) | 1,881) | 933) | (3,855) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.90% | 4.07% | 2.08% | -8.33% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Net operating assets = Operating assets – Operating liabilities
= 66,588 – 17,054 = 49,534
2 2017 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2017 – Net operating assets2016
= 49,534 – 47,166 = 2,368
3 2017 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,368 ÷ [(49,534 + 47,166) ÷ 2] = 4.90%
4 Click competitor name to see calculations.
The financial analysis of balance-sheet-based accruals reveals a consistent upward trajectory in both aggregate accruals and the corresponding accruals ratio over the four-year period ending December 31, 2017.
- Net Operating Assets
- Net operating assets demonstrated a steady increase, rising from US$ 44,352 million in 2014 to US$ 49,534 million in 2017. This indicates a gradual expansion of the operating asset base throughout the observed period.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals underwent a significant shift, moving from a negative value of US$ -3,855 million in 2014 to a positive value of US$ 2,368 million by 2017. This transition from negative to positive accruals indicates a reversal in the relationship between reported accounting earnings and actual cash flows.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the trend of aggregate accruals, climbing from -8.33% in 2014 to 4.90% in 2017. The negative ratio in 2014 suggested high earnings quality, as cash flows exceeded accrual-based earnings. The subsequent shift to a positive and increasing ratio through 2017 indicates that a larger portion of the company's earnings is being driven by non-cash accruals relative to its net operating assets, which typically suggests a decrease in earnings quality over time.
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Cash-Flow-Statement-Based Accruals Ratio
Time Warner Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Time Warner Inc. shareholders | 5,247) | 3,926) | 3,833) | 3,827) | 3,691) | |
| Less: Cash provided by operations | 5,094) | 4,683) | 3,851) | 3,681) | 3,716) | |
| Less: Cash (used) provided by investing activities | (996) | (1,360) | (993) | 1,383) | (910) | |
| Cash-flow-statement-based aggregate accruals | 1,149) | 603) | 975) | (1,237) | 885) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.38% | 1.30% | 2.18% | -2.67% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,149 ÷ [(49,534 + 47,166) ÷ 2] = 2.38%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality from 2014 to 2017 reveals a consistent expansion in the asset base coupled with fluctuating accrual levels. Net operating assets exhibited a steady upward trajectory, growing from 44,352 million US dollars in 2014 to 49,534 million US dollars by the end of 2017.
- Net Operating Assets Trend
- A continuous increase in net operating assets is observed over the four-year period, representing a total growth of approximately 11.7%. This steady rise suggests a gradual expansion of the operational resource base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals shifted from a negative position of -1,237 million US dollars in 2014 to positive values in subsequent years. While the figure decreased slightly in 2016 to 603 million US dollars, it rebounded to 1,149 million US dollars in 2017, indicating a transition where accrual-based earnings began to exceed cash flows from operations.
- Accruals Ratio Interpretation
- The cash-flow-statement-based accruals ratio mirrored the volatility of the aggregate accruals. The ratio moved from -2.67% in 2014 to 2.18% in 2015, dipped to 1.30% in 2016, and rose again to 2.38% in 2017. The negative ratio in 2014 suggests that cash flows were higher than reported accrual earnings for that period, while the subsequent positive ratios indicate a divergence where earnings were higher than the corresponding cash flows.
Overall, the data indicates that while the balance sheet grew consistently, the relationship between reported earnings and actual cash flows experienced notable shifts. The movement from a negative accruals ratio to a consistently positive one suggests a change in the quality of earnings or a shift in the timing of cash realizations relative to revenue recognition.
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