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
Twitter Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 14,059,516) | 13,379,090) | 12,703,389) | 10,162,572) | 7,412,477) | |
| Less: Cash and cash equivalents | 2,186,549) | 1,988,429) | 1,799,082) | 1,894,444) | 1,638,413) | |
| Less: Short-term investments | 4,207,133) | 5,483,873) | 4,839,970) | 4,314,957) | 2,764,689) | |
| Operating assets | 7,665,834) | 5,906,788) | 6,064,337) | 3,953,171) | 3,009,375) | |
| Operating Liabilities | ||||||
| Total liabilities | 6,752,317) | 5,409,008) | 3,999,003) | 3,356,978) | 2,365,259) | |
| Less: Convertible notes, short-term | —) | 917,866) | —) | 897,328) | —) | |
| Less: Finance lease liabilities, short-term | —) | 567) | 23,476) | 68,046) | 84,976) | |
| Less: Convertible notes, long-term | 3,559,023) | 1,875,878) | 1,816,833) | 1,730,922) | 1,627,460) | |
| Less: Senior notes, long-term | 693,996) | 692,994) | 691,967) | —) | —) | |
| Less: Finance lease liabilities, long-term | —) | —) | 205) | 24,394) | 81,308) | |
| Operating liabilities | 2,499,298) | 1,921,703) | 1,466,522) | 636,288) | 571,515) | |
| Net operating assets1 | 5,166,536) | 3,985,085) | 4,597,815) | 3,316,883) | 2,437,860) | |
| Balance-sheet-based aggregate accruals2 | 1,181,451) | (612,730) | 1,280,932) | 879,023) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 25.82% | -14.28% | 32.37% | 30.55% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | 1.73% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | 200.00% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 7,665,834 – 2,499,298 = 5,166,536
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 5,166,536 – 3,985,085 = 1,181,451
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,181,451 ÷ [(5,166,536 + 3,985,085) ÷ 2] = 25.82%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals between 2018 and 2021 reveals significant volatility in financial reporting quality and the relationship between reported earnings and cash flows.
- Net Operating Assets Trend
- Net operating assets demonstrated a general upward trajectory over the four-year period, increasing from US$ 3,316,883 thousand in 2018 to US$ 5,166,536 thousand by 2021. A temporary contraction was observed in 2020, where assets declined to US$ 3,985,085 thousand, before rebounding strongly in the final year.
- Aggregate Accruals Dynamics
- Balance-sheet-based aggregate accruals exhibited extreme fluctuations. Following an increase from US$ 879,023 thousand in 2018 to US$ 1,280,932 thousand in 2019, there was a substantial reversal in 2020, with accruals falling to negative US$ 612,730 thousand. This trend inverted again in 2021, with a return to positive accruals of US$ 1,181,451 thousand.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio tracks the volatility of the aggregate accruals. The ratio remained elevated in 2018 (30.55%) and 2019 (32.37%), indicating a significant gap where accrual-based earnings exceeded cash flows. The shift to -14.28% in 2020 signifies a period where cash flows likely exceeded accrual earnings, often interpreted as an increase in earnings quality. However, the ratio climbed back to 25.82% in 2021, suggesting a return to a high-accrual environment.
The dramatic oscillation of the accruals ratio—moving from a positive peak to a negative value and back to a positive level—suggests inconsistent reporting quality or significant shifts in operational working capital and non-cash earnings components throughout the analyzed period.
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Cash-Flow-Statement-Based Accruals Ratio
Twitter Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | (221,409) | (1,135,626) | 1,465,659) | 1,205,596) | (108,063) | |
| Less: Net cash provided by operating activities | 632,689) | 992,870) | 1,303,364) | 1,339,711) | 831,209) | |
| Less: Net cash (used in) provided by investing activities | 52,623) | (1,560,565) | (1,115,974) | (2,055,513) | (112,932) | |
| Cash-flow-statement-based aggregate accruals | (906,721) | (567,931) | 1,278,269) | 1,921,398) | (826,340) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -19.82% | -13.23% | 32.30% | 66.78% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | -0.29% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 4.79% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | 12.91% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -906,721 ÷ [(5,166,536 + 3,985,085) ÷ 2] = -19.82%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality indicates a substantial shift in the relationship between accrual-based earnings and cash flows from 2018 to 2021. While net operating assets exhibited an overall upward trajectory, the aggregate accruals transitioned from significantly positive to negative values, signaling a fundamental change in the composition of reported earnings.
- Net Operating Assets Trend
- Net operating assets grew from $3.32 billion in 2018 to $5.17 billion by 2021. A temporary contraction was observed in 2020, where assets decreased to $3.99 billion, before recovering to a peak in 2021.
- Aggregate Accruals Trajectory
- Cash-flow-statement-based aggregate accruals demonstrated a consistent and steep decline over the four-year period. Values decreased from $1.92 billion in 2018 to $1.28 billion in 2019, subsequently entering negative territory in 2020 at -$567.93 million, and further declining to -$906.72 million by the end of 2021.
- Accruals Ratio Interpretation
- The cash-flow-statement-based accruals ratio fell sharply from 66.78% in 2018 to -19.82% in 2021. The high positive ratio in 2018 suggests that reported earnings were heavily driven by non-cash accruals. The transition to a negative ratio in 2020 and 2021 indicates that cash flows from operations exceeded accrual-based earnings, which typically suggests an improvement in earnings quality or the realization of previously recognized accruals.
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