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. | 22.86% | — | — | — | — | |
| Comcast Corp. | -0.48% | — | — | — | — | |
| Meta Platforms Inc. | 14.69% | — | — | — | — | |
| Netflix Inc. | 27.24% | — | — | — | — | |
| Take-Two Interactive Software Inc. | 268.82% | — | — | — | — | |
| Walt Disney Co. | 1.73% | -4.26% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 8.32% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | 10.24% | 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.
- Net Operating Assets
- The net operating assets showed an overall upward trend over the four-year period. Starting at approximately 3.32 billion US dollars at the end of 2018, there was a notable increase in 2019 to about 4.60 billion. Although there was a decrease in 2020 to approximately 4.00 billion, the figure rose again in 2021 to reach around 5.17 billion. This indicates fluctuating but generally increasing operational investment.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibited significant volatility. The figure rose from approximately 879 million US dollars in 2018 to roughly 1.28 billion in 2019. Subsequently, there was a sharp decline to a negative value of about -613 million in 2020, indicating possible reversals or adjustments. In 2021, the accruals reverted to a positive value of approximately 1.18 billion. This pattern suggests instability and possible variations in earnings management or accounting estimates during the analyzed years.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, followed a similar volatile pattern. It increased from 30.55% in 2018 to 32.37% in 2019, then sharply decreased to -14.28% in 2020, and rose again to 25.82% in 2021. The negative ratio in 2020 reflects the negative aggregate accruals relative to net operating assets, potentially indicating unusual financial reporting behavior or one-time adjustments during that year. Overall, the ratio suggests fluctuating quality or consistency in accrual accounting practices.
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. | 17.48% | — | — | — | — | |
| Comcast Corp. | -0.83% | — | — | — | — | |
| Meta Platforms Inc. | -14.89% | — | — | — | — | |
| Netflix Inc. | 27.32% | — | — | — | — | |
| Take-Two Interactive Software Inc. | 1,842.27% | — | — | — | — | |
| Walt Disney Co. | -0.29% | -4.68% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 2.58% | 7.89% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | 6.83% | -1.39% | — | — | — | |
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.
The analysis of the available financial reporting quality measures over the four-year period reveals notable trends and shifts in the company's financial dynamics.
- Net Operating Assets
- The net operating assets showed an overall increasing trend from 2018 to 2021. Starting at approximately 3.3 billion US dollars at the end of 2018, the figure rose to nearly 4.6 billion in 2019. A decline followed in 2020 to about 4 billion, yet the value rebounded significantly in 2021, reaching roughly 5.2 billion US dollars. This upward movement over the time horizon suggests a general expansion in operating assets, reflecting possible growth initiatives or increased investment in the company’s core operations.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibited a distinct downward trend. In 2018, accruals were positive at nearly 1.9 billion US dollars, decreasing substantially to about 1.3 billion in 2019. Thereafter, a significant reversal occurred with accruals turning negative, amounting to approximately -568 million in 2020 and further declining to near -907 million in 2021. The shift from positive to negative accruals may indicate changes in earnings management, adjustments in working capital, or the timing of cash flows affecting the recognition of income and expenses.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio followed a similar trajectory to aggregate accruals, diminishing sharply over the period. The ratio was substantially positive at 66.78% in 2018, indicating accruals comprised a large portion relative to operating assets or relevant base. It then declined to 32.3% in 2019. Notably, the ratio became negative in 2020 and 2021, reaching -13.23% and -19.82%, respectively. A negative accruals ratio suggests that cash flows possibly exceeded accrual-based earnings or that accrual adjustments reduced reported earnings relative to cash flows. This trend might point to a shift in earnings quality or the company's accounting policies impacting reported profitability.
Overall, the data depicts increased operational asset bases alongside a notable transition in accrual behavior, moving from substantial positive to significant negative accrual figures and ratios. Such changes bear implications for earnings quality and cash flow relations, underscoring the necessity for ongoing monitoring and deeper examination of the underlying causes driving these financial reporting quality measures.