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
Visa Inc., balance sheet computation of aggregate accruals
US$ in millions
| Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | Sep 30, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 85,501) | 82,896) | 80,919) | 72,574) | 69,225) | 67,977) | |
| Less: Cash and cash equivalents | 15,689) | 16,487) | 16,289) | 7,838) | 8,162) | 9,874) | |
| Less: Restricted cash equivalents, U.S. litigation escrow | 1,449) | 894) | 901) | 1,205) | 1,491) | 1,031) | |
| Less: Investment securities | 2,833) | 2,025) | 3,752) | 4,236) | 3,547) | 3,564) | |
| Less: Customer collateral | 2,342) | 2,260) | 1,850) | 1,648) | 1,324) | 1,106) | |
| Operating assets | 63,188) | 61,230) | 58,127) | 57,647) | 54,701) | 52,402) | |
| Operating Liabilities | |||||||
| Total liabilities | 49,920) | 45,307) | 44,709) | 37,890) | 35,219) | 35,217) | |
| Less: Current maturities of debt | 2,250) | 999) | 2,999) | —) | —) | 1,749) | |
| Less: Long-term debt, excluding current maturities | 20,200) | 19,978) | 21,071) | 16,729) | 16,630) | 16,618) | |
| Operating liabilities | 27,470) | 24,330) | 20,639) | 21,161) | 18,589) | 16,850) | |
| Net operating assets1 | 35,718) | 36,900) | 37,488) | 36,486) | 36,112) | 35,552) | |
| Balance-sheet-based aggregate accruals2 | (1,182) | (588) | 1,002) | 374) | 560) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -3.26% | -1.58% | 2.71% | 1.03% | 1.56% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | 21.70% | — | — | — | — | — | |
| Adobe Inc. | -8.24% | 14.14% | — | — | — | — | |
| AppLovin Corp. | 36.28% | — | — | — | — | — | |
| Cadence Design Systems Inc. | 26.65% | — | — | — | — | — | |
| Datadog Inc. | 17.56% | — | — | — | — | — | |
| International Business Machines Corp. | 1.55% | — | — | — | — | — | |
| Intuit Inc. | 85.68% | — | — | — | — | — | |
| Microsoft Corp. | 42.27% | — | — | — | — | — | |
| Oracle Corp. | 9.90% | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | — | — | — | — | — | |
| Salesforce Inc. | 57.74% | — | — | — | — | — | |
| ServiceNow Inc. | 12.89% | — | — | — | — | — | |
| Synopsys Inc. | 5.01% | 0.36% | — | — | — | — | |
| Workday Inc. | 55.93% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 29.53% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 19.09% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 63,188 – 27,470 = 35,718
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 35,718 – 36,900 = -1,182
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,182 ÷ [(35,718 + 36,900) ÷ 2] = -3.26%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals reveals a distinct shift in financial reporting quality between 2018 and 2022. The period began with positive aggregate accruals that peaked in 2020, followed by a transition to negative accruals in 2021 and 2022. This reversal suggests a transition toward a regime where cash flows from operations exceed reported accounting earnings, which is generally interpreted as an improvement in earnings quality.
- Net Operating Assets Trend
- Net operating assets exhibited relative stability over the five-year horizon, maintaining a range between 35,718 million and 37,488 million US dollars. A marginal peak was observed in 2020, followed by a slight downward trend through 2022, indicating a consistent scale of operational assets.
- Aggregate Accruals Dynamics
- Balance-sheet-based aggregate accruals showed significant variance, moving from a positive 560 million US dollars in 2018 to a peak of 1,002 million US dollars in 2020. A sharp reversal occurred in 2021, where accruals became negative at -588 million US dollars, further descending to -1,182 million US dollars by September 30, 2022.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio followed the trajectory of aggregate accruals, rising from 1.56% in 2018 to 2.71% in 2020. The subsequent decline into negative territory, reaching -1.58% in 2021 and -3.26% in 2022, indicates that earnings are increasingly supported by cash inflows rather than accounting accruals. This downward trend in the ratio suggests a reduction in the gap between reported profits and actual cash generation.
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Cash-Flow-Statement-Based Accruals Ratio
Visa Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | Sep 30, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income | 14,957) | 12,311) | 10,866) | 12,080) | 10,301) | 6,699) | |
| Less: Net cash provided by operating activities | 18,849) | 15,227) | 10,440) | 12,784) | 12,713) | 9,208) | |
| Less: Net cash (used in) provided by investing activities | (4,288) | (152) | 1,427) | (591) | (3,084) | 735) | |
| Cash-flow-statement-based aggregate accruals | 396) | (2,764) | (1,001) | (113) | 672) | (3,244) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 1.09% | -7.43% | -2.71% | -0.31% | 1.88% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | 11.87% | — | — | — | — | — | |
| Adobe Inc. | -19.93% | 9.21% | — | — | — | — | |
| AppLovin Corp. | 22.07% | — | — | — | — | — | |
| Cadence Design Systems Inc. | 15.03% | — | — | — | — | — | |
| Datadog Inc. | -34.44% | — | — | — | — | — | |
| International Business Machines Corp. | -7.22% | — | — | — | — | — | |
| Intuit Inc. | 25.60% | — | — | — | — | — | |
| Microsoft Corp. | 13.42% | — | — | — | — | — | |
| Oracle Corp. | -30.58% | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | — | — | — | — | — | |
| Salesforce Inc. | 21.96% | — | — | — | — | — | |
| ServiceNow Inc. | 8.80% | — | — | — | — | — | |
| Synopsys Inc. | -4.64% | -4.88% | — | — | — | — | |
| Workday Inc. | -0.65% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 2.29% | 21.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 3.25% | 15.65% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 396 ÷ [(35,718 + 36,900) ÷ 2] = 1.09%
2 Click competitor name to see calculations.
The analysis of financial reporting quality between September 30, 2018, and September 30, 2022, reveals a period of notable volatility in the accruals ratio despite a relatively stable base of net operating assets.
- Net Operating Assets
- Net operating assets remained consistent throughout the five-year period, fluctuating within a narrow range. The value increased slightly from US$ 36,112 million in 2018 to a peak of US$ 37,488 million in 2020, before declining to US$ 35,718 million by September 30, 2022.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals experienced significant variance. A positive value of US$ 672 million in 2018 transitioned into negative territory starting in 2019. This negative trend intensified through 2021, reaching a trough of negative US$ 2,764 million, before rebounding to a positive US$ 396 million in 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the movement of aggregate accruals, starting at 1.88% in 2018 and declining steadily to -0.31% in 2019, -2.71% in 2020, and -7.43% in 2021. This downward trajectory indicates that cash flows exceeded accrual-based earnings relative to net operating assets during this window. The ratio then returned to a positive 1.09% in 2022.
The pronounced shift toward negative accruals from 2019 to 2021 suggests a period of conservative accounting or a phase where operating cash flows significantly outperformed reported earnings. The subsequent reversal to a positive ratio in 2022 indicates a normalization of the relationship between cash flow and accrual-based reporting.
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