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
YUM! Brands Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 26, 2015 | Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 8,075) | 8,345) | 8,695) | 9,011) | 8,834) | |
| Less: Cash and cash equivalents | 737) | 578) | 573) | 776) | 1,198) | |
| Operating assets | 7,338) | 7,767) | 8,122) | 8,235) | 7,636) | |
| Operating Liabilities | ||||||
| Total liabilities | 7,100) | 6,732) | 6,427) | 6,699) | 6,918) | |
| Less: Short-term borrowings | 923) | 267) | 71) | 10) | 320) | |
| Less: Long-term debt | 3,054) | 3,077) | 2,918) | 2,932) | 2,997) | |
| Operating liabilities | 3,123) | 3,388) | 3,438) | 3,757) | 3,601) | |
| Net operating assets1 | 4,215) | 4,379) | 4,684) | 4,478) | 4,035) | |
| Balance-sheet-based aggregate accruals2 | (164) | (305) | 206) | 443) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -3.82% | -6.73% | 4.50% | 10.41% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Airbnb Inc. | — | — | — | — | — | |
| Booking Holdings Inc. | — | — | — | — | — | |
| Chipotle Mexican Grill Inc. | — | — | — | — | — | |
| DoorDash, Inc. | — | — | — | — | — | |
| McDonald’s Corp. | — | — | — | — | — | |
| Starbucks Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2015-12-26), 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= 7,338 – 3,123 = 4,215
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 4,215 – 4,379 = -164
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -164 ÷ [(4,215 + 4,379) ÷ 2] = -3.82%
4 Click competitor name to see calculations.
The financial reporting quality, as measured by the balance-sheet-based accruals ratio, underwent a significant transition between 2012 and 2015, moving from a positive accrual position to a sustained negative accrual state.
- Net Operating Assets Trends
- Net operating assets exhibited a slight increase in the first year, rising from US$ 4,478 million in 2012 to a peak of US$ 4,684 million in 2013. This was followed by a consistent decline over the next two years, dropping to US$ 4,379 million in 2014 and further to US$ 4,215 million in 2015.
- Aggregate Accruals Analysis
- Balance-sheet-based aggregate accruals showed a sharp downward trajectory. Starting at US$ 443 million in 2012, the figure decreased to US$ 206 million in 2013 before shifting to a negative value of -US$ 305 million in 2014. By 2015, the negative accruals moderated slightly to -US$ 164 million.
- Accruals Ratio Interpretation
- The accruals ratio declined from 10.41% in 2012 to 4.50% in 2013, eventually crossing into negative territory at -6.73% in 2014 and ending at -3.82% in 2015. The transition from positive to negative ratios indicates a shift in earnings quality; whereas positive accruals suggest that reported earnings exceeded cash-flow-based operating assets, the negative ratios observed in 2014 and 2015 suggest that cash flows were stronger relative to reported accounting earnings, typically signaling higher earnings quality.
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Cash-Flow-Statement-Based Accruals Ratio
YUM! Brands Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 26, 2015 | Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income, YUM! Brands, Inc. | 1,293) | 1,051) | 1,091) | 1,597) | 1,319) | |
| Less: Net cash provided by operating activities | 2,139) | 2,049) | 2,139) | 2,294) | 2,170) | |
| Less: Net cash used in investing activities | (682) | (936) | (886) | (1,005) | (1,006) | |
| Cash-flow-statement-based aggregate accruals | (164) | (62) | (162) | 308) | 155) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -3.82% | -1.37% | -3.54% | 7.24% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Airbnb Inc. | — | — | — | — | — | |
| Booking Holdings Inc. | — | — | — | — | — | |
| Chipotle Mexican Grill Inc. | — | — | — | — | — | |
| DoorDash, Inc. | — | — | — | — | — | |
| McDonald’s Corp. | — | — | — | — | — | |
| Starbucks Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2015-12-26), 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -164 ÷ [(4,215 + 4,379) ÷ 2] = -3.82%
2 Click competitor name to see calculations.
An analysis of financial reporting quality reveals a significant shift in the relationship between accrual-based earnings and cash flows starting in 2013. After an initial period of positive accruals, the company transitioned to a consistent pattern of negative accruals through 2015, suggesting a period where operating cash flows exceeded accrual-based earnings.
- Net Operating Assets
- Net operating assets experienced a peak in 2013 at 4,684 million USD, followed by a steady decline over the next two years to 4,215 million USD by December 26, 2015. This downward trend in the asset base coincides with the period of negative accruals.
- Cash-flow-statement-based Aggregate Accruals
- A sharp reversal in aggregate accruals is observed after 2012. The positive value of 308 million USD in 2012 shifted to negative values in 2013 (-162 million USD), 2014 (-62 million USD), and 2015 (-164 million USD). The persistence of negative aggregate accruals from 2013 to 2015 indicates that cash flows from operations were consistently higher than the reported accounting earnings.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the movement of aggregate accruals, dropping from 7.24% in 2012 to -3.54% in 2013. While the ratio saw a slight moderation toward zero in 2014 (-1.37%), it returned to -3.82% in 2015. This sustained negative ratio is generally indicative of high earnings quality, as it implies that reported profits are well-supported by actual cash inflows.
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