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. | — | — | — | — | — | |
| 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 data over the four-year period shows several notable trends related to the quality of financial reporting measured through accruals and net operating assets.
- Net Operating Assets
- The net operating assets show a gradual decline from US$4,478 million in 2012 to US$4,215 million in 2015. This represents a downward trend of approximately 6%, indicating a modest reduction in the company's operating asset base over the period.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals decrease sharply from a positive value of US$443 million in 2012 to a negative amount of US$-164 million in 2015. This transition from positive to negative accruals suggests a shift in the company's earnings quality or accounting policies. Notably, the values indicate significant volatility, with a peak at 443 million in 2012, declining to 206 million in 2013, then dropping sharply to negative territory (-305 million in 2014 and -164 million in 2015).
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio follows a corresponding downward trajectory, starting at 10.41% in 2012 and decreasing to -3.82% by 2015. The ratio's move from a positive to a negative percentage highlights an increasing proportion of cash-based earnings relative to accrual-based earnings. This reduction might indicate improving earnings quality or a strategic shift toward more conservative accounting practices. Despite this, the ratio remains volatile, with a steep decline between 2013 and 2014.
Overall, the data reflects a consistent contraction in net operating assets alongside a marked reduction in accruals and their ratio, both turning negative by the final year. This pattern points to potential improvements in the quality of earnings but also signals notable fluctuations that warrant further investigation into the factors driving these changes.
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. | — | — | — | — | — | |
| 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.
- Net Operating Assets
- The net operating assets exhibit a decreasing trend over the four-year period. Starting at 4,478 million US dollars in 2012, the value increased slightly to 4,684 million in 2013, followed by a decline to 4,379 million in 2014 and further down to 4,215 million in 2015. This pattern suggests a reduction in the company’s net investment in operating assets after the peak in 2013.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure shows considerable volatility and remains negative in most years after 2012. In 2012, aggregate accruals were 308 million US dollars, indicating positive accrual activity. However, the value became negative in 2013 at -162 million and slightly improved but still negative in 2014 at -62 million. The figure dropped again to -164 million in 2015. Negative accruals in the latter years suggest a shift toward more conservative earnings or changes in working capital management affecting reported earnings.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend observed in aggregate accruals, beginning at a high positive level of 7.24% in 2012, then turning negative at -3.54% in 2013. The ratio modestly recovered in magnitude to -1.37% in 2014 but declined again to -3.82% in 2015. This negative ratio in three of the four years implies that accruals are detracting from cash flows, which may be indicative of lower earnings quality or more conservative revenue recognition practices during those years.