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
Automatic Data Processing Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | Jun 30, 2017 | Jun 30, 2016 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 48,772,500) | 39,165,500) | 41,887,700) | 37,088,700) | 37,180,000) | 43,670,000) | |
| Less: Cash and cash equivalents | 2,575,200) | 1,908,500) | 1,949,200) | 2,170,000) | 2,780,400) | 3,191,100) | |
| Less: Funds held for clients | 34,905,800) | 26,708,100) | 29,434,200) | 27,137,800) | 27,291,500) | 33,841,200) | |
| Operating assets | 11,291,500) | 10,548,900) | 10,504,300) | 7,780,900) | 7,108,100) | 6,637,700) | |
| Operating Liabilities | |||||||
| Total liabilities | 43,102,400) | 33,413,300) | 36,487,800) | 33,629,100) | 33,203,000) | 39,188,400) | |
| Less: Obligations under reverse repurchase agreements | 23,500) | 13,600) | 262,000) | —) | —) | —) | |
| Less: Short-term debt | —) | 1,001,800) | —) | —) | —) | —) | |
| Less: Long-term debt | 2,985,000) | 1,002,800) | 2,002,200) | 2,002,400) | 2,002,400) | 2,007,700) | |
| Operating liabilities | 40,093,900) | 31,395,100) | 34,223,600) | 31,626,700) | 31,200,600) | 37,180,700) | |
| Net operating assets1 | (28,802,400) | (20,846,200) | (23,719,300) | (23,845,800) | (24,092,500) | (30,543,000) | |
| Balance-sheet-based aggregate accruals2 | (7,956,200) | 2,873,100) | 126,500) | 246,700) | 6,450,500) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | — | — | — | — | — | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | 27.93% | 3.73% | — | — | — | — | |
| Adobe Inc. | 14.14% | 8.20% | — | — | — | — | |
| Cadence Design Systems Inc. | 4.43% | — | — | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| Fair Isaac Corp. | -6.17% | -0.02% | — | — | — | — | |
| International Business Machines Corp. | -7.39% | — | — | — | — | — | |
| Intuit Inc. | 139.73% | -1.39% | — | — | — | — | |
| Microsoft Corp. | 40.52% | 14.41% | — | — | — | — | |
| Oracle Corp. | 5.62% | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | 85.21% | 69.06% | — | — | — | — | |
| Salesforce Inc. | 10.87% | — | — | — | — | — | |
| ServiceNow Inc. | 34.89% | — | — | — | — | — | |
| Synopsys Inc. | 0.36% | 8.40% | — | — | — | — | |
| Workday Inc. | -15.99% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 16.66% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 19.16% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 11,291,500 – 40,093,900 = -28,802,400
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= -28,802,400 – -20,846,200 = -7,956,200
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -7,956,200 ÷ [(-28,802,400 + -20,846,200) ÷ 2] = —
4 Click competitor name to see calculations.
The financial data over the five-year period indicate several noteworthy trends in the company's net operating assets and aggregate accruals.
- Net Operating Assets
-
The net operating assets remain negative throughout the entire period, indicating net liabilities from operating activities. The magnitude of these negative assets generally increases, moving from approximately -24.1 billion USD in 2017 to nearly -28.8 billion USD in 2021. Notably, there is a slight improvement observed in 2020, where the net operating assets decrease in absolute negative value to around -20.8 billion USD before worsening again in 2021. This suggests some fluctuation but an overall trend toward increasing net operating liabilities over the five years.
- Balance-Sheet-Based Aggregate Accruals
-
The aggregate accruals exhibit considerable volatility during the period. Starting at a high positive value of approximately 6.45 billion USD in 2017, the accruals sharply decrease in 2018 and 2019 to much lower positive values (around 247 million USD and 127 million USD respectively). There is a brief resurgence in 2020, with accruals rising to approximately 2.87 billion USD. However, in 2021, this trend reverses drastically, with aggregate accruals turning negative to the extent of roughly -7.96 billion USD. This sharp decline could suggest a significant change in accounting accruals or operational adjustments affecting the accrual accounting components.
- Balance-Sheet-Based Accruals Ratio
-
No data are available for the balance-sheet-based accruals ratio across the reported periods, limiting insights into this metric. Its absence implies that the ratio could not be calculated or was not reported, which restricts a deeper understanding of accrual quality relative to total assets or another base.
In summary, the data indicate an overall deterioration in net operating assets, reflecting increasing net operating liabilities over the five years, with a brief improvement in 2020. The aggregate accruals demonstrate high variability and a significant turnaround from positive to a substantial negative figure in the final year. This pattern may reflect changing operational or accounting conditions impacting financial accruals, warranting further examination to understand underlying causes and implications for financial quality.
Cash-Flow-Statement-Based Accruals Ratio
Automatic Data Processing Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | Jun 30, 2017 | Jun 30, 2016 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 2,598,500) | 2,466,500) | 2,292,800) | 1,620,800) | 1,733,400) | 1,492,500) | |
| Less: Net cash flows provided by operating activities | 3,093,300) | 3,026,200) | 2,688,300) | 2,515,200) | 2,125,900) | 1,859,900) | |
| Less: Net cash flows (used in) provided by investing activities | (3,515,000) | 3,156,300) | (2,197,700) | (2,504,600) | 5,730,400) | (9,087,200) | |
| Cash-flow-statement-based aggregate accruals | 3,020,200) | (3,716,000) | 1,802,200) | 1,610,200) | (6,122,900) | 8,719,800) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | — | — | — | — | — | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | 11.80% | -13.65% | — | — | — | — | |
| Adobe Inc. | 9.21% | -0.48% | — | — | — | — | |
| Cadence Design Systems Inc. | -5.75% | — | — | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| Fair Isaac Corp. | -17.25% | -10.25% | — | — | — | — | |
| International Business Machines Corp. | -1.64% | — | — | — | — | — | |
| Intuit Inc. | 58.72% | -34.22% | — | — | — | — | |
| Microsoft Corp. | 17.68% | -8.19% | — | — | — | — | |
| Oracle Corp. | 25.81% | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | -68.30% | -488.47% | — | — | — | — | |
| Salesforce Inc. | 10.57% | — | — | — | — | — | |
| ServiceNow Inc. | -21.14% | — | — | — | — | — | |
| Synopsys Inc. | -4.88% | 0.92% | — | — | — | — | |
| Workday Inc. | -18.51% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 11.15% | -28.80% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 8.62% | -15.54% | — | — | — | — | |
Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,020,200 ÷ [(-28,802,400 + -20,846,200) ÷ 2] = —
2 Click competitor name to see calculations.
- Net Operating Assets
-
The net operating assets exhibit a generally decreasing trend from June 30, 2017 through June 30, 2020, moving from approximately -24.1 billion USD to about -20.8 billion USD. This decline indicates a reduction in the company's net operating asset base over the first four years. However, in the final period ending June 30, 2021, there is a significant reversal, with net operating assets sharply decreasing further to approximately -28.8 billion USD, marking the largest negative value in the observed timeframe.
- Cash-flow-statement-based Aggregate Accruals
-
The aggregate accruals data demonstrates considerable volatility over the five-year period. In June 2017, the figure is markedly negative at roughly -6.1 million USD, suggesting possible cash flow shortfalls or adjustments. This is followed by a positive shift in June 2018 and June 2019, with values of approximately 1.6 million USD and 1.8 million USD respectively, indicating improved accrual behavior or enhanced earnings quality during those years. The trend again reverses in June 2020, with accruals falling to around -3.7 million USD, which could reflect operational challenges or increased non-cash adjustments. The final data point, June 2021, shows a recovery to a positive 3.0 million USD, suggesting improved accrual performance and potentially better earnings quality.
- Cash-flow-statement-based Accruals Ratio
-
No data has been reported for the cash-flow-statement-based accruals ratio throughout the period, which restricts detailed insight into the relationship between accruals and cash flows. The absence of this metric implies limited ability to assess accrual quality relative to cash flows directly from the provided information.