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
Yahoo! Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 48,083,079) | 45,203,966) | 61,960,344) | 16,804,959) | 17,103,253) | |
| Less: Cash and cash equivalents | 1,119,469) | 1,631,911) | 2,667,916) | 2,077,590) | 2,667,778) | |
| Less: Short-term marketable securities | 5,700,925) | 4,225,112) | 5,327,412) | 1,330,304) | 1,516,175) | |
| Operating assets | 41,262,685) | 39,346,943) | 53,965,016) | 13,397,065) | 12,919,300) | |
| Operating Liabilities | ||||||
| Total liabilities | 16,999,003) | 16,124,546) | 23,174,752) | 3,674,362) | 2,497,650) | |
| Less: Convertible notes | 1,299,945) | 1,233,485) | 1,170,423) | 1,110,585) | —) | |
| Less: Net lease obligations | 23,000) | 33,000) | 47,000) | 44,000) | 37,000) | |
| Operating liabilities | 15,676,058) | 14,858,061) | 21,957,329) | 2,519,777) | 2,460,650) | |
| Net operating assets1 | 25,586,627) | 24,488,882) | 32,007,687) | 10,877,288) | 10,458,650) | |
| Balance-sheet-based aggregate accruals2 | 1,097,745) | (7,518,805) | 21,130,399) | 418,638) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.38% | -26.62% | 98.54% | 3.92% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | — | — | — | — | — | |
| Adobe Inc. | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Fair Isaac Corp. | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | |
| Synopsys Inc. | — | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Net operating assets = Operating assets – Operating liabilities
= 41,262,685 – 15,676,058 = 25,586,627
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= 25,586,627 – 24,488,882 = 1,097,745
3 2016 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,097,745 ÷ [(25,586,627 + 24,488,882) ÷ 2] = 4.38%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets displayed a considerable increase from 10,877,288 thousand US dollars in 2013 to 32,007,687 thousand US dollars in 2014. However, there was a notable decline in 2015, with the figure dropping to 24,488,882 thousand US dollars. In 2016, the value slightly rose again to 25,586,627 thousand US dollars. Overall, the trend indicates significant fluctuations with a peak in 2014 followed by a reduction and partial recovery.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals also exhibited substantial volatility. Starting at 418,638 thousand US dollars in 2013, there was a dramatic increase to 21,130,399 thousand US dollars in 2014, corresponding with the peak in net operating assets. In 2015, the accruals sharply decreased to a negative value of -7,518,805 thousand US dollars, indicating a reversal or correction in accruals. By 2016, the figure rebounded to 1,097,745 thousand US dollars, approaching the initial level but remaining significantly lower than the peak.
- Balance-sheet-based Accruals Ratio
- The accruals ratio followed an erratic pattern aligned with the aggregate accruals. It began at 3.92% in 2013, surged to an extremely high 98.54% in 2014, suggesting potential issues in accrual quality or financial operations during that year. A sharp decline occurred in 2015, with the ratio falling to -26.62%, implying possibly aggressive earnings management or restatements. The ratio then normalized to 4.38% in 2016, closer to the initial 2013 level but substantially more stable than the 2014-2015 period.
- Overall Analysis
- The data reveals periods of instability in financial reporting quality, particularly in 2014 and 2015. The spike in both net operating assets and aggregate accruals in 2014, followed by a sharp reversal in 2015, may indicate significant adjustments or volatility in asset recognition and accrual practices. The extreme values in the accruals ratio further support the possibility of irregularities or shifts in accounting estimates during this period. By 2016, the figures appear to stabilize closer to earlier levels, suggesting a return to more consistent financial reporting practices.
Cash-Flow-Statement-Based Accruals Ratio
Yahoo! Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Yahoo! Inc. | (214,321) | (4,359,082) | 7,521,731) | 1,366,281) | 3,945,479) | |
| Less: Net cash provided by (used in) operating activities | 1,248,863) | (2,383,422) | 896,700) | 1,195,247) | (281,554) | |
| Less: Net cash (used in) provided by investing activities | (1,574,265) | 1,752,112) | 3,761,969) | (23,221) | 3,362,044) | |
| Cash-flow-statement-based aggregate accruals | 111,081) | (3,727,772) | 2,863,062) | 194,255) | 864,989) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 0.44% | -13.20% | 13.35% | 1.82% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | — | — | — | — | — | |
| Adobe Inc. | — | — | — | — | — | |
| Cadence Design Systems Inc. | — | — | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Fair Isaac Corp. | — | — | — | — | — | |
| International Business Machines Corp. | — | — | — | — | — | |
| Intuit Inc. | — | — | — | — | — | |
| Microsoft Corp. | — | — | — | — | — | |
| Oracle Corp. | — | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | — | — | — | — | — | |
| Salesforce Inc. | — | — | — | — | — | |
| ServiceNow Inc. | — | — | — | — | — | |
| Synopsys Inc. | — | — | — | — | — | |
| Workday Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 111,081 ÷ [(25,586,627 + 24,488,882) ÷ 2] = 0.44%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets increased substantially from US$ 10,877,288 thousand in 2013 to US$ 32,007,687 thousand in 2014. Following this sharp rise, there was a decline to US$ 24,488,882 thousand in 2015, and a moderate rise again to US$ 25,586,627 thousand in 2016. The trend indicates a significant expansion in net operating assets in the first year, followed by some contraction and a stabilization phase over the subsequent years.
- Cash-flow-statement-based Aggregate Accruals
- This measure exhibited considerable volatility over the years. Starting at US$ 194,255 thousand in 2013, it sharply rose to US$ 2,863,062 thousand in 2014. However, in 2015, the value turned negative, declining significantly to -US$ 3,727,772 thousand. In 2016, it reverted to a positive but much lower amount of US$ 111,081 thousand. This pattern suggests fluctuations in the quality or timing of accrual-based earnings relative to cash flows, with a notable negative adjustment in 2015.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio shows a similar pattern to the aggregate accruals. It was relatively low at 1.82% in 2013, then increased sharply to 13.35% in 2014, indicating a larger proportion of accruals relative to cash flow. In 2015, the ratio turned negative to -13.2%, implying a significant reversal or correction in accruals that year. Finally, it dropped back to a minimal positive value of 0.44% in 2016, close to the original level in 2013. This ratio's fluctuation reflects changes in earnings quality, with a notable deterioration in 2015, followed by recovery.