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
Anadarko Petroleum Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 45,564) | 46,414) | 61,689) | 55,781) | 52,589) | |
| Less: Cash and cash equivalents | 3,184) | 939) | 7,369) | 3,698) | 2,471) | |
| Operating assets | 42,380) | 45,475) | 54,320) | 52,083) | 50,118) | |
| Operating Liabilities | ||||||
| Total liabilities | 30,067) | 30,957) | 39,371) | 32,131) | 30,707) | |
| Less: Short-term debt | 42) | 33) | —) | 500) | —) | |
| Less: Long-term debt, excluding current portion | 15,281) | 15,718) | 15,092) | 13,065) | 13,269) | |
| Operating liabilities | 14,744) | 15,206) | 24,279) | 18,566) | 17,438) | |
| Net operating assets1 | 27,636) | 30,269) | 30,041) | 33,517) | 32,680) | |
| Balance-sheet-based aggregate accruals2 | (2,633) | 228) | (3,476) | 837) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -9.09% | 0.76% | -10.94% | 2.53% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
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
= 42,380 – 14,744 = 27,636
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= 27,636 – 30,269 = -2,633
3 2016 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -2,633 ÷ [(27,636 + 30,269) ÷ 2] = -9.09%
4 Click competitor name to see calculations.
The financial reporting quality between 2013 and 2016 is characterized by substantial volatility in accrual levels and a general downward trajectory in net operating assets.
- Net Operating Assets Trend
- An overall decline in net operating assets is observed, decreasing from $33,517 million in 2013 to $27,636 million by 2016. Although a marginal increase occurred in 2015, the general trend indicates a contraction of the operating balance sheet over the four-year period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibit significant fluctuations, alternating between positive and negative values. The most pronounced shifts occurred in 2014 and 2016, where accruals reached -$3,476 million and -$2,633 million, respectively. These negative figures contrast sharply with the positive accruals reported in 2013 ($837 million) and 2015 ($228 million).
- Accruals Ratio Analysis
- The accruals ratio mirrors the instability of the aggregate accruals, swinging from 2.53% in 2013 to a low of -10.94% in 2014, recovering to 0.76% in 2015, and ending at -9.09% in 2016. The recurring and significant negative ratios in 2014 and 2016 suggest periods where cash flows from operations significantly exceeded accrual-based accounting earnings, which may be indicative of conservative accounting adjustments or substantial non-cash charges during those fiscal years.
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Cash-Flow-Statement-Based Accruals Ratio
Anadarko Petroleum Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to common stockholders | (3,071) | (6,692) | (1,750) | 801) | 2,391) | |
| Less: Net cash provided by (used in) operating activities | 3,000) | (1,877) | 8,466) | 8,888) | 8,339) | |
| Less: Net cash used in investing activities | (2,762) | (4,771) | (6,472) | (8,216) | (6,869) | |
| Cash-flow-statement-based aggregate accruals | (3,309) | (44) | (3,744) | 129) | 921) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -11.43% | -0.15% | -11.78% | 0.39% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
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 × -3,309 ÷ [(27,636 + 30,269) ÷ 2] = -11.43%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2013 to 2016 reveals a period of significant volatility in aggregate accruals and a general contraction in the company's operational asset base. Net operating assets exhibited a downward trend, decreasing from 33,517 million US dollars in 2013 to 27,636 million US dollars by the end of 2016, reflecting a reduction in the total capital employed in operations over the four-year period.
- Cash-flow-statement-based aggregate accruals
- Aggregate accruals demonstrated extreme fluctuations, shifting from a marginally positive 129 million US dollars in 2013 to a substantial negative value of -3,744 million US dollars in 2014. While these accruals nearly neutralized in 2015 at -44 million US dollars, they returned to a deeply negative position in 2016, reaching -3,309 million US dollars. This pattern indicates periods where cash flows from operations significantly exceeded accrual-based earnings.
- Cash-flow-statement-based accruals ratio
- The accruals ratio mirrors the volatility of the aggregate accruals, fluctuating between narrow positive margins and significant negative percentages. Starting at 0.39% in 2013, the ratio dropped sharply to -11.78% in 2014, recovered to -0.15% in 2015, and declined again to -11.43% in 2016. The recurrence of large negative ratios in 2014 and 2016 suggests that reported net income was substantially lower than the cash generated from operations during those specific years, which is often characteristic of significant non-cash charges or conservative accounting adjustments.
The divergence between accrual-based metrics and cash flow is most pronounced in 2014 and 2016. The stability seen in 2015 represents a brief anomaly in an otherwise volatile trend of negative accruals, suggesting that the drivers causing the divergence in the surrounding years were temporary but severe.
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