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
Baxter International Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 20,975) | 25,917) | 25,869) | 20,390) | 19,073) | |
| Less: Cash and equivalents | 2,213) | 2,925) | 2,733) | 3,270) | 2,905) | |
| Less: Investment in Baxalta common stock | 5,148) | —) | —) | —) | —) | |
| Operating assets | 13,614) | 22,992) | 23,136) | 17,120) | 16,168) | |
| Operating Liabilities | ||||||
| Total liabilities | 12,110) | 17,761) | 17,383) | 13,412) | 12,245) | |
| Less: Short-term debt | 1,775) | 913) | 181) | 27) | 256) | |
| Less: Current maturities of long-term debt and lease obligations | 810) | 786) | 859) | 323) | 190) | |
| Less: Long-term debt and lease obligations, excluding current maturities | 3,935) | 7,606) | 8,126) | 5,580) | 4,749) | |
| Operating liabilities | 5,590) | 8,456) | 8,217) | 7,482) | 7,050) | |
| Net operating assets1 | 8,024) | 14,536) | 14,919) | 9,638) | 9,118) | |
| Balance-sheet-based aggregate accruals2 | (6,512) | (383) | 5,281) | 520) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -57.73% | -2.60% | 43.01% | 5.54% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| CVS Health Corp. | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= 13,614 – 5,590 = 8,024
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 8,024 – 14,536 = -6,512
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -6,512 ÷ [(8,024 + 14,536) ÷ 2] = -57.73%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets displayed a significant increase from 9,638 million US dollars in 2012 to 14,919 million US dollars in 2013. This upward trend slightly reversed in 2014 with a marginal decrease to 14,536 million US dollars, followed by a substantial decline in 2015, dropping to 8,024 million US dollars. This pattern indicates considerable volatility in the company's operational asset base within the analyzed period.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals initially recorded a modest amount of 520 million US dollars in 2012, which surged drastically to 5,281 million US dollars in 2013. Subsequently, a sharp reversal is observed, with values turning negative at -383 million US dollars in 2014 and further declining to -6,512 million US dollars in 2015. This fluctuation suggests a shift from positive to significantly negative accruals, highlighting potential changes in the company's earnings quality or accounting practices over time.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrored the aggregate accruals' behavior. It rose substantially from 5.54% in 2012 to 43.01% in 2013, indicating a higher proportion of accrual-based earnings relative to net operating assets. In 2014, the ratio reversed to a negative value of -2.6%, culminating in a dramatic decline to -57.73% in 2015. This significant negative turn suggests a considerable reduction in accrual quality and may imply increased earnings management or higher earnings volatility during the later years.
Cash-Flow-Statement-Based Accruals Ratio
Baxter International Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Baxter | 968) | 2,497) | 2,012) | 2,326) | 2,224) | |
| Less: Cash flows from operations | 1,129) | 3,215) | 3,198) | 3,106) | 2,817) | |
| Less: Cash flows from investing activities | (861) | (1,542) | (5,362) | (1,569) | (1,427) | |
| Cash-flow-statement-based aggregate accruals | 700) | 824) | 4,176) | 789) | 834) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 6.21% | 5.59% | 34.01% | 8.41% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| CVS Health Corp. | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
Based on: 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), 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 × 700 ÷ [(8,024 + 14,536) ÷ 2] = 6.21%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed a notable increase from 9,638 million US dollars at the end of 2012 to a peak of 14,919 million in 2013. This was followed by a slight decline to 14,536 million in 2014, and a significant decrease to 8,024 million by the end of 2015. The pattern suggests substantial expansion in 2013, stabilization in 2014, and a sharp contraction in 2015.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed substantial volatility over the period. In 2012, accruals were 789 million US dollars, sharply increasing to 4,176 million in 2013, then rapidly falling back to levels close to the 2012 base with 824 million in 2014 and remaining relatively steady at 700 million in 2015. This indicates a significant fluctuation in non-cash components of earnings, especially in 2013.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the trend in aggregate accruals. It surged from 8.41% in 2012 to an elevated 34.01% in 2013, reflecting a higher proportion of accruals relative to net operating assets. Subsequently, the ratio fell significantly to 5.59% in 2014 and slightly increased to 6.21% in 2015. This suggests that the extraordinary accrual activity observed in 2013 was an anomaly, and accrual levels returned closer to normal in the following years.