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.
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IQVIA Holdings Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Assets
- Common Stock Valuation Ratios
- Dividend Discount Model (DDM)
- Operating Profit Margin since 2013
- Current Ratio since 2013
- Total Asset Turnover since 2013
- Price to Operating Profit (P/OP) since 2013
- Price to Book Value (P/BV) since 2013
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
IQVIA Holdings Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Investments in debt, equity and other securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Current finance lease liabilities | ||||||
| Less: Long-term debt, less current portion | ||||||
| Less: Long-term finance lease liabilities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
The data reveals several noteworthy trends in the financial reporting quality measures over the four-year period.
- Net Operating Assets
- The net operating assets remained relatively stable from 2019 through 2021, with values fluctuating slightly between 16,876 and 17,033 million US dollars. In 2022, there was a modest increase to 17,432 million US dollars, indicating a slight growth in operational asset base.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibited significant volatility across the timeline. In 2019, a negative accrual of -14 million US dollars was reported. This shifted to a small positive value of 24 million in 2020, followed by a more substantial negative value of -157 million in 2021. A marked increase to 556 million was observed in 2022, which reflects a notable rise in accruals within that year.
- Balance-sheet-based Accruals Ratio
- Aligning with the aggregate accruals, the accruals ratio displayed pronounced variability. It was slightly negative at -0.08% in 2019, turned positive at 0.14% in 2020, then dipped to -0.93% in 2021. The most striking change occurred in 2022, with the accruals ratio rising sharply to 3.24%. The elevated ratio in 2022 suggests an increased proportion of accruals relative to net operating assets, which warrants attention for its potential implications on earnings quality.
Overall, while net operating assets displayed minimal fluctuation, the accrued measures show increasing instability, especially in the most recent year. The sharp increase in both aggregate accruals and accruals ratio in 2022 may indicate changes in earnings management practices or shifts in underlying business activities that impact accruals. These patterns highlight the need for further investigation into the drivers behind the 2022 figures to assess the sustainability and quality of reported earnings.
Cash-Flow-Statement-Based Accruals Ratio
IQVIA Holdings Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to IQVIA Holdings Inc. | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets remained relatively stable over the four-year period, with minor fluctuations. The value was approximately $17,009 million at the end of 2019 and showed a slight increase to $17,432 million by the end of 2022. The intervening years exhibited minimal variation, indicating consistent asset management and a steady operational base.
- Cash-Flow-Statement-Based Aggregate Accruals
- There was a noticeable shift in the aggregate accruals from a negative amount of -$36 million in 2019 to a substantially larger negative value of -$884 million in 2020. Subsequently, the accruals reversed to positive values, amounting to $127 million in 2021 and further increasing to $837 million in 2022. This pattern suggests a significant change in the timing or recognition of revenues and expenses between 2020 and the later years, potentially reflecting adjustments in accounting practices or business operations affecting accrual accounting.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored changes observed in the aggregate accruals. It started at a marginal negative rate of -0.21% in 2019, steeply declined to -5.19% in 2020, and then transitioned to positive values of 0.75% in 2021 and a more pronounced 4.88% in 2022. This trend demonstrates increasing reliance on accruals in the company’s financial reporting, which may impact earnings quality and warrant further analysis to understand potential implications for cash flow alignment and earnings sustainability.