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
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 | 25,337) | 24,689) | 24,564) | 23,251) | 22,549) | |
| Less: Cash and cash equivalents | 1,216) | 1,366) | 1,814) | 837) | 891) | |
| Less: Investments in debt, equity and other securities | 93) | 111) | 88) | 62) | 47) | |
| Operating assets | 24,028) | 23,212) | 22,662) | 22,352) | 21,611) | |
| Operating Liabilities | ||||||
| Total liabilities | 19,572) | 18,647) | 18,284) | 16,988) | 15,595) | |
| Less: Current portion of long-term debt | 152) | 91) | 149) | 100) | 100) | |
| Less: Current finance lease liabilities | 5) | 9) | —) | —) | —) | |
| Less: Long-term debt, less current portion | 12,595) | 12,034) | 12,384) | 11,545) | 10,907) | |
| Less: Long-term finance lease liabilities | 224) | 177) | 122) | —) | —) | |
| Operating liabilities | 6,596) | 6,336) | 5,629) | 5,343) | 4,588) | |
| Net operating assets1 | 17,432) | 16,876) | 17,033) | 17,009) | 17,023) | |
| Balance-sheet-based aggregate accruals2 | 556) | (157) | 24) | (14) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 3.24% | -0.93% | 0.14% | -0.08% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | -14.27% | — | — | — | — | |
| Amgen Inc. | 4.07% | — | — | — | — | |
| Bristol-Myers Squibb Co. | -3.86% | — | — | — | — | |
| Danaher Corp. | -1.55% | — | — | — | — | |
| Eli Lilly & Co. | 11.56% | — | — | — | — | |
| Gilead Sciences Inc. | -2.92% | — | — | — | — | |
| Johnson & Johnson | 19.84% | — | — | — | — | |
| Merck & Co. Inc. | 0.46% | — | — | — | — | |
| Pfizer Inc. | 24.95% | — | — | — | — | |
| Regeneron Pharmaceuticals Inc. | 11.07% | — | — | — | — | |
| Thermo Fisher Scientific Inc. | -1.78% | — | — | — | — | |
| Vertex Pharmaceuticals Inc. | 14.07% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 4.85% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.30% | 200.00% | — | — | — | |
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
= 24,028 – 6,596 = 17,432
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 17,432 – 16,876 = 556
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 556 ÷ [(17,432 + 16,876) ÷ 2] = 3.24%
4 Click competitor name to see calculations.
Net operating assets demonstrated a high degree of stability between 2019 and 2022, maintaining a consistent range around US$ 17 billion. A marginal decrease to US$ 16,876 million occurred in 2021, followed by a recovery to US$ 17,432 million by the end of 2022.
- Balance-sheet-based aggregate accruals
- Aggregate accruals exhibited significant volatility over the analyzed period. The values transitioned from a nominal negative of US$ -14 million in 2019 to a positive US$ 24 million in 2020. This was followed by a contraction to US$ -157 million in 2021 and a sharp expansion to US$ 556 million in 2022.
- Balance-sheet-based accruals ratio
- The accruals ratio mirrored the movement of aggregate accruals due to the stability of the net operating asset base. The ratio remained negligible from 2019 through 2021, fluctuating between -0.93% and 0.14%. However, a notable increase is observed in 2022, with the ratio rising to 3.24%.
The shift in the accruals ratio in 2022 indicates a divergence between accrual-based earnings and cash flow relative to operating assets. While the ratio remained near zero for the first three years—suggesting that earnings were closely aligned with cash movements—the 2022 spike indicates a higher proportion of non-cash earnings. This pattern suggests an increase in the reliance on accruals to drive reported financial performance during the final year of the period.
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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. | 1,091) | 966) | 279) | 191) | 259) | |
| Less: Net cash provided by operating activities | 2,260) | 2,942) | 1,959) | 1,417) | 1,254) | |
| Less: Net cash used in investing activities | (2,006) | (2,103) | (796) | (1,190) | (810) | |
| Cash-flow-statement-based aggregate accruals | 837) | 127) | (884) | (36) | (185) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 4.88% | 0.75% | -5.19% | -0.21% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | -16.25% | — | — | — | — | |
| Amgen Inc. | 8.81% | — | — | — | — | |
| Bristol-Myers Squibb Co. | -9.10% | — | — | — | — | |
| Danaher Corp. | 1.44% | — | — | — | — | |
| Eli Lilly & Co. | 10.27% | — | — | — | — | |
| Gilead Sciences Inc. | -4.95% | — | — | — | — | |
| Johnson & Johnson | 10.78% | — | — | — | — | |
| Merck & Co. Inc. | 0.61% | — | — | — | — | |
| Pfizer Inc. | 18.46% | — | — | — | — | |
| Regeneron Pharmaceuticals Inc. | 18.61% | — | — | — | — | |
| Thermo Fisher Scientific Inc. | -0.06% | — | — | — | — | |
| Vertex Pharmaceuticals Inc. | -14.45% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 2.52% | 15.89% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.25% | 14.62% | — | — | — | |
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 × 837 ÷ [(17,432 + 16,876) ÷ 2] = 4.88%
2 Click competitor name to see calculations.
An analysis of financial reporting quality from 2019 to 2022 reveals significant volatility in aggregate accruals despite a relatively stable base of net operating assets. The shift in the cash-flow-statement-based accruals ratio indicates a transition from a period where cash flows exceeded reported earnings to a period where reported earnings exceeded cash flows.
- Net Operating Assets Stability
- Net operating assets remained consistent throughout the period, starting at US$ 17,009 million in 2019 and ending at US$ 17,432 million in 2022. This stability indicates that the fluctuations observed in the accruals ratio are driven by changes in the relationship between earnings and cash flow rather than significant expansions or contractions of the asset base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited a sharp decline in 2020, falling to -US$ 884 million. This was followed by a recovery to US$ 127 million in 2021 and a substantial increase to US$ 837 million in 2022. This trajectory demonstrates a reversal in the direction and magnitude of non-cash adjustments to earnings over the four-year span.
- Accruals Ratio Trends
- The accruals ratio mirrored the volatility of the aggregate accruals, moving from -0.21% in 2019 to a low of -5.19% in 2020, before rising to 0.75% in 2021 and 4.88% in 2022. The transition from a negative ratio in 2020 to a positive ratio in 2022 suggests that reported earnings were lower than cash flows in 2020, while by 2022, accruals contributed more significantly to earnings than to cash flow generation.
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