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
Mastercard 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 | 38,724) | 37,669) | 33,584) | 29,236) | 24,860) | |
| Less: Cash and cash equivalents | 7,008) | 7,421) | 10,113) | 6,988) | 6,682) | |
| Less: Restricted cash for litigation settlement | 589) | 586) | 586) | 584) | 553) | |
| Less: Investments | 400) | 473) | 483) | 688) | 1,696) | |
| Less: Restricted security deposits held for customers | 1,568) | 1,873) | 1,696) | 1,370) | 1,080) | |
| Operating assets | 29,159) | 27,316) | 20,706) | 19,606) | 14,849) | |
| Operating Liabilities | ||||||
| Total liabilities | 32,347) | 30,257) | 27,067) | 23,245) | 19,371) | |
| Less: Short-term debt | 274) | 792) | 649) | —) | 500) | |
| Less: Long-term debt, excluding current portion | 13,749) | 13,109) | 12,023) | 8,527) | 5,834) | |
| Operating liabilities | 18,324) | 16,356) | 14,395) | 14,718) | 13,037) | |
| Net operating assets1 | 10,835) | 10,960) | 6,311) | 4,888) | 1,812) | |
| Balance-sheet-based aggregate accruals2 | (125) | 4,649) | 1,423) | 3,076) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -1.15% | 53.84% | 25.41% | 91.82% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 21.70% | 27.93% | — | — | — | |
| Adobe Inc. | -8.24% | 14.14% | — | — | — | |
| AppLovin Corp. | 36.28% | — | — | — | — | |
| Cadence Design Systems Inc. | 26.65% | — | — | — | — | |
| Datadog Inc. | 17.56% | — | — | — | — | |
| International Business Machines Corp. | 1.55% | — | — | — | — | |
| Intuit Inc. | 85.68% | — | — | — | — | |
| Microsoft Corp. | 42.27% | — | — | — | — | |
| Oracle Corp. | 9.90% | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | — | — | — | — | |
| Salesforce Inc. | 57.74% | — | — | — | — | |
| ServiceNow Inc. | 12.89% | — | — | — | — | |
| Synopsys Inc. | 5.01% | 0.36% | — | — | — | |
| Workday Inc. | 55.93% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 29.53% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 19.09% | 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
= 29,159 – 18,324 = 10,835
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 10,835 – 10,960 = -125
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -125 ÷ [(10,835 + 10,960) ÷ 2] = -1.15%
4 Click competitor name to see calculations.
An analysis of the financial reporting quality between 2019 and 2022 reveals significant volatility in accrual levels relative to the growth of net operating assets. While the asset base expanded considerably over the period, the reliance on accruals to drive reported earnings fluctuated sharply, ending with a near-zero ratio in the final year.
- Net Operating Assets Trend
- Net operating assets exhibited a strong growth trajectory, increasing from US$ 4,888 million in 2019 to a peak of US$ 10,960 million in 2021. This represents a substantial expansion of the operational balance sheet, which remained relatively stable through December 31, 2022, closing at US$ 10,835 million.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals showed inconsistent patterns. Following a decline from US$ 3,076 million in 2019 to US$ 1,423 million in 2020, there was a sharp increase to US$ 4,649 million in 2021. This was followed by a dramatic reversal in 2022, where accruals became negative, reaching US$ -125 million.
- Accruals Ratio Interpretation
- The accruals ratio, which serves as a proxy for earnings quality, shifted from a high of 91.82% in 2019 to a low of -1.15% in 2022. The high ratio in 2019 and the rebound to 53.84% in 2021 indicate periods where a larger portion of earnings was comprised of non-cash accruals. Conversely, the negative ratio observed at the end of 2022 suggests that cash flows exceeded reported accrual-based earnings, typically signaling higher financial reporting quality.
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Cash-Flow-Statement-Based Accruals Ratio
Mastercard 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 | 9,930) | 8,687) | 6,411) | 8,118) | 5,859) | |
| Less: Net cash provided by operating activities | 11,195) | 9,463) | 7,224) | 8,183) | 6,223) | |
| Less: Net cash used in investing activities | (1,470) | (5,272) | (1,879) | (1,640) | (506) | |
| Cash-flow-statement-based aggregate accruals | 205) | 4,496) | 1,066) | 1,575) | 142) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.88% | 52.06% | 19.04% | 47.01% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | 11.87% | 11.80% | — | — | — | |
| Adobe Inc. | -19.93% | 9.21% | — | — | — | |
| AppLovin Corp. | 22.07% | — | — | — | — | |
| Cadence Design Systems Inc. | 15.03% | — | — | — | — | |
| Datadog Inc. | -34.44% | — | — | — | — | |
| International Business Machines Corp. | -7.22% | — | — | — | — | |
| Intuit Inc. | 25.60% | — | — | — | — | |
| Microsoft Corp. | 13.42% | — | — | — | — | |
| Oracle Corp. | -30.58% | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | — | — | — | — | |
| Salesforce Inc. | 21.96% | — | — | — | — | |
| ServiceNow Inc. | 8.80% | — | — | — | — | |
| Synopsys Inc. | -4.64% | -4.88% | — | — | — | |
| Workday Inc. | -0.65% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 2.29% | 21.87% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 3.25% | 15.65% | — | — | — | |
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 × 205 ÷ [(10,835 + 10,960) ÷ 2] = 1.88%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between 2019 and 2022 reveals significant volatility in the relationship between earnings and cash flows, characterized by sharp fluctuations in aggregate accruals relative to net operating assets.
- Net Operating Assets Trend
- A general upward trajectory in net operating assets is observed, growing from US$ 4,888 million in 2019 to US$ 10,835 million by 2022. The most substantial expansion occurred between 2020 and 2021, where assets increased by approximately 73.6%, before stabilizing in 2022.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited a non-linear pattern. After a decrease from 2019 to 2020, there was a sharp spike in 2021 to US$ 4,496 million. This peak was followed by a dramatic contraction in 2022, falling to US$ 205 million, representing the lowest absolute accrual level within the analyzed four-year period.
- Accruals Ratio and Earnings Quality
- The cash-flow-statement-based accruals ratio demonstrates extreme variance, which serves as a proxy for financial reporting quality. The ratio declined from 47.01% in 2019 to 19.04% in 2020, before surging to a peak of 52.06% in 2021. The subsequent drop to 1.88% in 2022 indicates a period where reported earnings were almost entirely supported by cash flows, suggesting a high degree of earnings quality and a minimal reliance on accounting accruals for that specific fiscal year.
The divergence between the steady growth of net operating assets and the volatile movement of the accruals ratio suggests that the components of the balance sheet expanded independently of the accrual-based earnings adjustments. The sharp correction in 2022 suggests a normalization of reporting quality following the volatility observed in 2021.
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