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
Norfolk Southern Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 38,493) | 37,962) | 37,923) | 36,239) | 35,711) | |
| Less: Cash and cash equivalents | 839) | 1,115) | 580) | 358) | 690) | |
| Operating assets | 37,654) | 36,847) | 37,343) | 35,881) | 35,021) | |
| Operating Liabilities | ||||||
| Total liabilities | 24,852) | 23,171) | 22,739) | 20,877) | 19,352) | |
| Less: Short-term debt | —) | —) | —) | —) | 100) | |
| Less: Current maturities of long-term debt | 553) | 579) | 316) | 585) | 600) | |
| Less: Long-term debt, excluding current maturities | 13,287) | 12,102) | 11,880) | 10,560) | 9,136) | |
| Operating liabilities | 11,012) | 10,490) | 10,543) | 9,732) | 9,516) | |
| Net operating assets1 | 26,642) | 26,357) | 26,800) | 26,149) | 25,505) | |
| Balance-sheet-based aggregate accruals2 | 285) | (443) | 651) | 644) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 1.08% | -1.67% | 2.46% | 2.49% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| FedEx Corp. | — | — | — | — | — | |
| Uber Technologies Inc. | — | — | — | — | — | |
| Union Pacific Corp. | — | — | — | — | — | |
| United Airlines Holdings Inc. | — | — | — | — | — | |
| United Parcel Service Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 200.00% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 37,654 – 11,012 = 26,642
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 26,642 – 26,357 = 285
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 285 ÷ [(26,642 + 26,357) ÷ 2] = 1.08%
4 Click competitor name to see calculations.
An analysis of balance-sheet-based accruals reveals a period of relative stability followed by significant volatility in financial reporting quality indicators between 2018 and 2021.
- Net Operating Assets Trend
- Net operating assets exhibited minimal variance over the four-year period. The values remained concentrated between 26,149 million USD and 26,800 million USD, suggesting a stable operating asset base that provides a consistent baseline for analyzing accrual levels.
- Accruals Volatility and Ratio Shifts
- The balance-sheet-based aggregate accruals and the corresponding ratio showed a distinct pattern of fluctuation. In 2018 and 2019, the accruals ratio remained steady at 2.49% and 2.46%, respectively. A sharp transition occurred in 2020, where aggregate accruals shifted to a negative 443 million USD, resulting in a negative accruals ratio of -1.67%.
- Recovery and Recent Positioning
- A reversal of the 2020 trend is observed in 2021, as aggregate accruals returned to a positive 285 million USD. This shift brought the accruals ratio back to 1.08%, although this level remained lower than the benchmarks established in 2018 and 2019.
The shift to negative accruals in 2020 represents a notable divergence from the prior years' patterns, indicating a temporary change in the relationship between reported earnings and cash-based operating assets before a return to positive accruals in 2021.
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Cash-Flow-Statement-Based Accruals Ratio
Norfolk Southern Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income | 3,005) | 2,013) | 2,722) | 2,666) | 5,404) | |
| Less: Net cash provided by operating activities | 4,255) | 3,637) | 3,892) | 3,726) | 3,253) | |
| Less: Net cash used in investing activities | (1,222) | (1,175) | (1,764) | (1,658) | (1,481) | |
| Cash-flow-statement-based aggregate accruals | (28) | (449) | 594) | 598) | 3,632) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -0.11% | -1.69% | 2.24% | 2.32% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| FedEx Corp. | — | — | — | — | — | |
| Uber Technologies Inc. | — | — | — | — | — | |
| Union Pacific Corp. | — | — | — | — | — | |
| United Airlines Holdings Inc. | — | — | — | — | — | |
| United Parcel Service Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | 2.42% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -17.51% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -28 ÷ [(26,642 + 26,357) ÷ 2] = -0.11%
2 Click competitor name to see calculations.
The analysis of financial reporting quality between 2018 and 2021 reveals a significant shift in the relationship between reported earnings and cash flows. While net operating assets remained relatively stable throughout the period, the aggregate accruals transitioned from positive values to negative values, impacting the accruals ratio.
- Net Operating Assets Trend
- Net operating assets exhibited minimal volatility over the four-year period, starting at US$ 26,149 million in 2018 and ending at US$ 26,642 million in 2021. The slight increase and subsequent stabilization suggest a consistent asset base used to generate operating results.
- Cash-Flow-Statement-Based Aggregate Accruals
- A marked reversal in accruals is observed. In 2018 and 2019, aggregate accruals were positive and stable at US$ 598 million and US$ 594 million, respectively. However, this trend inverted sharply in 2020, with accruals dropping to negative US$ 449 million, before moderating to negative US$ 28 million in 2021. This shift indicates a transition from a period where reported earnings exceeded cash flows to a period where cash flow from operations surpassed reported earnings.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio reflects the aforementioned trend, declining from 2.32% in 2018 to -0.11% by 2021. The transition into negative territory in 2020 (-1.69%) suggests a higher quality of earnings during the latter part of the period, as negative accruals typically indicate conservative accounting or a strong cash-conversion cycle where earnings are backed by actual cash inflows.
Overall, the data indicates a move toward more conservative financial reporting or a shift in operational cash flow dynamics starting in 2020. The convergence of the accruals ratio toward zero in 2021 suggests a closer alignment between net income and cash flow from operations compared to the 2018-2019 period.
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