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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Reynolds American Inc. pages available for free this week:
- Common-Size Income Statement
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Reportable Segments
- Price to FCFE (P/FCFE)
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Revenues
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Reynolds American Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Long-term debt, less current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Philip Morris International Inc. | ||||||
Based on: 10-K (reporting date: 2016-12-31), 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).
1 2016 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= – =
3 2016 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 indicates significant fluctuations in the reported financial quality measures over the four-year period.
- Net operating assets
- The net operating assets remained relatively stable between 2013 and 2014, showing a slight decline from 8,766 million US dollars to 8,639 million US dollars. However, there was a marked increase in 2015, where the value surged to 32,983 million US dollars, maintaining a similar level in 2016 with 32,825 million US dollars. This substantial increase suggests a significant change in asset base or balance sheet structure beginning in 2015.
- Balance-sheet-based aggregate accruals
- The aggregate accruals showed high volatility. Starting at a positive figure of 916 million US dollars in 2013, the value reversed to a negative -127 million US dollars in 2014. In 2015, there was an extraordinary jump to 24,344 million US dollars, which then sharply reverted to negative -158 million US dollars in 2016. Such oscillations might indicate changes in earnings management or shifts in accounting policies during these years.
- Balance-sheet-based accruals ratio
- This ratio, which expresses aggregate accruals as a percentage of net operating assets, also showed extreme variance. From a positive 11.03% in 2013, it dropped to -1.46% in 2014, then spiked dramatically to 116.98% in 2015 before declining back to -0.48% in 2016. The 2015 figure is particularly notable, exceeding 100%, indicating that aggregate accruals vastly outweighed net operating assets for that year. This is indicative of either highly unusual accrual activity or possible accounting adjustments.
Overall, the data suggests a period of relative stability in 2013–2014, followed by considerable anomalies or structural changes in 2015, and a return towards previous levels in 2016. Such volatility, especially in accrual values and ratios, warrants closer examination to understand the underlying causes, including potential changes in accounting methodology, asset base valuation, or financial reporting practices during this timeframe.
Cash-Flow-Statement-Based Accruals Ratio
Reynolds American Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash flows from operating activities | ||||||
| Less: Net cash flows (used in) from investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Philip Morris International Inc. | ||||||
Based on: 10-K (reporting date: 2016-12-31), 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).
1 2016 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 between 2013 and 2014, experiencing a slight decrease from 8,766 million USD to 8,639 million USD. A significant increase occurred in 2015, with the value rising sharply to 32,983 million USD, followed by a minor decrease to 32,825 million USD in 2016. This shift indicates a substantial expansion in the company's operating assets starting in 2015, which then stabilized the following year.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed a dramatic change over the period. Initially, there was a decline from 523 million USD in 2013 to 52 million USD in 2014, indicating a reduction in non-cash working capital adjustments. In 2015, aggregate accruals spiked significantly to 13,062 million USD, aligning with the rise in net operating assets. In 2016, there was a reversal to a negative value of -285 million USD, suggesting that the company adjusted its accruals downward following the previous year’s large increase.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio remained low at 6.3% in 2013 and dropped further to 0.6% in 2014, reflecting modest accrual activity relative to operating assets. In 2015, the ratio surged dramatically to 62.76%, mirroring the substantial increase in aggregate accruals and net operating assets. By 2016, the ratio reversed sharply to -0.87%, indicating a negative accrual impact and a notable shift toward cash-based earnings or a reduction in the non-cash component.