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
ServiceNow Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 26,038) | 20,383) | 17,387) | 13,299) | 10,798) | |
| Less: Cash and cash equivalents | 3,726) | 2,304) | 1,897) | 1,470) | 1,728) | |
| Less: Marketable securities | 2,558) | 3,458) | 2,980) | 2,810) | 1,576) | |
| Operating assets | 19,754) | 14,621) | 12,510) | 9,019) | 7,494) | |
| Operating Liabilities | ||||||
| Total liabilities | 13,074) | 10,774) | 9,759) | 8,267) | 7,103) | |
| Less: Current debt, net | —) | —) | —) | —) | 92) | |
| Less: Long-term debt, net, less current portion | 1,491) | 1,489) | 1,488) | 1,486) | 1,484) | |
| Operating liabilities | 11,583) | 9,285) | 8,271) | 6,781) | 5,527) | |
| Net operating assets1 | 8,171) | 5,336) | 4,239) | 2,238) | 1,967) | |
| Balance-sheet-based aggregate accruals2 | 2,835) | 1,097) | 2,001) | 271) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 41.98% | 22.91% | 61.79% | 12.89% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 2.83% | 35.69% | 16.32% | 21.70% | 27.93% | |
| Adobe Inc. | -5.28% | -3.83% | 1.85% | -8.24% | 14.14% | |
| AppLovin Corp. | — | -0.63% | -1.52% | 36.28% | — | |
| Cadence Design Systems Inc. | — | 39.84% | 11.17% | 26.65% | 4.43% | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | — | -28.51% | -35.73% | 17.56% | 173.39% | |
| International Business Machines Corp. | — | 2.79% | 2.42% | 1.55% | -7.39% | |
| Intuit Inc. | 3.52% | 3.35% | -1.74% | 85.68% | 139.73% | |
| Microsoft Corp. | 21.81% | 52.18% | 22.96% | 42.27% | 40.52% | |
| Oracle Corp. | 20.79% | 4.30% | 51.77% | 9.90% | 5.62% | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | 32.24% | 89.91% | 137.01% | -124.73% | 85.21% | |
| Salesforce Inc. | 0.71% | -2.46% | -2.30% | 57.74% | 10.87% | |
| Synopsys Inc. | 154.48% | 7.85% | 13.85% | 5.01% | 0.36% | |
| Workday Inc. | 20.74% | 28.44% | -11.24% | 55.93% | -15.99% | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 0.00% | 26.16% | 18.26% | 29.59% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 0.00% | 21.35% | 8.92% | 18.19% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 19,754 – 11,583 = 8,171
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 8,171 – 5,336 = 2,835
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,835 ÷ [(8,171 + 5,336) ÷ 2] = 41.98%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibited significant fluctuation over the observed period. Net operating assets increased consistently year over year, while aggregate accruals demonstrated a more volatile pattern. This resulted in substantial shifts in the accruals ratio.
- Net Operating Assets
- Net operating assets increased from US$2,238 million in 2022 to US$8,171 million in 2025, representing a substantial and consistent growth trajectory. This indicates expanding business operations and asset base.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals experienced a marked increase from US$271 million in 2022 to US$2,001 million in 2023. This was followed by a decrease to US$1,097 million in 2024, and a subsequent rise to US$2,835 million in 2025. The variability suggests potential changes in the timing of revenue and expense recognition, or shifts in working capital management.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio increased dramatically from 12.89% in 2022 to 61.79% in 2023, indicating a significantly higher proportion of earnings derived from accruals relative to cash flows. The ratio then decreased to 22.91% in 2024, before rising again to 41.98% in 2025. A consistently high accruals ratio, particularly the peak in 2023, may warrant further investigation into the quality of earnings and the potential for aggressive accounting practices. The fluctuations observed suggest that the relationship between accruals and operating assets is not stable.
The substantial increase in the accruals ratio in 2023, followed by a decrease and subsequent increase, suggests a dynamic relationship between reported earnings and underlying cash flows. Continued monitoring of this ratio is recommended to assess the sustainability of earnings and identify any potential red flags regarding financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
ServiceNow Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | 1,748) | 1,425) | 1,731) | 325) | 230) | |
| Less: Net cash provided by operating activities | 5,444) | 4,267) | 3,398) | 2,723) | 2,191) | |
| Less: Net cash used in investing activities | (1,689) | (2,501) | (2,167) | (2,583) | (1,607) | |
| Cash-flow-statement-based aggregate accruals | (2,007) | (341) | 500) | 185) | (354) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -29.72% | -7.12% | 15.44% | 8.80% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | -6.95% | 24.31% | -0.19% | 11.87% | 11.80% | |
| Adobe Inc. | -14.85% | -21.90% | -21.73% | -19.93% | 9.21% | |
| AppLovin Corp. | — | -10.24% | -15.40% | 22.07% | — | |
| Cadence Design Systems Inc. | — | 17.36% | 3.78% | 15.03% | -5.75% | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | — | 30.92% | 53.36% | -34.44% | -28.18% | |
| International Business Machines Corp. | — | -3.73% | 0.99% | -7.22% | -1.64% | |
| Intuit Inc. | -0.10% | -8.44% | -8.74% | 25.60% | 58.72% | |
| Microsoft Corp. | 12.55% | 30.89% | 5.22% | 13.42% | 17.68% | |
| Oracle Corp. | 13.98% | -1.01% | 42.79% | -30.58% | 25.81% | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -8.91% | 33.84% | -37.95% | -196.64% | -68.30% | |
| Salesforce Inc. | -6.66% | -8.44% | -8.49% | 21.96% | 10.57% | |
| Synopsys Inc. | 71.60% | -7.64% | 0.20% | -4.64% | -4.88% | |
| Workday Inc. | -4.25% | 34.56% | 18.64% | -0.65% | -18.51% | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 0.00% | 11.97% | 7.19% | 2.21% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 0.00% | 6.25% | 1.40% | 2.99% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -2,007 ÷ [(8,171 + 5,336) ÷ 2] = -29.72%
2 Click competitor name to see calculations.
Net operating assets increased consistently over the observed period, rising from US$2,238 million in 2022 to US$8,171 million in 2025. However, cash-flow-statement-based aggregate accruals exhibited significant volatility. Initially increasing substantially, they then turned negative and declined sharply. Consequently, the cash-flow-statement-based accruals ratio demonstrated a corresponding pattern of fluctuation.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals began at US$185 million in 2022 and increased to US$500 million in 2023, indicating a growing reliance on accruals relative to cash flows. This trend reversed dramatically in 2024, with accruals becoming negative at US$-341 million. The decline accelerated in 2025, reaching US$-2,007 million. This substantial negative value suggests a significant reversal of previously recognized accruals or a considerable reduction in accrual-based earnings relative to cash flows.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals. It rose from 8.80% in 2022 to 15.44% in 2023, suggesting an increasing proportion of reported earnings derived from accruals rather than cash. A substantial shift occurred in 2024, with the ratio falling to -7.12%. This negative value indicates that cash flows exceeded accrual-based earnings. The ratio continued to decline, reaching -29.72% in 2025, signifying a considerable divergence between cash flows and reported earnings. This substantial negative ratio warrants further investigation.
The increasing net operating assets alongside the fluctuating accruals and accruals ratio suggest a complex relationship between operational growth and earnings quality. The shift from positive to negative accruals, and the corresponding movement in the accruals ratio, could indicate changes in accounting practices, revenue recognition policies, or underlying business performance. The significant negative accruals ratio in 2025 requires further scrutiny to determine the underlying causes and potential implications for the reliability of reported earnings.