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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Waste Management Inc. pages available for free this week:
- Balance Sheet: Assets
- Common-Size Income Statement
- Common-Size Balance Sheet: Assets
- Analysis of Profitability Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Enterprise Value (EV)
- Enterprise Value to EBITDA (EV/EBITDA)
- Dividend Discount Model (DDM)
- Selected Financial Data since 2005
- Net Profit Margin since 2005
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Balance-Sheet-Based Accruals Ratio
Waste Management Inc., balance sheet computation of aggregate accruals
US$ in millions
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
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
- Net Operating Assets
- The net operating assets increased consistently from 2018 to 2020, rising from 16,241 million USD in 2018 to 20,711 million USD in 2020. However, in 2021, there was a slight decline to 20,413 million USD. Overall, the increase over the four-year period indicates expansion in the company's operating asset base, although the decrease in the most recent year may suggest stabilization or a strategic adjustment.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibited significant variability. From 730 million USD in 2018, the figure increased marginally to 766 million USD in 2019, followed by a substantial rise to 3,704 million USD in 2020. In 2021, the accruals reversed sharply to a negative 298 million USD. This considerable fluctuation illustrates episodic changes in accrual accounting components, which can impact earnings quality and suggests potential changes in accounting estimates or operational dynamics.
- Balance-sheet-based Accruals Ratio
- The accruals ratio followed a similar pattern to aggregate accruals, remaining stable at approximately 4.6% in 2018 and 2019, before sharply increasing to 19.64% in 2020. In 2021, it turned negative to -1.45%. The pronounced spike in 2020 indicates a high level of accruals relative to net operating assets, which might raise concerns about earnings quality and the sustainability of reported earnings during that period. The negative ratio in 2021 could reflect adjustments or reversals in accruals, potentially signaling a correction or improved cash flow alignment.
Cash-Flow-Statement-Based Accruals Ratio
Waste Management Inc., cash flow statement computation of aggregate accruals
US$ in millions
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 × ÷ [( + ) ÷ 2] =
- Net Operating Assets
- The net operating assets demonstrated a rising trend from 2018 to 2020, increasing from US$16,241 million to US$20,711 million. However, there was a slight decrease in 2021 to US$20,413 million, indicating a stabilization or minor reduction in operating asset investment after consistent growth.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals showed notable variability over the period. In 2018, the accruals were US$524 million and declined to US$172 million in 2019, which may reflect improved cash flow quality or operational efficiency. Subsequently, there was a significant spike to US$2,940 million in 2020, followed by a sharp reversal to a negative value of US$-628 million in 2021. This volatility suggests fluctuations in earnings quality and potential irregularities or adjustments affecting cash flow measurements during this timeframe.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals, starting at 3.3% in 2018 and decreasing to 1.03% in 2019, indicating a reduction in accruals relative to net operating assets and potentially more conservative accounting or stronger cash conversion. The ratio then surged significantly to 15.59% in 2020, consistent with the large accruals reported, and reversed to -3.05% in 2021, reflecting the negative aggregate accruals and a sudden change in earnings components relative to net operating assets.