AAA Spark Meeting of Regions

How Do Uniformity and Flexibility in Classification Standards Affect Cash Flow Statement Comparability?

• In Event: FAR: Financial Statement Comparabiity and COVID-19 impact on organizational outcomes

Abstract

I examine the conditions under which uniformity or flexibility in cash flow classification standards affects the comparability of cash flow statement information. The discretion afforded by flexible standards can better reflect differences among underlying transactions, while uniform standards can better withstand managerial reporting opportunism. I study this question by exploiting the different extent of flexibility permitted under International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP) in classifying cash interest paid, interest and dividends received. I find that holding constant classification opportunism, cash flow information is more comparable under flexible classification standards than uniform standards when cash flows are more heterogeneous in nature relative to peers. Further, I show that classification flexibility impairs comparability when firms experience greater opportunistic classification incentives. To my knowledge, this is the first study to directly examine the comparability effect of different cash flow classification standards. It also provides timely empirical evidence for IASB’s recent effort to improve cash flow statement comparability via changes in classification guidance.

Author

• Chunzi (Mayer) Liang, University of Wisconsin - Madison