Flexibility in Cash Flow Reporting Classification Choices under IFRS

• In Event: Concurrent Session 4.4: IFRS, Culture, and Transfer Pricing

Abstract

Relative to U.S. GAAP, IFRS allows more flexibility in classifying certain items within the statement of cash flows. Where U.S. GAAP requires firms to classify interest paid, interest received, and dividends received as operating cash flows (OCF), IFRS allows firms to report these within OCF or classify them as investing or financing. Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 77%, 54%, and 49% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF tends to be higher under IFRS than it would be under U.S. GAAP classification. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, greater probability of default, and accessing equity markets more frequently. We also find the cross-listed firms in our sample do not necessarily make choices consistent with U.S. GAAP

Authors

• elizabeth gordon, temple university

• Bjorn N Jorgensen, University of Colorado at Boulder

• Elaine Henry, Fordham University

• Cheryl L. Linthicum, The University of Texas at San Antonio