Flexibility in cash-flow classification under IFRS: determinants and consequences

Elizabeth A. Gordon; Elaine Henry; Bjorn Jorgensen; Cheryl L. Linthicum

doi:10.1007/s11142-017-9387-1

Flexibility in cash-flow classification under IFRS: determinants and consequences

Elizabeth A. Gordon¹; Elaine Henry²; Bjorn Jorgensen³; Cheryl L. Linthicum⁴

¹ Temple University · ² Stevens Institute of Technology · ³ London School of Economics and Political Science · ⁴ The University of Texas at San Antonio

Review of Accounting Studies 2017 open access

International Financial Reporting Standards (IFRS) allow managers flexibility in classifying interest paid, interest received, and dividends received within operating, investing, or financing activities within the statement of cash flows. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 76, 60, and 57% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, higher leverage, and accessing equity markets more frequently. In analyzing the consequences of reporting flexibility, we find some evidence that the market’s assessment of the persistence of operating cash flows and accruals varies with the firm’s classification choices and the results of certain OCF prediction models are sensitive to classification choices.

DOI: 10.1007/s11142-017-9387-1
Volume: 22 (2)
Pages: 839-872
Language: en
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