Flexibility in Cash Flow Classification under IFRS: Determinants and Consequences

56 Pages Posted: 21 May 2014 Last revised: 6 Dec 2014

See all articles by Elizabeth A. Gordon

Elizabeth A. Gordon

Temple University - Department of Accounting

Elaine Henry

Stevens Institute of Technology - School of Business

Bjorn Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Cheryl L. Linthicum

University of Texas - San Antonio

Multiple version iconThere are 3 versions of this paper

Date Written: May 30, 2013

Abstract

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.

Keywords: Statement of cash flows, classification shifting, IFRS, operating cash flows

JEL Classification: M41, F23

Suggested Citation

Gordon, Elizabeth A. and Henry, Elaine and Jorgensen, Bjorn N and Linthicum, Cheryl L., Flexibility in Cash Flow Classification under IFRS: Determinants and Consequences (May 30, 2013). Available at SSRN: https://ssrn.com/abstract=2439383 or http://dx.doi.org/10.2139/ssrn.2439383

Elizabeth A. Gordon (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Elaine Henry

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Bjorn N Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Department of Accounting Room, OLD 2.17
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/bjorn-jorgensen

Cheryl L. Linthicum

University of Texas - San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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