Although an extensive literature examines classification shifting within the income statement and the balance sheet (Engel et al. 2008), Footnote 1 contracting (e.g., Dichev and Skinner 2002 Mulford and Comiskey 2005), and financial analysis (e.g., Estridge and Lougee 2007). We describe variation in firms’ cash-flow classification choices under IFRS, identify capital market incentives and firm reporting environment characteristics associated with these choices, and document consequences of classification flexibility.Ĭash flow, and particularly OCF, is well established as a basis for business valuation (e.g., Damodaran 2006 Imam et al. In contrast, IFRS allows firms the flexibility to report these items as operating cash flows (OCF) or as investing or financing. ![]() GAAP requires that firms classify interest paid, interest received, and dividends received as operating cash flows. This increased flexibility is apparent with regard to classifications within the statement of cash flows. International Financial Reporting Standards (IFRS) are perceived to allow managers more flexibility than generally accepted accounting principles in the United States (U.S. We examine the determinants and consequences of comparative flexibility in classification choices within the statement of cash flows. ![]() 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. 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. Reported OCF under IFRS tends to exceed what would be reported under U.S. ![]() 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. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). 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.
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