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

Gordon, Elizabeth A., Henry, Elaine, Jorgensen, Bjorn N. and Linthicum, Cheryl L. (2017) Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22 (2). pp. 839-872. ISSN 1380-6653

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Identification Number: 10.1007/s11142-017-9387-1

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 IFRSreporting 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.

Item Type: Article
Official URL: http://link.springer.com/journal/11142
Additional Information: © 2017 The Authors © CC BY 4.0
Divisions: Accounting
Subjects: H Social Sciences > HG Finance
JEL classification: M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Sets: Departments > Accounting
Date Deposited: 04 Aug 2016 15:08
Last Modified: 20 Jul 2019 02:25
URI: http://eprints.lse.ac.uk/id/eprint/67367

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