Flexibility in Cash-Flow Classification under IFRS: Determinants and Consequences

Elizabeth A. Gordon, Elaine Henry, Bjørn N. Jørgensen, Cheryl L. Linthicum

Research output: Contribution to journalJournal articleResearchpeer-review


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.
Original languageEnglish
JournalReview of Accounting Studies
Issue number2
Pages (from-to)839-872
Number of pages34
Publication statusPublished - Jun 2017
Externally publishedYes


  • Statement of cash flow
  • Classification shifting
  • IFRS
  • Operating cash flows

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