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financial-reporting-and-analysis
27 Sep 2023
Several differences exist between how the cash flow statement is prepared under IFRS and US GAAP.
The most significant difference is that IFRS gives companies more flexibility regarding how interest is paid or received, how dividend paid or received is reported, and how income tax expense is classified. Despite the flexibility provided by IFRS, companies must use a consistent classification each year. Besides, they must separately disclose the amounts of interest and dividends received and paid and where the amounts are reported.
IFRS vs. US GAAP Cash Flow Statements
The elements below summarize the significant differences between how the cash flow statement is prepared under IFRS and US GAAP.
IFRS Requirements
- Interest received may be classified either as an operating activity or an investing activity.
- Interest paid may be classified as an operating or financing activity.
- Dividends received may be classified either as an operating activity or an investing activity.
- Dividends paid may be classified as an operating or financing activity.
- Income tax expense is generally classified as an operating activity. Despite this, a portion of it may be allocated for investing in or financing activities if specifically related to those activities.
- Bank overdrafts are classified as part of cash and cash equivalents.’
- The direct or indirect method may be used to report cash flow from operating activities. However, of the two, the direct method is generally encouraged.
US GAAP Requirements
- Interest received must be classified as an operating activity.
- Interest paid must be classified as an operating activity.
- Dividends received must be classified as an operating activity.
- Dividends paid must be classified as a financing activity.
- Income tax expense must be classified as an operating activity.
- Bank overdrafts are not considered part of cash and cash equivalents. Instead, they are classified as financing activities.
- Either the direct or indirect method may be used for reporting cash flow from operating activities. It is noteworthy, though, that the direct method is encouraged. However, unlike under IFRS, a reconciliation of net income to cash flow from operating activities must be provided regardless of the method used.
Question #1
Which of the following statements is inaccurate?
- Under IFRS, dividends paid may be classified as an operating or financing activity, while under US GAAP, it can only be reported as a financing activity.
- Under IFRS, interest paid may be classified as an operating or financing activity, while under US GAAP, it can only be reported as a financing activity.
- Under IFRS, dividends received may be classified as an operating or an investing activity, while under US GAAP, it can only be reported as an operating activity.
Solution
The correct answer is B.
Under IFRS, interest paid may be classified as an operating or financing activity. However, under US GAAP, it can only be reported as an operating activity, not a financing activity.
Options A and C give accurate statements.
Question #2
A company paid $500,000 as dividends during the year. How would that company classify this payment on the cash flow statement under IFRS and US GAAP?
- It would be classified as a financing cash outflow under both accounting standards.
- Under IFRS, it would be classified as an operating or as a financing cash flow. Under US GAAP, it would be classified as a financing cash flow.
- Under IFRS, it would be classified as an operating or as a financing cash flow. Under US GAAP, it would be classified as an operating cash flow.
Solution
The correct answer is B.
Activity: Dividends paid
IFRS Classification: Operating/Financing
US-GAAP Classification: Financing
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