9/16/2023 0 Comments Dividends in cash flow statement![]() ![]() 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). Sorry if you were looking for a totally definitive answer, this one is not so cut-and-dry.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. If you're outside the US, I would also check with your local accounting authority if they have any preference or follow any particular option (teacher, lecturer, textbook or accounting standards board). If you're in the US, financing activities only. So bottom line: If you're outside the US, dividends paid can go under either operating activities or financing activities. Both investments and loans are sources of finance, so paying them should also go under this section. Since repayments of loans to the business also go under this section (cash flow from financing activities), it seems logical to include dividends paid to investors in this section too. This also makes sense as the investors were the source of finance for the business, and paying them dividends is a sort of repayment to them. However, I have also heard that it is possible to place dividends paid under cash flow from financing activities. The reason for this is that it could be considered to be a regular part of one's operations or operating activities - one usually pays dividends once a year to one's investors (the business owners) as standard company practice. From what I was taught (which was outside the US), the usual practice is to put it under cash flow from operating activities. However, according to US GAAP (Generally Accepted Accounting Principles) Accounting Standards Codification Topic 230, dividends paid must be classified under financing activities. Alternatively, dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an entity to pay dividends out of operating cash flows." "Dividends paid may be classified as a financing cash flow because they are a cost of obtaining financial resources. ![]() Q: Does the payment of dividends go under financing activities or operating activities in the cash flow statement?Ī: The answer to this is not so straightforward.Īccording to the definitive international statement on this, International Accounting Standards (IAS) 7, Statement of Cash Flows: Dividends Paid under Financing or Operating Activities? ![]()
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