Accounting Equations
Financial statement elements (assets, liabilities, owners’ equity, revenue and expenses) are used as... Read More
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 dividends paid or received are 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.
The elements below summarize the significant differences between how the cash flow statement is prepared under IFRS and US GAAP.
A summary of the above differences is summarized in the following table:
$$\begin{array}{l|l|l}\textbf{Item} & \textbf{IFRS} & \textbf{US GAAP} \\
\hline
\text{Interest received} & \text{Either an operating} & \text{Operating} \\
& \text{or investing activity} & \text{activity} \\
\hline
\text{Interest paid} & \text{Either an operating} & \text{Operating} \\
& \text{or financing activity} & \text{activity} \\
\hline
\text{Dividends received} & \text{Either an operating} & \text{Operating} \\
& \text{or investing activity} & \text{activity} \\
\hline
\text{Dividends paid} & \text{Either an operating} & \text{Financing} \\
& \text{or financing activity} & \text{activity} \\
\hline
\text{Income tax} & \text{Generally an operating} & \text{Operating} \\
& \text{activity, but a portion} & \text{activity} \\
& \text{is allocated to investing} & \\
& \text{or financing activities} & \\
& \text{if it is specifically} & \\
& \text{identifiable with those} & \\
& \text{activities} & \\
\hline
\text{Bank overdrafts} & \text{Part of “cash and} & \text{Financing} \\
& \text{cash equivalents”} & \text{activity} \\
\hline \text{Reporting method} & \text{-Either direct or} & \text{-Either direct or} \\ & \text{indirect method} & \text{indirect method} \\ & \text{may be used} & \text{may be used} \\ & \text{for reporting cash} & \text{for reporting cash} \\ & \text{flow from} & \text{flow from} \\ & \text{operating activities.} & \text{operating activities.} \\ & \text{-Although the direct} & \text{-Although the direct} \\ & \text{method is} & \text{method is} \\ & \text{encouraged.} & \text{encouraged.} \\ & & \text{-Unlike under IFRS,} \\ & & \text{however, a} \\ & & \text{reconciliation of net} \\ & & \text{income to cash flow} \\ & & \text{from operating} \\ & & \text{activities must be} \\ & & \text{provided regardless of} \\ & & \text{the method used.} \\ \hline
\end{array}$$
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