Cash flow statements under IFRS vs US GAAP

Where do interest, dividends and taxes go?

US GAAP fixes them; IFRS gives a choice for four of the five. Memorize this table.

Item	IFRS	US GAAP
Interest received	operating or investing	operating
Dividends received	operating or investing	operating
Interest paid	operating or financing	operating
Dividends paid	operating or financing	financing
Taxes paid	operating, unless specifically tied to investing or financing	operating
Bank overdrafts	may be part of cash and cash equivalents	financing, not part of cash
Format	direct or indirect; direct encouraged	direct or indirect; direct encouraged; indirect reconciliation always required

Interest, dividends and taxesUS GAAP fixed, IFRS a choice

• Interest received Memorize US GAAP: operating
  • IFRS option 1 operating
  • IFRS option 2 investing
• Dividends received Memorize US GAAP: operating
  • IFRS option 1 operating
  • IFRS option 2 investing
• Interest paid Memorize US GAAP: operating
  • IFRS option 1 operating
  • IFRS option 2 financing
• Dividends paid Memorize US GAAP: financing
  • IFRS option 1 operating
  • IFRS option 2 financing
• Taxes paid Use it US GAAP: operating
  • IFRS operating unless specifically tied to investing or financing

Learn the interest received classification , the dividends received classification , the interest paid classification and the dividends paid classification as a set of four. The taxes paid classification is operating in almost every case. The one balance sheet quirk is bank overdrafts : IFRS can treat them as part of cash, US GAAP does not.

Pattern: money coming in can be classified under investing (it is the return on an investment), and money going out can be classified under financing (it is the cost of financing). US GAAP sticks everything to operating, except dividends paid.

Exam tip Say it as: US GAAP, everything interest-related is operating; only dividends paid escapes to financing.

On format, both systems note direct method encouraged : the direct format is preferred but not required. US GAAP requires a reconciliation of net income to CFO even when the direct method is used. Taxes follow the activity they relate to under IFRS only when they can be specifically identified, such as the tax on a gain from selling a long-term investment, which can then sit in investing.

Does the choice change operating cash flow?

Yes. Moving interest paid out of operating raises CFO; moving interest or dividends received out of operating lowers it. Two otherwise identical companies can report different CFO, with the same cash.

$$CFO_{GAAP} = CFO_{IFRS} - I_p + R$$

Here $I_p$ is interest paid shown in financing and $R$ is interest and dividends received shown in investing. Add back any dividends paid that the IFRS filer deducted in operating.

Move the four items yourself and read off the range.

Go deeper Why IFRS allows a choice

Interest can be seen as a cost of running the business or as a cost of financing it. IFRS leaves that call to management, but requires the policy to be applied consistently over time. A bank, for which interest is the core activity, would naturally keep it in operating.

Go deeper What analysts do about it

Check each filer’s policy in the notes before comparing CFO, cash conversion or free cash flow across companies. Restate to one basis, as above. An analyst should also note that a policy change by itself moves CFO without any change in the business.