ABSTRACT
This study explores how flexibility in classification standards affects the production of comparable cash flow information. In the context of cash flow reporting, comparability means users can infer similarities (differences) in transactions from similar (different) classification of items across firms. Current cash flow classification guidance is a collection of uniform and flexible standards with standard setters sometimes taking different approaches for the same items. I exploit variation in flexibility permitted across U.S. GAAP and IFRS in classifying cash interest paid, cash interest received and dividends received, and find that flexibility produces more comparable cash flows when firms have a more heterogeneous interest and dividend generating process than peers. Additionally, opportunistic classification incentives undermine cash flow comparability more under flexible standards. This is the first study to examine comparability implications of classification flexibility, thereby providing timely evidence for IASB’s effort to improve cash flow statement comparability via changes in classification guidance.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: G18; M41.
