Flexibility in cash-flow classification under IFRS: determinants and consequences

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. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRSreporting 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. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. 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. 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

Earnings quality: evidence from Canadian firms’ choice between IFRS and U.S. GAAP

For fiscal years starting on or after January 1, 2011, Canada abandoned Canadian Generally Accepted Accounting Principles (GAAP) and adopted International Financial Reporting Standards (IFRS), but permitted firms cross-listed in the U.S. to adopt U.S. GAAP instead. We document that the number of Canadian firms reporting under U.S. GAAP increased after Canada adopted IFRS. We find that cross-listed firms are more likely to choose IFRS if IFRS is the standard most commonly used by the leading global firms in their industry. In addition, we find that firms more likely to choose IFRS are larger, of civil law legal origin, have less U.S. operations, report exploration expense, have fewer U.S. shareholders and report higher stockholders’ equity under Canadian GAAP than under U.S. GAAP. Of these, we find that the convergence benefits of comparability with industry peers is the most significant determinant in firms’ choice of standard. Further, we are unable to document changes in earnings quality from cross-listed firms adopting IFRS or U.S. GAAP or that earnings quality changed for firms adopting IFRS relative to firms adopting U.S. GAAP

Have ‘European’ and US GAAP Measures of Income and Equity Converged under IFRS? Evidence from European Companies Listed in the US

The EU\u27s adoption of IFRS, combined with the SEC\u27s removal of the US GAAP reconciliation requirement for non‐US registrants reporting under IFRS, signifies a major shift toward the acceptance of global standards. Based on 20‐F reconciliations provided by the population of US-listed European companies filing IFRS‐based statements with the SEC in 2005, we examine whether European and US GAAP measures of income and equity converged under IFRS. We find that during the period immediately preceding IFRS, for our sample companies, European and US GAAP measures are generally comparable in respect of income and equity. However, as an exception to the latter, we find that UK GAAP yielded significantly lower measures of equity than US GAAP For companies adopting IFRS for the first time in 2005, we find a significant gap between IFRS and US GAAP measures of income, thereby, signifying de facto divergence from US GAAP in regard to income determination. Furthermore, we find that, following IFRS adoption, significant differences with US GAAP equity persisted for companies that previously reported using UK GAAP. Our findings, thus, support critics’ claims that standard‐setters, most notably the IASB and FASB, have more work to do to achieve a sufficient degree of convergence between IFRS and US GAAP that will convince the SEC to require US companies to use IFRS

Social responsibility and corporate reputation: The case of the Arthur Andersen Enron audit failure

We examine the influence of social responsibility ratings on market returns to Arthur Andersen (AA) clients following the Enron audit failure. Chaney and Philipich (2002) found that AA's loss of reputation resulted in negative market returns to AA clients following the Enron audit failure. Proponents of social responsibility argue that social responsibility can improve the reputation of the firm, while detractors argue that social responsibility expenditures are a poor use of shareholder money. If social responsibility sends a signal to investors regarding the reputation/ethics of management, social responsibility could mitigate the negative returns to AA clients following the Enron audit failure. Using a matched sample of AA and non-AA firms, we do not find evidence that social responsibility mitigated the negative returns to AA clients following the Enron audit failure. Our results are inconsistent with claims that social responsibility can burnish a firm's reputation in a time of crisis and with prior research indicating a positive relationship between social responsibility and market value.Social responsibility Corporate reputation Audit failure