What are the key differences in cash flow classification between IFRS and US GAAP?

Question

AcadiFi · Accepted Answer

Cash flow classification is one of the most-tested CFA Level I topics, and the IFRS/GAAP differences are exam gold. Here's the definitive comparison:

```mermaid
flowchart LR
    subgraph US_GAAP["US GAAP (Fixed)"]
        A1["Interest paid → CFO"]
        A2["Interest received → CFO"]
        A3["Dividends paid → CFF"]
        A4["Dividends received → CFO"]
    end
    subgraph IFRS["IFRS (Flexible)"]
        B1["Interest paid → CFO or CFF"]
        B2["Interest received → CFO or CFI"]
        B3["Dividends paid → CFO or CFF"]
        B4["Dividends received → CFO or CFI"]
    end
```

**Complete Classification Table:**

| Item | US GAAP | IFRS |
|---|---|---|
| Interest paid | CFO (mandatory) | CFO **or** CFF (choice) |
| Interest received | CFO (mandatory) | CFO **or** CFI (choice) |
| Dividends paid | CFF (mandatory) | CFO **or** CFF (choice) |
| Dividends received | CFO (mandatory) | CFO **or** CFI (choice) |
| Taxes paid | CFO (mandatory) | CFO (default), can split if identifiable |
| Bank overdrafts | CFF | Part of cash equivalents (if repayable on demand) |

**Why this matters for analysis:**

When comparing Oakmont Technologies (US GAAP) to Vantage Group (IFRS), an analyst must check how Vantage classified these items. If Vantage puts interest paid in CFF instead of CFO, its CFO will appear **higher** than an equivalent US GAAP company.

**Example:**
Both companies have identical operations, paying $8M in interest annually.

- Oakmont CFO = $50M (interest paid included)
- Vantage CFO = $58M (interest paid in CFF) → looks more cash-generative
- Vantage CFF = ($38M) vs what it would be at ($30M)

The analyst must reclassify to make them comparable.

**Other important classification rules (both frameworks):**
- Depreciation/amortization: Add back in CFO (indirect method)
- Purchase of PP&E: CFI
- Issuance of stock: CFF
- Sale of investments: CFI

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What are the key differences in cash flow classification between IFRS and US GAAP?

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Practice Questions

Item	US GAAP	IFRS
Interest paid	CFO (mandatory)	CFO or CFF (choice)
Interest received	CFO (mandatory)	CFO or CFI (choice)
Dividends paid	CFF (mandatory)	CFO or CFF (choice)
Dividends received	CFO (mandatory)	CFO or CFI (choice)
Taxes paid	CFO (mandatory)	CFO (default), can split if identifiable
Bank overdrafts	CFF	Part of cash equivalents (if repayable on demand)