GAAP vs. IFRS: Statement of Cash Flows - Online Tutor, Practice Problems & Exam Prep

The cash flow statement is essential under both GAAP and IFRS, detailing operating, investing, and financing activities. While both frameworks require this statement, GAAP mandates reporting significant non-cash transactions directly in the statement, whereas IFRS includes them in the notes. Interest and dividends are classified differently; GAAP categorizes interest as operating, while IFRS allows flexibility. Understanding these distinctions is crucial for accurate financial reporting and analysis, particularly in mastering the cash flow statement and its implications for liquidity and financial health.

GAAP vs. IFRS: Statement of Cash Flows

Now let's discuss some of the main similarities and differences when it comes to the cash flow statement when we're talking about GAAP rules versus IFRS rules. So remember GAAP, that's what we've been focusing on in this course. The generally accepted accounting principles here in the USA and these rules are set by the Financial Accounting Standards Board, FASB creates GAAP compared to the international rules that are set by the International Accounting Standards Board and they're creating IFRS, the International Financial Reporting Standards. Okay? So let's see some of these similarities and differences for the statement of cash flows.

So in both cases, a cash flow statement is required. Both GAAP and IFRS say you need to make a cash flow statement. It's very important information. Both cases we're separating it into the operating, investing, and financing activities just like we've learned, same thing for IFRS; again, we have the indirect method or the direct method when it comes to the operating section. So remember that indirect method where we started with net income and then we made some changes to get to our operating cash flows? Well, it's basically the same thing or doing the same calculation when it comes to GAAP or IFRS. And we've got the definition of cash equivalents, so remember cash equivalents, which are basically converted into cash in less than 90 days. They're very liquid investments that aren't going to be investments for that long. They're basically cash. They're as good as cash, okay?

So now let's go ahead and see some of these differences between GAAP and IFRS when it comes to the cash flow statement. First is that significant non-cash investing and financing activities. Remember when we talked about significant non-cash investing and financing activities? This was a separate part at the bottom of the statement where we made disclosures in GAAP to say, hey, we bought land for common stock or something like that. And the reason this is important is because we're kind of skipping a step, right? Because we could have issued common stock and got cash and then used that cash to buy land, but instead we just gave them common stock and we got land. Something like that. So it's still almost like we skipped the cash step, so it's still a significant transaction that happened, and we want to disclose it. In GAAP, we reported on the statement of cash flows, while IFRS just reports it in the notes to the financial statements, okay? The notes section includes this information after the financial statements, well described across multiple pages.

We're going to go over the differences between interest, dividend, and taxes wherein GAAP, we learn the way we do it in GAAP. Interest is included in operating. We've got interest in operating, dividends are financing, and taxes are operating as well. Well, we'll see the differences there with IFRS. And finally, IFRS allows the operating section to be presented as one line. So you could just say operating cash flows are this much and then in the footnotes when you get to the notes to the financial statements, they basically show the operating section in the notes to the financial statements instead of on the face of the statement itself. So that's just a small difference there. They're still giving you all the information, they're just kind of putting it in the notes instead of on the face of the statement. So let's look at some of these classification differences.

So notice when there's interest paid when we pay interest or receive interest from a GAAP perspective, remember we learned those were operating activities, but IFRS gives you a little more leeway, right? IFRS gives you the chance to put them in as financing or investing activities whether they're paid or received. When we pay interest, that could be a financing activity, that makes sense, right? We're paying interest to our creditors so it could be a financing activity. So IFRS gives you that leeway when it comes to interest. Same thing with dividends. Dividends paid well, when we paid dividends, we know from GAAP that was a financing activity, but again, IFRS lets you put them in either operating or financing. As long as you're consistent in how you do this reporting, IFRS gives you that leeway. Dividends received, that was an operating activity, right? When we're receiving dividends, well IFRS gives you the chance to put it in operating or investing and finally taxes paid. They're going to be operating activities in both cases, but IFRS has this rule that if it's related to some financing or investing activity, well then we're going to put it in that category, okay? For the most part, you don't need to worry about these differences. When you talk about your cash flow statement in this class, you're focused on GAAP. Don't bother your mind up with these differences for IFRS, that's going to be knowledge for a future course. I just wanted to expose it to you here that there are differences when they prepare the statement of cash flows under the rules of IFRS, okay? So definitely focus your attention on the GAAP rules and then once you are a master of accounting and you're getting into your higher level courses, then you're going to be focusing on these differences with IFRS, alright? Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What are the main differences between GAAP and IFRS in the statement of cash flows?

The main differences between GAAP and IFRS in the statement of cash flows include the treatment of significant non-cash transactions, classification of interest and dividends, and presentation options. Under GAAP, significant non-cash transactions are reported directly in the cash flow statement, while IFRS includes them in the notes to the financial statements. GAAP classifies interest paid and received as operating activities, whereas IFRS allows these to be classified as either operating, investing, or financing activities. Similarly, dividends paid are classified as financing activities under GAAP, but IFRS permits them to be classified as either operating or financing activities. Additionally, IFRS allows the operating section to be presented as a single line item with details in the notes, unlike GAAP which requires detailed presentation on the face of the statement.

How do GAAP and IFRS differ in the classification of interest and dividends in the cash flow statement?

GAAP and IFRS differ significantly in the classification of interest and dividends in the cash flow statement. Under GAAP, interest paid and received are classified as operating activities. Dividends paid are classified as financing activities, and dividends received are classified as operating activities. In contrast, IFRS provides more flexibility. Interest paid can be classified as either operating or financing activities, and interest received can be classified as either operating or investing activities. Similarly, dividends paid can be classified as either operating or financing activities, and dividends received can be classified as either operating or investing activities. This flexibility under IFRS allows companies to better align their cash flow classifications with their business models.

Why does IFRS allow more flexibility in classifying interest and dividends in the cash flow statement compared to GAAP?

IFRS allows more flexibility in classifying interest and dividends in the cash flow statement to better reflect the economic reality of different business models and industries. This flexibility enables companies to present their cash flows in a manner that aligns more closely with their operational and financial activities. For example, a financial institution might classify interest received as an operating activity because it is a core part of its business operations, whereas a manufacturing company might classify it as an investing activity. This approach under IFRS provides a more accurate representation of a company's cash flows and financial health, allowing stakeholders to make more informed decisions.

How are significant non-cash transactions reported differently under GAAP and IFRS?

Significant non-cash transactions are reported differently under GAAP and IFRS. Under GAAP, these transactions are disclosed directly in the statement of cash flows. For example, if a company acquires land by issuing common stock, this non-cash transaction would be reported at the bottom of the cash flow statement. In contrast, IFRS requires that significant non-cash transactions be disclosed in the notes to the financial statements rather than in the cash flow statement itself. This means that while the information is still provided, it is not included in the main body of the cash flow statement but rather in the accompanying notes, which provide additional details and context.

What are the similarities between GAAP and IFRS in the preparation of the statement of cash flows?

Despite their differences, GAAP and IFRS share several similarities in the preparation of the statement of cash flows. Both frameworks require the cash flow statement to be divided into three sections: operating, investing, and financing activities. They also both allow the use of either the direct or indirect method for reporting cash flows from operating activities. Additionally, both GAAP and IFRS define cash equivalents similarly, as short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. These commonalities ensure that the fundamental structure and purpose of the cash flow statement are consistent across both accounting standards.