2.2 Previous Studies on Choices for Classification in CFSs
An analysis of classification shifting in the Statement of Cash Flows at the adoption of IFRS
Lee (2012 Lee, L. F. (2012). The Accounting Review, 87(1), 1-33. ) studied incentives to inflate CFO in CFSs using classification and timing in companies from the United States of America in the period from 1988 to 2008. This study observed what it called CFO management (CFOM), which is different from earnings management, as indicated by the author. CFOM does not affect the result for the period, that is, this remains constant, as well as the aggregate cash flow, which is the sum of the cash flows from operating, investing, and financing activities. One of the characteristics identified by Lee (2012) Lee, L. F. (2012). The Accounting Review, 87(1), 1-33. to inflate CFO in the CFS was the bankruptcy probability of companies, which indicates there being incentives for the classifications in the CFS.
Incentives to inflate reported cash from operations using classification and timing
Baik et al. (2016 Baik, B., Cho, H., Choi, W., & Lee, K.. (2016). Who classify interest payments as financing activities? Journal of Accounting and Public Policy, 35(4), 331-351. ) examined the changes in CFS classifications in companies that adopted IFRS in Korea, specifically the determining factors and economic consequences of a change in classification of interest paid. It was observed that companies with high indebtedness and a concentrated ownership structure tend to reclassify the amount of interest paid from operating activity to financing activity, thus increasing the value of the CFO disclosed.
Gordon et al. (2017 Gordon, E. A., Henry, E., Jorgensen, B., & Linthicum, C. L.. (2017). Flexibility in cash flow reporting classification choices under IFRS. Review of Accounting Studies, 22(2), 839-872. ) studied the flexibility in the choice of CFS classification according to IFRS in companies from 13 European countries, for financial years between 2005 and 2008, and identified determining factors for classification choices that increase CFO related to company characteristics, including profitability and debt. The authors mention the effect of the flexibility of CFS classifications using, as a reference, SFAS 95, which establishes the classification of interest and dividends in a similar way to that encouraged by CPC 03, in paragraph 34A.
In Brazil, the debate involving the elaboration and disclosure of CFSs was primarily developed in the 1990s, since the substitution of the Statement of Origins and Applications of Resources (Demonstracao das Origens e Aplicacoes de Recursos – Doar) by the CFS was already being considered at that time, which in fact only occurred as of 2008, following the alteration in the corporate act that occurred in 2007. Various academic and technical papers have been developed based on this discussion and, specifically in relation to accounting choices, two studies by Santos and Lustosa, from 1999 Santos, A., & Lustosa, P.R.B.. (1999). Juros e dividendos pagos: onde classifica-los na demonstracao dos fluxos de caixa? IOB – Informacoes Objetivas, Tematica Contabil e Balancos, 33(39), 1-7. and 2000 Santos, A., https://www.paydayloanstennessee.com/cities/chattanooga/ & Lustosa, P.R.B. (2000). Recebimento de juros e dividendos na demonstracao de fluxos de caixa: atividades operacionais ou de investimentos? IOB – Informacoes Objetivas, Tematica Contabil e Balancos, 34(18), 1-6. , warrant attention. In these two papers, published in the journal Tematica Contabil e Balancos (Accounting and Balance Sheets), by Informacoes Objetivas e Publicacoes Juridicas (IOB) (Objective Information and Legal Publications), the authors discussed in depth the options for classifying interest and dividends paid (in the first article) and received (in the second) and, at the end, suggested that, technically, interest and dividends paid should be classified in financing activity and interest and dividends received should be classified in investing activity. This suggestion, if embraced, would have eliminated the possibility of accounting choices and, consequently, the possible opportunistic behaviors of the preparers of financial statements. However, this did not occur, since, as already highlighted in the Introduction, Brazil essentially adopted the IASB model, which enables such choices.