Who classifies interest payments as financing activities? An analysis of classification shifting in the statement of cash flows at the adoption of IFRS

In this study, we examine a firm’s classification shifting behavior in the statement of cash flows under the IFRS regime. Specifically, we examine the determinants and economic consequences of classification shifting to manage operating cash flows. Based on a sample of firms that mandatorily adopt IFRS in Korea, the result shows that financially distressed firms, firms with high interest payments, firms with high bank ownership, and Chaebol affiliated firms tend to shift their interest payments from operating to financing cash flows, thereby increasing the total amounts of operating cash flows. We also find evidence largely consistent with the view that investors discount operating cash flow surprises from classification shifting. Overall, we provide initial evidence that classification shifting exists in the statement of cash flows under the IFRS regime and its economic consequences are significant.