Adjusted CFO, please help guys, appreciate with millions of thanks.

[shangfhai]

Regarding adjusted CFO,
“Also, IFRS allows interest expense to be classified as operating cash flow or financing cash flow. U.S. GAAP requires interest expense to be classified as operating cash flow. Therefore, analysts often adjust CFO by adding back the after-tax interest cost and call it adjusted CFO.”

I understand that the adjusted CFO is trying to represent itself as available cash flows to both equity and debt holders.
Is it correct to say that the adjustment (adding back after tax interest cost) is only necessary under the GAAP???
thanks tons guys!

 

[shangfhai]

like if its classified as financing cash flow under IFRS, no adjustment would be necessary?

 

[CFA_shareholder]

Hi shangfhai,
If I understand correctly, I believe you would only need to adjust CFO when comparing a US GAAP to a IFRS cash flow - i.e. to compare apples to apples. Chances are the institute will present a question where we would need to do this comparison (I think there are BB examples/ EOC questions too)- so to ensure that CFO is not “tainted” with interest expense, you add back interest expense (1-tax rate) so that it is in line with IFRS rules for CFO…

 

[S2000magician]

You would make that adjustment to compare a US GAAP cash flow statement to an IFRS cash flow statement if the latter classified interest expense (actually, interest paid) as CFF; if the IFRS cash flow statement classified it as CFO, they’re already comparable.
You would also make that adjustment to an IFRS cash flow statement if they chose to classify interest paid as CFO and you wanted to compare to another IFRS cash flow statement that classified it as CFF.
(And be sure that you make the distinction between interest expense and interest paid.)

 

[cfalevel2john]

Good question. I was wondering the same thing. Schweser says to add int net of tax back to CFO, but then under the practice problems at the end, it doesnt. I am confused by this as well.

 

[SpyAli]

shangfhai wrote:
like if its classified as financing cash flow under IFRS, no adjustment would be necessary?

That’s right. No adjustment necessary if classified as CFF.