Companies may be mingling operating cash flow that arises from a controlling interest in a consolidated company with cash that is produced by non-controlling interests, giving investors an inflated impression about cash that might be available to pay dividends.

That's the conclusion of the Georgia Tech Financial Analysis Lab after it reviewed the financial statements of companies with significant non-controlling or minority interests. The analysis revealed that income and equity attributable to non-controlling interests is easy to spot in the income statement and balance sheet, but not so much in the statement of cash flows. “Investors, analysts and other users of financial statements may be unaware that operating cash flow includes amounts attributable to both controlling and non-controlling interests, potentially leading to overestimates of cash available for dividends to controlling interests,” the Georgia Tech report says.

That worries Chuck Mulford, director of the research operation that produced the report and an accounting professor at Georgia Tech. Corporate dividend distributions are getting increasing attention from investors as changes in tax law combine with economic uncertainty to leave big questions in investors' minds about what they can reasonably expect, he says. Many companies paid out big dividends at the end of 2012 to beat tax increases expected from Congress as it crafted a solution to the fiscal cliff.

“Investors and analysts often look to free cash flow, or reported operating cash flow less capital expenditures, for the amount of cash available for the payment of those dividends,” he says. “Those investors and analysts may be unaware, however, that due to distributions made to non-controlling interests, free cash flow is not cash that is available for distribution to shareholders.”

The study looked at a sample of 24 large public companies with market capitalizations of greater than $1 billion making sizable distributions to their non-controlling shareholders, an average of 10.4 percent of consolidated operating cash flow, says Mulford. “We found that there is disparity in how these companies are reporting distributions to non-controlling interests in their cash flow statements,” he says. The study showed that 20 of the 24 companies report distributions in the financing section of the cash flow statement clearly labeled as a distribution or dividend to non-controlling interests, consistent with what is required in accounting rules, he says. However, that leads to an overstatement of cash available for distribution to controlling shareholders, he says.

Mulford believes operating cash flow should be reduced for any distributions made to non-controlling interests, and companies should clearly label distributions make to non-controlling interests in the financing section of the cash flow statement. In fact, Mulford says the Financial Accounting Standards Board or its Emerging Issues Task Force should look closely at making such a distinction a requirement in accounting standards.