Other Comprehensive Bases of Accounting

McNair, McLemore, Middlebrooks & Co., LLCCharles B. Hall, CPA, CFE, Macc

chall@mmmcpa.com

OCBOA

Other Comprehensive Bases of Accounting

OCBOA

Cash basis

Modified cash basis

Tax basis

OCBOA

“Other” meaning other than GAAP

OCBOA

Why use OCBOA?

OCBOABasis determines how transactions are recognized and measured.

E.g., Cash basis does not recognize a transaction until cash is received or disbursed

E.g., Modified cash basis may capitalize property and equipment and then depreciate the asset

E.g., Tax basis will recognize a transaction as it would be recognized on the tax return

OCBOA

Little authoritative guidance

OCBOA

OCBOA is permissible by:

SAS 62, Special Reports - Auditing Standard

SSARS 19 - Compilation Standard

Auditing Standards

SAS 62 describes the following OCBOAs:

Governmental regulatory provisions

Income tax basis

Cash basis

Definite set of criteria having substantial support

Auditing Standards

SAS 62 prohibits issuing a special report unless one of the foregoing descriptions applies to the financial statements

SSARS 19

Defines OCBOA as a definite set of standards having substantial support underlying the preparation of financial statements

Clarified Auditing Standards

The term “OCBOA” becomes “Special Purpose Framework”

Clarified Auditing Standards

The term “OCBOA” still appropriate for cash, tax, and regulatory bases of accounting.

Reporting

Use OCBOA titles in the financial statements

E.g., Statement of Assets, Liabilities and Equity - Tax Basis

Cash flow statement not necessary, but permissible

Cash Basis

Balance sheet

Cash

Equity

Can use a single statement titled “Statement of Cash Receipts and Cash Disbursements”

Cash Basis

Purchase of a building is shown a cash outflow and not an asset on the balance sheet

A loan for the purchase of the building is shown as a cash inflow rather than a debt on the balance sheet

Cash Basis

The purchase of $10,000,000 investment is shown as a cash outflow and not as an investment asset

Cash Basis

Use the following captions in the “Statement of Cash Receipts and Disbursements”:

Cash receipts

Cash disbursements

Increase (Decrease) in Cash

Beginning Cash

Ending Cash

Modified Cash Basis

SSARS 19 defines as pure cash basis incorporating “modifications...having substantial support”

Modified Cash Basis

Substantial support defined as:

It is equivalent to the accrual basis of accounting

It is not illogical

Modified Cash Basis

Example of illogical modification

• E.g., Accrue revenues but not expenses

Modified Cash Basis

Common modifications include:

Capitalization of property and equipment; depreciation may be recorded

Recording loans as liabilities

Modified Cash Basis

Modifications that are occasionally made include:

Modifications of cash basis to record inventories

If done, then compute cost of goods sold using the same method

Accruing income taxes

Modified Cash Basis

Amounts not normally recognized on the statement of assets, liabilities and equity include:

Trade receivables

Non-trade receivables may be accrued

Prepaid assets

Deferred taxes

Modified Cash BasisImportant

Define the basis of accounting in the notes

Consider use of selected disclosure (i.e., single note) explaining the basis of accounting

When possible, use the tax basis of accounting rather than the modified cash basis (tax-basis accounting provides a reason for your recognition or nonrecognition of all items)

Income Tax Basis

Defined as the basis of accounting that the reporting entity uses or expects to use to file its income tax return (typically based on federal income tax laws)

Income Tax Basis

Statements

Statement of assets, liabilities and equity - income tax basis

Statement of revenues and expenses - income tax basis

No cash flow statement required

Income Tax Basis

Disclosures

Follow auditing literature (with modifications for tax basis)

Include description of accounting policies and the primary differences from GAAP

Income Tax Basis

Internal Revenue Code (IRC) prescribes two methods:

Cash basis

Accrual basis

Income Tax BasisIRC prescribes conditions for cash basis of accounting:

1. Qualified personal service corporations

2. Most entities that have average annual gross receipts of no more than $1 million and

3. Entities that have average annual gross receipts of at least $1 million, but not exceeding $10 million

Income Tax Basis

Follow regular tax rules

Don’t follow alternative minimum tax rules

Income Tax Basis

Problem – SAS 62 and SSARS 19 define income tax basis as the basis of accounting an entity “uses...to file its income tax return”

Partnerships, LLCs and Nonprofits are not described by the IRS as “income tax returns”

Income Tax Basis

Most accountants interpret this to mean returns filed either to:

Report taxes owed or

Report information

Income Tax Basis

If the entity uses the accrual basis of accounting for tax filings, then consider reporting the financial statements in accordance with GAAP

SAS 62 and SSARS 19 do not however preclude the entity from reporting on the tax-basis of accounting even if the reporting is equivalent to GAAP

Income Tax Basis

What about nontaxable items (e.g., nondeductible penalties or tax-exempt interest income)?

Should nontaxable items be reported in the financial statements?

If yes, how?

Income Tax BasisIt is permissible to:

Present the nontaxable revenues and nondeductible expenses as separate line items on a statement of revenues and expenses that does not reconcile to taxable net income or

Include the nontaxable revenues and nondeductible expenses in line items with taxable revenues and deductible expenses (and provide a reconciliation on the face of the statements or in the notes)

Closing Comments

Where possible, use tax-basis of accounting without disclosure

No disclosures required

No cash flow statement

Tax return and statements are the same (less confusion)

Closing

• Contact Charles B. Hall, CPA, CFE, MAcc

• chall@mmmcpa.com

• Cpa-scribo.com