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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Accounting and Financial Statements (US GAAP)
Cash, Tax, and Other Bases of Accounting
Chapter 1 An Introduction to OCBOA Financial Statements
100 Background Information
100 Background Information
100.1 Bases of accounting other than GAAP [referred to in the authoritative literature as “special purpose frameworks”
or “other comprehensive bases of accounting” or (OCBOAs)] are a widely used alternative to the numerous and
sometimes complex accounting requirements prescribed by generally accepted accounting principles (GAAP). Also
contributing to the use of OCBOAs is the availability of inexpensive accounting software, which allows individuals more
familiar with tax laws than GAAP to maintain records and prepare financial statements with relative ease. 1
Unfortunately, limited authoritative guidance on applying other comprehensive bases of accounting exists.
100.2 References to OCBOAs appear in Statements on Auditing Standards (SASs) and Statements on Standards for
Accounting and Review Services (SSARS). AU-C 210, Terms of Engagement [formerly SAS No. 84 (AU 315) and SAS
No. 108 (AU 311)], requires the auditor to determine the acceptability of the financial reporting framework applied in
the preparation of the financial statements. Ordinarily, that framework is provided by GAAP; but AU-C 800, Special
Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks [formerly
SAS No. 62 (AU 623)], and SSARS No. 19 (AR 60.04) allow special purpose frameworks to be used. AU-C 800
describes the following special purpose frameworks:
• Cash Basis. A basis of accounting used by the reporting entity to record cash receipts and disbursements. It
includes modifications of the cash basis having substantial support (for example, recording depreciation on fixed
assets), commonly known as the modified cash basis.
• Regulatory Basis. A basis of accounting used by the reporting entity to comply with the requirements or financial
reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of
accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state
insurance commission).
• Tax Basis. A basis of accounting the reporting entity uses to file its tax return for the period covered by the
financial statements.
• Contractual Basis. A basis of accounting used by the entity to comply with an agreement between the entity and
one or more third parties other than the auditor.
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• Other Basis. A basis of accounting utilizing a definite set of logical and reasonable criteria that is applied to all
material items within the financial statements. 2
According to AU-C 800.07, the cash, tax, regulatory, and other bases of accounting are commonly referred to as other
comprehensive bases of accounting. While AU-C 800 predominantly uses the term special purpose framework, this
Guide continues to predominantly use the term other comprehensive basis of accounting or OCBOA.
100.3 SSARS No. 19 (AR 60.04) revised the definition of OCBOA as it relates to compilation and review
engagements, indicating that an OCBOA is a definite set of criteria, other than U.S. GAAP or International Financial
Reporting Standards (IFRS), having substantial support underlying the preparation of financial statements prepared
according to such basis. While that definition added a reference to IFRS, as discussed in paragraph 100.42, this Guide
does not address IFRS. Additionally, SSARS No. 19 indicates that ordinarily a modification would have substantial
support if the method is equivalent to the accrual basis of accounting for that item and if the method is not illogical.
100.4 AU-C 800 provides the primary guidance for disclosures in OCBOA financial statements. When special purpose
financial statements contain items that are the same as, or similar to, those in financial statements prepared in
accordance with GAAP, AU-C 800.17 states that the financial statements should include informative disclosures
similar to those required by GAAP. In addition, it states that additional disclosures, beyond those specifically required
by the framework, related to matters that are not specifically identified on the face of the financial statements, or other
disclosures, might be necessary for the financial statements to achieve fair presentation. The discussion beginning at
paragraph 300.6 addresses the applicability of this guidance to compiled or reviewed financial statements.
FASB Codification
100.5 GAAP measurement and disclosure requirements can be found in the FASB Accounting Standards Codification.
The FASB Accounting Standards Codification (FASB ASC or the Codification) is the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). Other accounting literature not included in
the Codification is nonauthoritative.
Clarity Project of the Auditing Standards Board
100.6 In response to growing concerns about the complexity of auditing standards and to converge U.S. GAAS with
International Standards on Auditing, the Auditing Standards Board has been working on the Clarity Project to revise all
existing standards and to design a format under which all new standards will be issued. In October 2011, the AICPA
issued:
• SAS No.122, Statements on Auditing Standards: Clarification and Recodification. This represents a completely
new set of auditing standards revised in format, structure, style, and content from the existing standards. It
supersedes all existing SASs through SAS No. 121, except:
•• SAS No. 51, Reporting on Financial Statements Prepared for Use in Other Countries. (Subsequently
superseded by SAS No. 124.)
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•• SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern.
(Subsequently superseded by SAS No. 126.)
•• SAS No. 65, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial
Statements. (Currently being redrafted and will be superseded when the clarified version is issued.)
•• SAS No. 87, Restricting the Use of an Auditor's Report. (Subsequently superseded by SAS No. 125.)
•• SAS No. 117 on compliance audits and SAS Nos. 118-120 on supplementary information. These
standards were previously issued in clarified format and are already effective.
• SAS No. 123, Omnibus Statement on Auditing Standards—2011. Amends SAS Nos. 117, 118, and 122 to
address matters that arose after the clarified standards were finalized.
• SAS No. 124, Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally
Accepted in Another Country. This is the clarified and recodified version of SAS No. 51, Reporting on Financial
Statements Prepared for Use in Other Countries.
All auditing interpretations corresponding to a SAS were considered in the development of the clarified standards and
incorporated as necessary. Generally, the interpretations have been withdrawn, except for certain interpretations that
were retained and revised to reflect the issuance of SAS No. 122. Going forward, the ASB will continue to issue SASs
to create, amend, or supersede the auditing standards as necessary.
100.7 Effective Date
With a few exceptions, all of the clarified standards are effective for audits of financial statements for periods ending on
or after December 15, 2012. Generally early adoption of SAS Nos. 122-126 is not permitted. However, an auditor may
implement aspects of SAS Nos. 122-126 early as long as he or she continues to comply with existing standards. See
the discussion of the implementation approach in this Guide beginning at paragraph 100.16.
100.8 SAS No. 125
In December 2011, the ASB issued SAS No. 125, Alert That Restricts the Use of the Auditor's Written Communication.
SAS No. 125 supersedes SAS No. 87 (AU 532), Restricting the Use of an Auditor's Report, and amends, among other
standards, AU-C 260, The Auditor's Communication With Those Charged With Governance, and AU-C 265,
Communicating Internal Control Related Matters Identified in an Audit. SAS No. 125 is effective for the auditor's written
communications related to audits of financial statements for periods ending on or after December 15, 2012.
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100.9 SAS No. 126
In July 2012, the ASB issued SAS No. 126, The Auditor's Consideration of an Entity's Ability to Continue as a Going
Concern (Redrafted), which supersedes SAS No. 59 of the same name. In issuing SAS No. 126, the ASB followed the
format of the other clarified SASs, but did not converge with the ISAs, pending the FASB's anticipated development of
accounting guidance addressing going concern. (At the time this Guide was completed, the FASB had indicated on its
Projects webpage that an exposure draft would be issued in the fourth quarter of 2012.) Accordingly, SAS No. 126
does not change or expand SAS No. 59 in any significant respect. SAS No. 126 has the same effective date as the
other clarified auditing standards.
100.10 Form and Structure of the Standards
The clarified standards were developed using formatting techniques, such as bulleted lists, that make them easier to
read and understand. In addition, each clarified standard is divided into the following topics:
• Introduction. Includes matters such as the purpose and scope of the guidance, subject matter, effective date,
and other introductory material.
• Objectives. Establishes objectives that allow the auditor to understand what he or she should achieve under the
standards. The auditor uses the objectives to determine whether additional procedures are necessary for their
achievement and to evaluate whether sufficient appropriate audit evidence has been obtained.
• Definitions. Provides key definitions that are relevant to the standard.
• Requirements. States the requirements that the auditor is to follow to achieve the objectives unless the
standard is not relevant or the requirement is conditional and the condition does not exist.
• Application and Other Explanatory Material. Provides further guidance to the auditor in applying or
understanding the requirements. While this material does not in itself impose a requirement, auditors should
understand this guidance. How it is applied will depend on professional judgment in the circumstances
considering the objectives of the standard. The requirements section references the applicable application and
explanatory material. Also, when appropriate, considerations relating to smaller and less complex entities are
included in this section.
100.11 A standard may also contain exhibits or appendices. Appendices to a standard are part of the application and
other explanatory material. The purpose and intended use of an appendix is explained in the standard or in the title
and introduction of the appendix. Exhibits to standards are interpretive publications. Interpretive publications are not
auditing standards and do not contain requirements. Rather, they are recommendations on applying the standards in
particular circumstances that are issued under the authority of the Auditing Standards Board. Auditors are required to
consider applicable interpretive publications when planning and performing the audit.
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100.12 New AU Section Organization
Within the AICPA Professional Standards, the clarified standards (SAS Nos. 122-126) use “AU-C” section numbers
instead of “AU” section numbers. “AU-C” is being used temporarily to avoid confusion with references to existing “AU”
sections, which remain effective through 2013. The “AU-C” identifier will revert to “AU” in 2014, when the clarified
standards are fully effective for all engagements. The organization of the new AU-C sections is as follows:
• Preface.
• Glossary.
• AU-C Section 200-299: General Principles and Responsibilities.
• AU-C Section 300-499: Risk Assessment and Response to Assessed Risks.
• AU-C Section 500-599: Audit Evidence.
• AU-C Section 600-699: Using the Work of Others.
• AU-C Section 700-799: Audit Conclusions and Reporting.
• AU-C Section 800-899: Special Considerations.
• AU-C Section 900-999: Special Considerations in the United States
• Exhibits and Appendixes.
100.13 An exhibit to SAS No. 122 contains a two-part cross-reference of AU-C and AU section numbers. One part of
the cross-reference shows which existing AU sections are encompassed by each new AU-C section. The other part of
the cross-reference shows, for each existing AU section, where the corresponding guidance can be found in the new
AU-C sections.
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100.14 Preface
AU-C Preface, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards,
contains the principles underlying an audit conducted in accordance with generally accepted auditing standards (the
principles). These principles are not requirements and are not authoritative. They provide a framework that is helpful in
understanding and explaining an audit and are organized to provide a structure for the codification of SASs. The
structure addresses the purpose of an audit, responsibilities of the auditor, performance of the audit, and reporting.
100.15 Implementation of the Clarified Auditing Standards
With a few exceptions, all of the clarified auditing standards are effective for audits of financial statements for periods
ending on or after December 15, 2012. Generally early adoption of SAS Nos. 122-126 (the clarified standards) is not
permitted. However, an auditor may implement aspects of the clarified standards early as long as he or she continues
to comply with existing standards.
100.16 Implementation in this Guide
The majority of the requirements in the clarified standards are consistent with the requirements in the pre-clarified
standards. Thus, the changes to the standards, although extensive, do not create many substantive changes in
practice. Therefore, the discussions throughout this Guide and references to authoritative auditing literature have been
updated for the clarified standards.
100.17 If there has been a change in the standards that will cause a change in practice, the authors have provided a
discussion of both the pre-clarified and clarified auditing standards, including appropriate references to the pre-clarified
authoritative literature. Therefore, unless a difference is specifically highlighted, the auditor using the updated
guidance in this Guide is also continuing to comply with existing standards. As a result, auditors may use this edition of
the Guide both before and after the effective date of the clarified standards.
100.18 Significant Changes to OCBOA Engagements
AU-C 800 supersedes the portion of SAS No. 62 that provides the current guidance for auditing OCBOA financial
statements. Some of the changes under the new standard that impact OCBOA audit engagements include:
• Changed definition of an OCBOA. AU-C 800 as initially issued eliminated the use of a “definite set of criteria
having substantial support that is applied to all material items appearing in financial statements, such as the price-
level basis of accounting.” However, as discussed in paragraph 100.2, that definition was added back (excluding
the mention of the price-level basis of accounting, which has been eliminated in the clarified auditing standard).
The contractual basis is added as one type of OCBOA that is not separately defined in SAS No. 62.
• New terminology. Throughout the new standard, the use of the term other comprehensive basis of accounting
has generally been replaced by the term special purpose framework, although use of the existing term is still
appropriate for the cash, tax, regulatory, and other bases of accounting.
• Acceptability of the Reporting Framework. AU-C 800.10 requires the auditor to determine whether the special
purpose framework used to prepare the entity's financial statements is acceptable by obtaining an understanding
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of (a) the purpose for which the financial statements are prepared, (b) the intended users, and (c) the steps taken
by management to determine that the framework is acceptable in the circumstances.
• Preconditions for the Audit. AU-C 800.11 requires the auditor to obtain management's agreement that it
acknowledges and understands its responsibility to include all informative disclosures that are appropriate for the
special purpose framework used to prepare the financial statements. Management's acknowledgment and
understanding should also cover any additional disclosures necessary to achieve fair presentation in the financial
statements. The auditor should evaluate whether such disclosures are necessary.
• Regulatory and Contractual Bases. When the special purpose framework is the regulatory or contractual basis,
certain performance, reporting, and/or presentation requirements exist under AU-C 800. Those requirements are
discussed in Chapters 6, 7, and 9.
• Reporting. Several new requirements exist in the area of reporting that impact all types of special purpose
frameworks pursuant to AU-C 800. Those requirements are discussed in Chapter 7.
100.19 Exhibit 1-1 provides a cross-reference between the clarified auditing standard requirements of AU-C 800 and
the pre-clarified auditing guidance for OCBOA engagements.
Exhibit 1-1
Audits of Financial Statements Prepared Using a Special Purpose Framework
Requirements/Guidance Clarified AU-
C Reference
Pre-clarified
Reference
Definitions:
Special purpose framework a —a financial reporting framework other than GAAP
that is one of the following bases of accounting—
AU-C 800.07 AU 623.04
• Cash basis. A basis of accounting that the entity uses to record cash receipts
and disbursements and modifications of the cash basis having substantial
support.
AU-C 800.07a AU 623.04c
• Tax basis. A basis of accounting that the entity uses to file its tax return for
the period covered by the financial statements.
AU-C 800.07b AU 623.04b
• Regulatory basis. A basis of accounting that the entity uses to comply with
the requirements or financial reporting provisions of a regulatory agency to
whose jurisdiction the entity is subject.
AU-C 800.07c AU 623.04a
• Contractual basis. A basis of accounting that the entity uses to comply with
an agreement between the entity and one or more third parties other than the
auditor.
AU-C 800.07d AU 623.22b b
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Requirements/Guidance Clarified AU-
C Reference
Pre-clarified
Reference
• Other basis. A basis of accounting that utilizes a definite set of logical and
reasonable criteria that is applied to all material items appearing in financial
statements.
AU-C 800.07e AU 623.04d
Reference to financial statements in AU-C 800 means a complete set of special
purpose financial statements, including the related notes. The related notes
ordinarily comprise a summary of significant accounting policies and other
explanatory information. The requirements of the applicable financial reporting
framework determine the form and content of the financial statements and what
constitutes a complete set of financial statements.
AU-C 800.08 AU 623.02
Requirements:
Considerations When Accepting the Engagement
AU-C 210, Terms of Engagement, requires the auditor to determine whether the
financial reporting framework used in the preparation of the financial statements is
acceptable. For an audit of special purpose financial statements, the auditor
should obtain an understanding of—
AU-C 800.10 N/A b
• the purpose for which the financial statements are prepared,
• the intended users, and
• the steps taken by management to determine that the applicable financial
reporting framework is acceptable in the circumstances.
AU-C 210 requires the auditor to establish whether the preconditions for an audit
are present, including whether the financial reporting framework to be applied in
the preparation of the financial statements is acceptable. When auditing special
purpose financial statements, the auditor should obtain management's agreement
that it acknowledges and understands its responsibility to include all informative
disclosures that are appropriate for the special purpose framework used to
prepare the entity's financial statements, including—
AU-C 800.11 N/A b
• A description of the special purpose framework, including a summary of
significant accounting policies, and how the framework differs from GAAP, the
effects of which need not be quantified.
AU-C 800.11a N/A b
• Informative disclosures similar to those required by GAAP, in the case of
special purpose financial statements that contain items that are the same as,
or similar to, those in financial statements prepared in accordance with GAAP.
AU-C 800.11b N/A b
• A description of any significant interpretations of the contract on which the
special purpose financial statements are based, in the case of special purpose
financial statements prepared in accordance with a contractual basis of
accounting.
AU-C 800.11c N/A b
• Additional disclosures beyond those specifically required by the framework
that may be necessary for the special purpose financial statements to achieve
fair presentation.
AU-C 800.11d N/A b
Considerations When Planning and Performing the Audit
AU-C 200, Overall Objective of the Independent Auditor and the Conduct of an
Audit in Accordance With Generally Accepted Auditing Standards, requires the
auditor to comply with all AU-C sections pertinent to the audit. Accordingly, in
planning and performing an audit of special purpose financial statements, the
AU-C 800.12 AU 623.02
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Requirements/Guidance Clarified AU-
C Reference
Pre-clarified
Reference
auditor should adapt and apply all AU-C sections relevant to the audit as
necessary in the circumstances of the engagement.
AU-C 300, Understanding the Entity and Its Environment and Assessing the Risks
of Material Misstatement, requires the auditor to obtain an understanding of the
entity's selection and application of accounting policies. In the case of special
purpose financial statements prepared in accordance with a contractual basis of
accounting, the auditor should obtain an understanding of any significant
interpretations of the contract that management made in the preparation of those
financial statements. An interpretation is significant when adoption of another
reasonable interpretation would result in a material difference in the information
presented in the financial statements.
AU-C 800.13 N/A b
Forming an Opinion and Reporting Considerations
When forming an opinion and reporting on special purpose financial statements,
the auditor should apply the requirements of AU-C 700, Forming an Opinion and
Reporting on Financial Statements. When, in forming an opinion, the auditor
concludes that a modification to the auditor's opinion on the financial statements is
necessary, the auditor should apply the requirements of AU-C 705, Modifications
to the Opinion in the Independent Auditor's Report.
AU-C 800.14 AU 544.04; AU
623.05-.06
AU-C 700 requires the auditor to evaluate whether the financial statements
adequately refer to or describe the applicable financial reporting framework. In an
audit of special purpose financial statements, the auditor should evaluate whether
the financial statements are suitably titled, include a summary of significant
accounting policies, and adequately describe how the special purpose framework
differs from GAAP. The effects of these differences need not be quantified.
AU-C 800.15 AU 623.07; AU
623.10
In the case of special purpose financial statements prepared in accordance with a
contractual basis of accounting, the auditor should also evaluate whether the
financial statements adequately describe any significant interpretations of the
contract on which the financial statements are based.
AU-C 800.16 N/A b
AU-C 700 requires the auditor to evaluate whether the financial statements
achieve fair presentation. In an audit of special purpose financial statements when
the special purpose financial statements contain items that are the same as, or
similar to, those in financial statements prepared in accordance with GAAP, the
auditor should evaluate whether the financial statements include informative
disclosures similar to those required by GAAP. The auditor should also evaluate
whether additional disclosures, beyond those specifically required by the
framework, related to matters that are not specifically identified on the face of the
financial statements or other disclosures are necessary for the financial
statements to achieve fair presentation.
AU-C 800.17 AU 623.09-.10
AU-C 700 addresses the form and content of the auditor's report. In the case of an
auditor's report on special purpose financial statements—
AU-C 800.18 AU 623.05
• The explanation of management's responsibility for the financial statements
should also make reference to its responsibility for determining that the
applicable financial reporting framework is acceptable in the circumstances,
when management has a choice of financial reporting frameworks in the
preparation of such financial statements.
AU-C 800.18a N/A b
• The auditor's report should also describe the purpose for which the financial
statements are prepared or refer to a note in the special purpose financial
statements that contains such information, when the financial statements are
prepared in accordance with a regulatory or contractual basis of accounting.
AU-C 800.18b AU 623.05 c
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Requirements/Guidance Clarified AU-
C Reference
Pre-clarified
Reference
Except for the circumstances described in AU-C 800.21, the auditor's report on
special purpose financial statements should include an emphasis-of-matter
paragraph, under an appropriate heading that—
AU-C 800.19 AU 623.29d
• indicates that the financial statements are prepared in accordance with the
applicable special purpose framework,
• refers to the note to the financial statements that describes that framework,
and
• states that the special purpose framework is a basis of accounting other than
GAAP.
Except for the circumstances described in AU-C 800.21, the auditor's report on
special purpose financial statements should include an other-matter paragraph,
under an appropriate heading that restricts the use of the auditor's report when the
special purpose financial statements are prepared in accordance with—
AU-C 800.20 AU 623.28g
• a contractual basis of accounting,
• a regulatory basis of accounting, or
• an other basis of accounting when required pursuant to AU-C 905.06 (bullets
a-b).
If the special purpose financial statements are prepared in accordance with a
regulatory basis of accounting, and such financial statements together with the
auditor's report are intended for general use, the auditor should not include the
emphasis-of-matter or other-matter paragraphs required by AU-C 800.19-.20.
Instead, the auditor should express an opinion about whether such financial
statements are presented fairly, in all material respects, in accordance with GAAP.
Additionally, in a separate paragraph, the auditor should express an opinion about
whether the financial statements are prepared in accordance with the special
purpose framework.
AU-C 800.21 N/A b
If the auditor is required by law or regulation to use a specific layout, form, or
wording of the auditor's report, the auditor's report should refer to GAAS only if the
auditor's report includes, at a minimum, each of the following elements—
AU-C 800.22 AU 623.29
• A title.
• An addressee.
• An introductory paragraph that identifies the special purpose financial
statements audited.
• A description of the responsibility of management for the preparation and fair
presentation of the special purpose financial statements.
• A reference to management's responsibility for determining that the
applicable financial reporting framework is acceptable in the circumstances
when required by AU-C 800.18a.
• A description of the purpose for which the financial statements are prepared
when required by AU-C 800.18b.
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Requirements/Guidance Clarified AU-
C Reference
Pre-clarified
Reference
• A description of the auditor's responsibility to express an opinion on the
special purpose financial statements and the scope of the audit, which includes
(1) a reference to GAAS and, if applicable, the law or regulation and (2) a
description of an audit in accordance with those standards.
• An opinion paragraph containing an expression of opinion on the special
purpose financial statements and a reference to the special purpose framework
used to prepare the financial statements (including identifying the origin of the
framework) and, if applicable, an opinion on whether the special purpose
financial statements are presented fairly, in all material respects, in accordance
with GAAP when required by AU-C 800.21.
• An emphasis-of-matter paragraph that indicates that the financial statements
are prepared in accordance with a special purpose framework when required
by AU-C 800.19.
• An other-matter paragraph that restricts the use of the auditor's report when
required by AU-C 800.20.
• The auditor's signature.
• The auditor's city and state.
• The date of the auditor's report.
If the prescribed specific layout, form, or wording of the auditor's report is not
acceptable or would cause an auditor to make a statement that he or she has no
basis to make, the auditor should reword the prescribed form of report or attach an
appropriately worded separate report.
AU-C 800.23 N/A b
Notes:
a The phrase special purpose framework is a new term used by the clarified auditing standards. The pre-clarified
auditing standards refer to such a framework as an other comprehensive basis of accounting (or OCBOA). AU-C
800.07 indicates that the cash, tax, regulatory, and other bases of accounting are commonly known as other
comprehensive bases of accounting.
b The requirement or guidance is new under the clarified auditing standards.
c The pre-clarified guidance includes the requirement, but related only to the regulatory basis of accounting.
____________________
100.20 Other Significant Changes
Other clarified SASs also have an impact on the audit of OCBOA (and other) financial statements. Some of the more
significant changes include:
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• New audit reports. The new authoritative guidance for reporting is covered by several clarified SASs including,
Forming an Opinion and Reporting on Financial Statements, Modifications to the Opinion in the Independent
Auditor's Report, and Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's
Report. The audit report will look quite different once the clarified SASs are effective.
• Changes to the engagement letter. The clarified SAS, Terms of Engagement, provides certain changed
requirements for the written agreement between the auditor and company management.
• Revisions to the management representation letter. The clarified SAS, Written Representations, supersedes
SAS No. 85 and provides changes to the management representation letter.
100.21 See the discussion beginning at paragraph 100.16 for an explanation of how the clarified auditing standards
have been incorporated within the Guide. Chapter text as well as the illustrative reports, engagement letters,
management representation letters, and all other impacted forms and checklists have been revised to comply with the
clarified auditing standards.
Clarified SSARS Project
100.22 Proposed Clarified SSARS, Association With Unaudited Financial Statements
There is currently a hole in the SSARS literature, as the guidance in AR 100.03 was not carried forward by SSARS No.
19. Once the clarified auditing standards become effective for audits of periods ending on or after December 15, 2012,
there will also be a hole in the auditing literature. Since May 2010, the ARSC has been working on a standard that will
address “association.” Most recently, at the ARSC's May 2012 meeting, a proposed SSARS, Association With
Unaudited Financial Statements, was discussed. The SSARS Association ED was voted for exposure and exposed in
June 2012. Comments are requested by November 30, 2012.
100.23 The new proposed SSARS addresses the accountant's responsibility when the accountant is associated with
financial statements that have not been compiled, reviewed, or audited (i.e., unaudited financial statements). The
accountant is considered to be associated with the unaudited financial statements when:
• The accountant permits the use of the accountant's name in a report, document, or written communication
containing unaudited financial statements that have not been prepared in whole or part by the accountant, or
• The accountant prepares, in whole or in part, unaudited financial statements for the entity, even though the
accountant does not append his or her name to the unaudited financial statements.
100.24 When the accountant's name is associated with unaudited financial statements the accountant did not prepare,
the accountant should:
a. Read the unaudited financial statements.
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b. Consider whether the statements appear free from material inconsistencies with other knowledge or information
of which the accountant may be aware.
c. After performing a. and b., if the accountant decides to allow the use of the accountant's name, the accountant
should request that the entity clearly indicate that the financial statements were not compiled, reviewed, or
audited.
100.25 When the accountant's name is associated with unaudited financial statements the accountant prepared and
the client did not engage the accountant to perform a compilation or review, the accountant should request that the
entity clearly indicate that the financial statements were not compiled, reviewed, or audited.
100.26 This proposed SSARS is expected to be effective for unaudited financial statements with which the accountant
is associated on or after December 15, 2014. Early implementation will be required if the accountant early implements
the proposed revised Interpretation No. 101-3, “Nonattest Services.” (See the discussion of the proposed changes to
ET 101-3 in section 902.) Otherwise, early implementation would be permitted. As of the date of this Guide, ARSC
plans to vote this SSARS final in February 2013. Accountants can monitor the status of this project at www.aicpa.org.
100.27 Clarified SSARS, Compilation of Financial Statements, Exposure Draft
ARSC has exposed clarified compilation standards that, if approved, would be effective for compilations of financial
statements of periods ending on or after December 15, 2014. Early implementation is required if the accountant early
implements the proposed revised Interpretation No. 101-3, “Nonattest Services.” (See the discussion of the proposed
changes to ET 101-3 in section 902.) Otherwise, early implementation would not be permitted. The exposure draft
would supersede AR 60, AR 80, AR 110, AR 300, and AR 600.
100.28 Some of the more significant changes from current compilation standards include the following—
• Changing the Standard to be engagement driven versus submission driven. The proposed SSARS would only
require a compilation if the accountant is engaged to perform that service. This means an accountant can prepare
financial statements, submit them to his or her clients, and, if they are not engaged to compile, they do not have to
follow the compilation standard. This change is consistent with the proposed changes to ET 101-3 discussed in
section 902 that would clarify that preparing financial statements is a nonattest service.
• Separating the normal recurring compilation guidance and the more specialized compilation guidance into
separate sections. The proposed SSARS would result in AR 70, Association with Unaudited Financial Statements;
AR 80, Compilation of Financial Statements (Revised); and AR 85, Compilation of Financial Statements—Special
Considerations.
• Separating requirements from application and other explanatory material. This is consistent with the format used
for the recent clarified auditing standards.
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• Distinguishing between emphasis-of-matter and other-matter paragraphs and designating when these types of
paragraphs should be used.
• Requiring an emphasis-of-matter paragraph when the financial statements have been prepared in accordance
with a special purpose framework.
• Changing the term OCBOA to special purpose framework to be consistent with the auditing standards.
• Changing all reports. In addition to using sections with headings, the accountant's compilation report should
name the city and state of the issuing office.
• If the financial statements are prepared in accordance with an OCBOA (or a contractual basis of accounting) and
omit substantially all disclosures, the report must highlight in a separate paragraph that the OCBOA (or the
contractual basis of accounting) is different than GAAP. If such financial statements include disclosures, the report
should reference the note to the financial statements that describes the OCBOA (or contractual basis of
accounting). Also, there are additional reporting requirements if management of the entity has a choice of financial
reporting frameworks or when the financial statements are prepared in accordance with a regulatory or contractual
basis of accounting.
• Engagement letters must be signed by the accountant or accounting firm and management or those charged
with governance.
100.29 Future editions of this Guide will update the status of this exposure draft. Accountants may also monitor the
SSARS Clarity Project at www.aicpa.org.
100.30 Proposed Clarified SSARS, Review of Financial Statements
The ARSC is also currently working on a proposed clarified review standard. An exposure draft is expected in late
2012. The clarified review SSARS is expected to be effective for reviews of financial statements for periods ending on
or after December 15, 2014.
OCBOA and Accounting Standards Overload
100.31 On and off for decades, the AICPA has examined the issue of standards overload. A solution often mentioned
is the use of OCBOA financial statements. One of the earliest examinations was performed by the AICPA's Special
Committee on Accounting Standards Overload. In 1981, that committee was formed to consider alternative means of
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providing relief from accounting standards that were not cost-effective, particularly for small, closely held companies.
In its final report published in 1983, the committee concluded:
Small, nonpublic entities can gain some measure of relief from accounting standards overload by issuing
compiled, reviewed, or audited financial statements prepared on a comprehensive basis of accounting
other than GAAP in accordance with existing disclosure and measurement standards and with the
existing reporting requirements for CPAs.
100.32 In 1995, the Private Companies Practice Section of the AICPA appointed the Special Task Force on Standards
Overload. Recognizing the increasing use of OCBOA and the confusion surrounding required disclosures (especially
in light of “disclosure only” accounting standards), the committee's August 1996 report included a recommendation that
standard setters provide more specific guidance on disclosures in OCBOA financial statements. In response to that
request, the Audit Issues Task Force of the Auditing Standards Board issued Interpretation 14 of AU 623.
100.33 Private Company Financial Reporting Task Force Report
In 2004, the AICPA appointed a Private Company Financial Reporting Task Force to gather information regarding the
needs of users of financial statements of larger or public entities versus the needs of users of financial statements of
smaller, nonpublic entities. The Task Force conducted a survey which found that certain types of financial statement
users were more likely to accept OCBOA financial statements for privately-held, for-profit companies. Specifically, 93%
of creditor/lenders, 72% of surety/bonding firms, and 58% of investor/venture capital firms have accepted OCBOA
financial statements. The survey also indicated that the size of the company is a factor in the decision to accept
OCBOA financial statements for the majority of the financial statement users that do accept them.
100.34 The Task Force concluded that GAAP should specifically address the needs of private company financial
statement users. That conclusion was based on findings that indicated many GAAP requirements are not relevant for
nonpublic companies and, in some cases, it would be more useful to require different accounting for nonpublic entity
transactions. As a result of those findings, the AICPA and FASB began working together to explore the development of
accounting standards for privately held companies. In 2006, the two organizations issued a joint proposal intended to
improve the financial reporting process for private companies. Subsequently, a joint committee was formed (the
Private Company Financial Reporting Committee) to serve as a resource to the FASB to ensure that the views of
private company constituents were considered during the standard-setting process. The Private Company Financial
Reporting Committee (PCFRC) began making recommendations regarding accounting standards proposals to the
FASB in 2007.
100.35 Blue Ribbon Panel
In December 2009, the AICPA and the Financial Accounting Foundation (FAF) announced the formation of the Blue
Ribbon Panel to address how U.S. accounting standards can best meet the needs of users of private company
financial statements. The purpose of the panel was to provide recommendations on the future of standard setting for
private companies, including whether separate, standalone accounting standards for private companies are needed.
After a series of meetings were held in 2010, the Blue Ribbon Panel delivered its report to the FAF early in 2011. The
report called for fundamental changes to the system of standard setting, including creating a new board to be
overseen by the FAF that would focus on making exceptions and modifications to U.S. GAAP for private companies
that better respond to the needs of the private company sector. The report also recommended the creation of a
differential framework (that is, a set of decision criteria) to facilitate a standard setter's ability to make appropriate,
justifiable exceptions and modifications. The FAF then embarked on an outreach program and released its proposal in
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the fall of that year. Roundtable meetings were held during the first quarter of 2012 for additional input and, in May
2012, the FAF announced its decision to establish the Private Company Council.
100.36 Private Company Council
At the time this Guide was completed, the Private Company Council (PCC) was still in the process of being formed. In
June 2012, the FAF issued a request for nominations for candidates to serve on the PCC and over 100 nominations
were received. At the present time, the FAF Board of Trustees continues to review the candidates nominated.
100.37 The PCC membership will ultimately comprise individuals with backgrounds and experience in using,
preparing, and auditing private company financial statements, including—
• users of private company financial statements, including bank lenders, equity investors, and/or sureties,
• preparers of private company financial statements from a variety of industries and companies of various sizes,
and
• CPA practitioners from national, regional, and local firms.
100.38 The responsibilities of the PCC will be two-fold:
a. To determine whether modifications or exceptions to existing nongovernmental U.S. GAAP are required to
address the needs of users of private company financial statements based on criteria mutually agreed to by the
PCC and the FASB.
b. To serve as the primary advisory body to the FASB on the appropriate treatment for private companies for
items under active consideration on the FASB's technical agenda.
100.39 FASB Private Company Decision-making Framework
In response to the Blue Ribbon Panel's recommendation, the FAF instructed the FASB to undertake a differential
framework project (see the discussion in paragraph 100.35), which the FASB is now calling its private company
decision-making framework project. The objective of the project is to develop a framework (set of decision criteria) for
making decisions about whether and when to adjust the requirements for recognition, measurement, presentation,
disclosure, effective dates, and transition methods for financial accounting standards that apply to private companies.
The creation of the PCC is an integral part of this FASB project. At the end of July 2012, the FASB released its initial
staff recommendations on whether and when it will be appropriate to adjust financial reporting requirements for private
companies. The recommendations are contained in a paper entitled, Private Company Decision-Making Framework: A
Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies, and the FASB has
issued an invitation to comment on the recommendations. The comment period will be open through October 31,
2012.
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100.40 The FASB and the PCC must first agree on the proposed decision-making framework before it will be
implemented. The framework will guide the PCC as it determines whether any modifications or exceptions to existing
GAAP are needed for private companies. Further information about this project and a link to the initial staff's
recommendations can be accessed from the FASB's Project page at www.fasb.org.
100.41 AICPA Financial Reporting Framework for Small- and Medium-sized Entities
In May 2012, the AICPA announced its plans to develop an other comprehensive basis of accounting financial
reporting framework (FRF) to meet the needs of certain privately held small- and medium-sized entities (SMEs), as
well as the users of those entities' financial statements. The AICPA envisions that this SME framework will provide a
less complicated and less costly system of accounting for SMEs that do not need GAAP financial statements. Since
the AICPA announced its development of the FRF for SMEs, it has published a short question-and-answer document
about the framework, which is available on the Private Company Financial Reporting page of the AICPA website at
www.aicpa.org. At the time this Guide was completed, the AICPA had indicated that a draft version of the framework
is scheduled for release in the fourth quarter of 2012, with the finalized framework expected in the first half of 2013. It
is anticipated that the FRF for SMEs will meet the criteria for the other basis type of OCBOA mentioned in paragraph
100.2 and discussed further beginning at paragraph 602.8.
International Financial Reporting Standards
100.42 In 2008, the Council of the AICPA designated the International Accounting Standards Board as the body to
establish international financial reporting standards for both private and public entities pursuant to Rule 202,
Compliance With Standards, and Rule 203, Accounting Principles, of the AICPA Code of Professional Conduct. This
gives AICPA members the option of using International Financial Reporting Standards as an alternative to U.S.
generally accepted accounting principles. This Guide is not designed to address issues related to financial statements
prepared in accordance with International Financial Reporting Standards.
1 There is an ongoing debate within the profession about whether accountants need to be thoroughly versed in GAAP
before they can prepare OCBOA financial statements. Because presentations and disclosures similar to GAAP may be
required or, at the very least, be necessary to make OCBOA presentations useful to readers, the authors believe
accountants should not accept an engagement to prepare OCBOA financial statements unless they have a good
foundation in generally accepted accounting principles.
2 Other basis was not included in AU-C 800 when it was originally issued. It will be added as part of a proposed SAS,
Omnibus Statement on Auditing Standards—2012, exposed at the end of August 2012 and expected to be effective at
the same time as the original AU-C 800 (that is, for audits of financial statements for periods ending on or after
December 15, 2012). Throughout this Guide, the authors have assumed that the use of the other basis will be allowed
as proposed. Practitioners can monitor the status of this exposure draft on the AICPA's website at www.aicpa.org.
© 2012 Thomson Reuters/PPC. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Accounting and Financial Statements (US GAAP)
Cash, Tax, and Other Bases of Accounting
Chapter 1 An Introduction to OCBOA Financial Statements
101 Deciding When to Use a Special Purpose Framework
101 Deciding When to Use a Special Purpose Framework
101.1 Special purpose framework, or OCBOA, financial statements are beneficial to clients for many reasons.
Because accountants do not need to consider the measurement requirements of GAAP, OCBOA financial statements
often can be prepared on a more timely basis and at less cost to the client. For example, if depreciation is the only
difference between GAAP and the client's tax basis, using the income tax basis can eliminate the need to prepare two
sets of depreciation schedules. OCBOA financial statements also may provide information in a format familiar to the
client. For example, cash basis financial statements can answer the basic question “Where did the money go?”
101.2 The AICPA's Compilation and Review Alert—1996/1997 provided the following guidance on characteristics of
entities that generally are good candidates for cash or tax basis financial statements:
a. There are no third-party users of the financial statements (for example, the entity is a small closely held
business with no third-party debt).
b. The entity's debt is secured rather than unsecured.
c. The entity's creditors do not require GAAP financial statements.
d. The cost of complying with GAAP would exceed the benefits (for example, a small construction contractor who
would be required to account for long-term contracts using the percentage of completion method and would be
required to compute deferred taxes).
e. The owners and managers are closely involved in the day-to-day operations of the business and have a fairly
accurate picture of the entity's financial position.
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f. The business's owners are primarily interested in cash flows (for example, a professional corporation of
physicians that distributes its cash basis earnings through salaries, bonuses, and retirement plan contributions).
g. The owners are primarily interested in the tax implications of transactions (for example, partners in a
partnership who are concerned about the effects of transactions on their personal tax returns).
h. Capital expenditures and long-term financing are not significant.
i. Internal Revenue Code rules do not require the entity to prepare its tax return on the accrual basis of accounting
(for example, an entity that does not have material inventories or does not have average gross receipts that
exceed $10 million for the prior three years). 3
101.3 There are instances in which OCBOA financial statements are not appropriate, however. The entity may have
substantial unfunded obligations or commitments not recorded on the income tax basis (because they are not
deductible until paid) or the cash basis (because they have not been paid). For example, under the accrual income tax
basis (a) pension liabilities are recorded at the amount determined to be deductible, (b) leases are recorded under IRC
rules, (c) deferred compensation is recognized when paid, (d) potential environmental liabilities are recorded only
when they meet the economic performance and all events tests of the Internal Revenue Code, and (e) interest due to
a related party cannot be accrued and deducted. When such conditions exist, accountants should consider whether
the financial statements prepared using an OCBOA could be misleading—especially if the financial statements omit
substantially all disclosures.
101.4 In advising a client about the use of OCBOA financial statements, accountants must have a clear idea about the
user's needs. Perhaps a banker can use a cash basis financial statement generated by the client's computer system if
the entity accompanies it with an aged accounts receivable listing. On the other hand, an absentee owner may be able
to use compiled cash basis financial statements that omit substantially all disclosures on an interim basis but needs full
disclosure GAAP statements at year end. Companies reporting financial results to third parties ordinarily use GAAP for
financial statements. The use of GAAP promotes comparability among financial statements, and users become
familiar with GAAP through experience with it. Additionally, loan covenants may require GAAP financial statements
and failure to provide such statements may result in a loan default.
Considerations When Accepting an Audit Engagement
101.5 Is the Financial Reporting Framework Acceptable?
Under the clarified auditing standards (AU-C 210, Terms of Engagement), the auditor is required to determine whether
the financial reporting framework used in the preparation of the entity's financial statements is acceptable. AU-C
800.10 refers to that requirement and further indicates that when performing an audit of special purpose financial
statements, the auditor should obtain an understanding of—
a. The purpose for which the financial statements are prepared.
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b. The intended users of the financial statements.
c. The steps management has taken to determine that the applicable financial reporting framework is acceptable
in the circumstances.
101.6 In contrasting the above requirement in AU-C 800.10 to the guidance in SAS No. 62, no such requirement exists
in the pre-clarified auditing standards for the auditor to consider whether the OCBOA is an acceptable framework for
presenting and reporting on the financial statements. Accordingly, prior to the effective date of the clarified auditing
standards (that is, for audits of financial statements for periods ending on or after December 15, 2012), the new
requirements of AU-C 800.10 do not have to be followed. However, the new requirement in AU-C 800.10 is effective
for 2012 calendar year-end audit engagements.
101.7 AU-C 800.A6-.A9 provides further information about AU-C 800.10 indicating that the following factors could be
used by the auditor when he or she considers whether the specific type of special purpose framework applied in the
preparation of the financial statements is acceptable—
• The financial information needs of the intended users.
• Whether the special purpose framework applied to the financial statements encompasses financial reporting
standards that have been established by an authorized standard-setting organization that follows an established
and transparent process, for example, the AICPA or the FASB. When such is the case, the financial reporting
standards that support the special purpose framework applied will be presumed acceptable.
• When the financial reporting framework applied is required by law or regulation to be used in the preparation of
the entity's special purpose financial statements, such a financial reporting framework is presumed acceptable
(unless indications to the contrary exist). For example, this type of situation often occurs when a regulator
establishes financial reporting provisions that must be met by those entities that it regulates.
• Whether the financial reporting framework applied exhibits attributes normally exhibited by acceptable financial
reporting frameworks. However, for special purpose frameworks, the relative importance to a particular
engagement of each of the attributes normally exhibited by acceptable financial reporting frameworks is a matter
of professional judgment.
• For financial statements prepared in accordance with a contractual basis of accounting, the parties to the
contract might agree on significant interpretations of the contract, if any, that are the basis of the special purpose
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framework. If the parties cannot reach agreement, the auditor may determine that the framework is not
acceptable.
101.8 Preconditions for an Audit Engagement
Under the clarified auditing standards (AU-C 210), the auditor is required to establish whether certain preconditions for
an audit are present, including whether the financial reporting framework to be used in the preparation of the financial
statement is acceptable. 4 In performing an audit of special purpose financial statements, AU-C 800.11 refers to the
requirement in AU-C 210 and further requires the auditor to obtain managements' agreement that it acknowledges and
understands its responsibility to include all information disclosures that are appropriate for the special purpose
framework used to prepare the entity's financial statements. These precondition requirements are further discussed in
section 904.
When Is Each Basis Appropriate?
101.9 Absent specific guidance from financial statement users, accountants need to consider issues such as the
following before advising a client about which presentation to use.
• Does the Entity Have Inventory? If so, the pure cash basis may not be helpful.
• What Basis of Accounting Does the Entity Use in Preparing Its Income Tax Returns? If the accrual basis is used,
preparing financial statements on the same basis makes sense.
• Is the Entity Highly Leveraged? Lenders may require GAAP financial statements.
• Are There Outside Investors? GAAP financial statements may provide information needed by such users.
• Does the Entity's Cash Flow Parallel Its Income and Expenses? The pure cash basis may be appropriate.
• Does the Entity Anticipate Going Public? If so, the entity will need a history of GAAP financial statements.
• Was the Entity Formed for Tax Purposes? If the answer is yes, the owners probably are interested in the tax
effects of transactions, and the income tax basis would be appropriate.
• Is the Entity Subject to Bonding Requirements? Many bonding companies will only accept GAAP financial
statements.
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101.10 Cash and Modified Cash Bases
In practice, use of the pure cash basis is rare. Generally, it is limited to nonbusiness entities with very simple
operations. Entities that might use the pure cash basis of accounting include school activity funds, fairs and other civic
ventures, trusts and estates, political action committees, and political campaigns.
101.11 Use of the modified cash basis is more common. To help provide some consistency in its use, however, the
authors recommend limiting it to entities whose operations are:
a. oriented toward cash receipts and disbursements,
b. not significantly influenced by financing of sales or purchases, and
c. relatively simple and without complexities (such as manufacturing, development, or other conversion activities
or acquisitions of property and equipment) that require significant modifications.
Chapter 4 discusses both the cash basis and the modified cash basis in further detail.
101.12 Tax Basis
Typically, entities that use the tax basis of accounting are either profit-oriented enterprises (such as small closely held
companies for which conversion to GAAP would be costly), partnerships whose partnership agreements require the
use of the tax basis of accounting, or nonprofit organizations seeking relief from the requirements of GAAP.
101.13 Regulatory and Contractual Basis
Regulatory basis financial statements are prepared by many types of entities, including insurance companies, credit
unions, construction contractors, certain state and local governmental entities, and some nonprofit organizations.
Contractual basis financial statements are prepared when an entity follows the provisions of a contract or agreement,
which often requires at least some unique financial reporting calculations. Due to the unique provisions in the contract
or agreement, it is common that interpretation is necessary with regard to measurement principles for the contractual
basis.
101.14 Other Basis
As explained at paragraph 100.18, AU-C 800 defines the other basis slightly different than SAS No. 62 does. The
phrase “having substantial support,” and the price-level basis of accounting example provided in SAS No. 62, no
longer exists under AU-C 800. As the price-level basis of accounting is not included in AU-C 800 and the authors
believe the price-level basis has not been used in practice for some time, this Guide no longer discusses the price-
level basis.
101.15 Additionally, as explained in the footnote to paragraph 100.2, the acceptability of an other basis was not
provided by AU-C 800 when it was originally issued. However, it has been added as part of a proposed SAS, Omnibus
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Statement on Auditing Standards—2012, exposed at the end of August 2012 and expected to be effective at the same
time as the original AU-C 800 (that is, for audits of financial statements for periods ending on or after December 15,
2012). The authors assume that the use of the other basis will be allowed as proposed. It is anticipated that the FRF
for SMEs discussed at paragraph 100.41 will meet the criteria for the other basis type of special purpose framework.
Cost-effective Alternatives for Clients
101.16 As discussed in paragraph 101.1, OCBOA financial statements are one option for providing more timely
information at less cost to some clients. The following paragraphs discuss some additional options to consider when
recommending a level of service to a client. For certain clients, these options may offer cost-effective means of
meeting a client's needs.
101.17 Using OCBOAs for Interim Financial Statements and GAAP for Annual Financial Statements
One option that accountants may want to consider for some clients is using OCBOAs for preparing interim financial
statements and GAAP for preparing annual statements. Some accountants find that this is both efficient and cost
effective. Considerations when preparing and reporting on interim OCBOA financial statements are discussed in
Chapter 10.
101.18 Issuing Management-use-only Financial Statements
If financial statements are intended for management's use only, 5 accountants may be able to compile the statements
and issue an engagement letter in lieu of a compilation report. Although the engagement letter should preferably be
signed by management and include various required elements, it is not required to detail departures from GAAP or
OCBOA. Many accountants view the requirement to do so in a compilation report one of the most time-consuming
procedures of a compilation engagement. Therefore, issuing management-use-only financial statements without a
report can be easier and less costly than compiling financial statements and issuing a SSARS No. 19 compilation
report. See the discussion of management-use-only financial statements beginning at paragraph 903.18. (Engagement
letters for management-use-only financial statements are discussed beginning at paragraph 904.6.)
101.19 Compiling Financial Statements That Omit Substantially All Disclosures
If a client does not feel that full disclosure statements are cost-effective, then the accountant may compile financial
statements that omit substantially all of the disclosures required by an OCBOA as long as the accountant's report
discloses the omission, and the omission is not, to his or her knowledge, undertaken to mislead those who might
reasonably be expected to use the financial statements. If the financial statements are intended for third-party use, the
accountant should modify the report to alert users to the lack of disclosures. 6 If the financial statements are intended
for management's-use-only, the required engagement letter should include a statement that substantially all
disclosures have been omitted and a statement that material departures from GAAP or OCBOA may exist and the
effects of those departures, if any, on the financial statements may not be disclosed. See the discussion on reporting
on financial statements that omit substantially all disclosures beginning at paragraph 701.12.
101.20 Combining Alternatives to Create the Best Level of Service for the Client
The accountant may wish to consider whether some combination of these alternatives provides the best level of
service for a client. One popular option was discussed in the AICPA's Compilation and Review Alert—1999/2000. That
alert stated that to reduce the costs of preparing the financial statements and the compilation report, many CPAs:
a. Use the cash or modified cash basis of accounting for monthly financial statements.
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b. Omit all disclosures on those monthly financial statements.
c. Generate annual GAAP financial statements with disclosures.
Considerations when preparing and reporting on interim OCBOA financial statements are discussed in Chapter 10 of
this Guide.
Planning Form for Engagements Involving OCBOA Financial Statements
101.21 Appendix 1A provides a planning questionnaire that may be used to determine whether an OCBOA is
appropriate.
3 The IRC allows qualifying small business taxpayers to change to the cash method if they have average annual
gross receipts of $10,000,000 or less. See discussion at paragraph 500.12 for more information.
4 The phrase in this sentence beginning with the word including was added to AU-C 800 as part of a proposed SAS,
Omnibus Statement on Auditing Standards—2012, exposed at the end of August 2012 and expected to be effective at
the same time as the original AU-C 800 (that is, for audits of financial statements for periods ending on or after
December 15, 2012). Throughout this Guide, the authors have assumed that changes made to AU-C 800 by the
proposed SAS will be finalized as proposed. Practitioners can monitor the status of this exposure draft on the AICPA's
website at www.aicpa.org.
5 SSARS No. 19 (AR 60.04) defines management as “the person(s) with executive responsibility for the conduct of
the entity's operations. For some entities, management includes some or all of those charged with governance (for
example, executive members of a governance board or an owner-manager).” Management-use-only financial
statements are only appropriate for use by individuals meeting this definition of management. Considering the
intended use of the financial statement(s) is discussed further beginning at paragraph 903.18. See the discussion of
the clarified SSARS project that would impact compilations of management-use-only financial statements beginning at
paragraph 100.22.
6 This discussion regarding compilation reports of compiled financial statements with substantially all disclosures
omitted would change pursuant to the clarified compilation standards recently exposed by the ARSC. See the
discussion of the clarified SSARS project beginning at paragraph 100.22.
© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT -
© 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Accounting and Financial Statements (US GAAP)
Cash, Tax, and Other Bases of Accounting
Chapter 1 An Introduction to OCBOA Financial Statements
102 Primary Issues in Preparing OCBOA Financial Statements
102 Primary Issues in Preparing OCBOA Financial Statements
Recognition and Measurement
102.1 Transactions are recognized and measured in financial statements based on the basis of accounting used.
Thus, cash basis financial statements do not recognize or measure transactions until cash is received or paid.
Modified cash basis financial statements reflect transactions similarly except for certain transactions the entity elects to
recognize and measure otherwise (for example, capitalizing property and equipment and charging their costs to
expense over the periods benefited rather than expensing them in the period purchased). Income tax basis financial
statements recognize transactions when they would be recognized in the entity's tax return, and then measure them
based on amounts that would be reported in the return. GAAP recognition and measurement principles, such as the
requirement of FASB ASC 715-30-25-1 to recognize an asset or a liability for the funded status of a defined benefit
pension plan, are not considered in OCBOA presentations (except to the extent the cash basis has been modified to
adopt GAAP principles).
102.2 Recognizing and measuring transactions under the cash or modified cash basis is discussed in Chapter 4 of this
Guide. Chapter 5 discusses measurement and recognition principles that apply to tax basis financial statements, and
Chapter 6 discusses considerations for financial statements prepared on other bases of accounting.
Presentation
102.3 While transactions are recognized and measured following the OCBOA, they generally should be presented in
financial statements following GAAP presentation guidelines. That is, assets and liabilities should be presented in the
statement of financial position and revenues and expenses (measured in accordance with the OCBOA) should be
presented in the statement of operations. Furthermore, changes in retained earnings and other components of
stockholders' equity generally should be presented following GAAP requirements. 7 As discussed further in Chapter 3,
however, OCBOA disclosures should be similar, but not necessarily identical to, those required by GAAP. Thus, items
required to be presented on the face of GAAP financial statements sometimes may be disclosed in the notes to
OCBOA financial statements so long as the substance of the GAAP information is communicated.
102.4 Since cash basis and tax basis financial statements do not purport to present financial position and results of
operations in accordance with GAAP, they should not be captioned or otherwise referred to as “Balance Sheet,”
“Income Statement,” etc. without appropriate modification. Such titles as “Statement of Assets, Liabilities, and Equity—
Cash Basis (or Income Tax Basis),” “Statement of Assets and Liabilities Arising From Cash Transactions,” “Balance
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Sheet—Modified Cash Basis,” “Statement of Revenues and Expenses—Cash Basis (or Income Tax Basis),”
“Statement of Revenues Collected and Expenses Paid,” or other appropriate wording should be used.
102.5 Financial statement form and style considerations are discussed further in Chapter 2, and general presentation
issues applicable to the cash, modified cash, and income tax basis are discussed in Chapter 3. Specific presentation
issues unique to each OCBOA are addressed in the respective chapter covering that basis of accounting.
Disclosures
102.6 Financial statements prepared on an OCBOA require notes and other disclosures. (If the statements are
compiled, management may elect to omit substantially all disclosures. However, that option is not available if the
statements are reviewed or audited.) The disclosure requirements for OCBOAs are not defined in accounting literature
as they are for GAAP, however. Guidance is found in AU-C 800 and states that the basis of accounting and how it
differs from GAAP should be disclosed. It also points out that when financial statements contain items that are the
same as, or similar to, those in GAAP financial statements, the same type and extent of informative disclosure
generally is appropriate. It also states that disclosures related to matters that are not specifically identified on the face
of the financial statements may be necessary to achieve fair presentation. The explanatory material at AU-C 800.A19-
.23 provides further information about achieving fair presentation through the disclosures in special purpose framework
financial statements and indicates that in some cases, qualitative information could replace the quantitative information
required by GAAP. See the discussion beginning at paragraph 300.6 for guidance to compiled or reviewed OCBOA
financial statements.
102.7 Disclosing information in cash, modified cash, and income tax basis financial statements is discussed further in
Chapter 3. In addition, disclosure considerations unique to each type of OCBOA are discussed in the chapter relevant
to each basis of accounting.
Reporting
102.8 When reporting on OCBOA financial statements, certain modifications should be made to the basic reports. 8
The statement titles in the reports should reflect the OCBOA statement titles. Audit reports must disclose the basis of
presentation, refer to the note that describes the basis, and include a statement that the basis is a comprehensive
basis of accounting other than GAAP. Other new requirements under AU-C 700 and AU-C 800 are effective for audits
of financial statements for periods ending on or after December 15, 2012, and are discussed in section 702. When
compiled financial statements omit substantially all disclosures, the compilation report should reflect OCBOA titles and
may, at the accountants' option, be modified to disclose the basis of accounting. Other compilation and review reports,
however, only need modification for OCBOA statement titles. 9 Chapter 7 discusses reporting on OCBOA financial
statements in further detail.
7 A statement of cash flows is not required for OCBOA financial statements since they do not purport to present
financial position and results of operations in accordance with GAAP (see paragraph 204.2). However, entities that
follow the modified cash and income tax basis may choose to present a statement of cash flows. In addition, because
the pure cash method reports all transactions, including purchases of assets and receipts of loan proceeds, as cash
receipts or disbursements, the only item that would be present in a pure cash basis statement of financial position
would be cash and equity. Thus, the authors recommend presenting a single statement titled “Statement of Cash
Receipts and Cash Disbursements” when financial statements are prepared on the pure cash basis.
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8 The SSARS allow accountants to provide clients with management-use-only financial statements without issuing a
compilation report if the statements are not reasonably expected to be used by third parties. See discussion of
management-use-only financial statements beginning at paragraph 903.18.
9 This discussion regarding reporting on compiled financial statements would change pursuant to the clarified
compilation standards recently exposed by the ARSC. See the discussion of the clarified SSARS project beginning at
paragraph 100.22.
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END OF DOCUMENT -
© 2013 Thomson Reuters/RIA. All rights reserved.
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