Other Comprehensive Basis of Accounting methods: non-GAAP-based financial statements

National Public Accountant, The, April-May, 2003 by John Stephen Grice

Financial statements prepared using other comprehensive bases of accounting [OCBOA] are growing in popularity. Many smaller, nonpublic entities are over burdened with the accounting and reporting guidance issued by the Financial Accounting Standards Board [FASB] and feel that the costs of adhering to the stringent accounting and reporting guidance issued by the FASB exceed the related benefits. Consequently, many of these entities are choosing to prepare OCBOA financial statements when the circumstances are appropriate.

Technical Guidance for OCBOA Financial Statements

Currently, there is minimal technical guidance related to accounting and reporting issues for OCBOA financial statements. The reason for this "lack" of guidance is that the accounting literature only relates to GAAP-based, as opposed to non-GAAP-based, financial statements. The technical guidance that practitioners should consider when preparing financial statements based on an OCBOA are as follows:

* SAS No. 62, entitled "Special Reports." [1989]

* SSARS No. 7, entitled "Omnibus Statement on Standards for Accounting and Review Services." [1992]

* AICPA Technical Practice Aids [TPA], Section 1500, entitled "Financial Statements Prepared Under an Other Comprehensive Basis of Accounting." [1995]

* AICPA Technical Practice Aids [TPA], Section 9210.10, entitled "Change From Generally Accepted Accounting Principles [GAAP] to an Other Comprehensive Basis of Accounting [OCBOA] pf From OCBOA to GAAP." [1995]

* AICPA Practice Aid Series [PAS] document, entitled "Preparing and Reporting on Cash and Tax Basis Financial Statements?' [1998]

* Auditing Interpretation No 14, [an interpretation of SAS No. 62], entitled "Evaluating the Adequacy of Disclosure in Financial Statements Prepared on the Cash, Modified Cash, or Income Tax Basis of Accounting."

What Are the Acceptable OCBOA Methods?

It is important to recognize that the use of OCBOA financial statements is an alternative to the use of GAAP-based statements. The primary guidance related to OCBOA financial statements is found in the auditing literature. Specifically, SAS No. 62 delineates the acceptable alternatives to GAAP-based financial statements. Exhibit 1 reports the OCBOA methods that are listed in SAS No. 62 and provides a related example for each method. It should be noted that the cash-and tax-basis OCBOA methods are the most prevalent in accounting practice.

In addition to specifying acceptable OCBOA methods, SAS No. 62 also specifies certain bases of accounting that are not considered OCBOA. These include: (I) a loan agreement that requires the borrower to prepare consolidated financial statements in which assets [e.g., accounts receivable] are presented on a basis that is not in conformity with GAAP [or any OCBOA], and (2) an acquisition agreement that requires the financial statements of the entity being acquired to be prepared in conformity with GAAP except for certain assets [e.g., inventories and properties] for which a valuation basis is specified in the agreement.

Determining Whether to Use an OCBOA Method

OCBOA financial statements typically are less costly to prepare than GAAP-based statements. Tax-basis financial statements result in cost savings because the tax returns and the financial statements are prepared using the same information. Cash-basis statements are less costly because the detailed records needed to comply with GAAP reporting are unnecessary. Though OCBOA financial statements generally are a cost-effective alternative, it is important to determine whether OCBOA statements are appropriate given the nature of the entity. The AICPA PAS document identifies characteristics of entities that should consider issuing cash- or tax-basis financial statements. Exhibit 2 highlights some of these characteristics as well as instances where OCBOA statements probably should not be issued.

The cost savings associated with OCBOA statements primarily result from the ability to prepare financial statements using simpler measurement principles [e.g., cash- and modified cash-basis statements] or measurement principles that already have been incorporated into other documents [e.g., a tax return]. Since disclosure requirements for OCBOA statements generally parallel disclosure requirements for GAAP-based statements, there usually will be only limited cost savings because of different disclosure requirements. The issuance of Auditing Interpretation No. 14 provided additional guidance to practitioners related to disclosure requirements in OCBOA financial statements. As a result of this Interpretation, there is more of a disclosure advantage when issuing OCBOA financial statements than there has been previously.

Though OCBOA financial statements may be audited, reviewed, or compiled, the disclosure requirements essentially are the same. The SSARS No. 7 disclosure requirements for compiled [or reviewed] OCBOA financial statements are similar to the SAS No. 62 disclosure requirements for audited OCBOA financial statements. In all cases, practitioners should have an understanding of GAAP disclosure requirements to ensure the OCBOA statements comply with the reporting requirements [e.g., making disclosures that communicate the substance of GAAP disclosures].