OCBOA is not a monster, although it does sound like one.
It is actually a kinder, gentler animal when compared to GAAP (generally accepted accounting principles) – also not a monster (though some accountants would beg to differ).
Types of OCBOA
OCBOA – other comprehensive bases of accounting – encompasses the following:
- Cash basis
- Modified-cash basis
- Tax basis
- Regulatory basis
In a word: Efficiency.
Often OCBOA is used as a simpler substitute for GAAP and is most often used in compiled financial statements. For instance, an accountant may be compiling financial information to complete a tax return, so it may be easier to create financial statements on the tax basis – killing two birds with one stone. (Converting tax-basis financial statements to GAAP can, in many cases, require a great deal of time, and your client’s banker may be just as happy with tax-basis statements.)
Sources of OCBOA
So where does OCBOA come from?
There is no standard setter for OCBOA. The OCBOA reporting options have largely evolved from tax and governmental regulators and from client requests for cash or modified-cash statements.
The lack of a standard setter allows for a great deal of reporting flexibility, however, the down side is that there is little guidance on the application of the various OCBOA options.
Cash and Modified-Cash Bases of Accounting
A pure cash-basis balance sheet has only two accounts: cash and equity.
The modified-cash basis of accounting is the cash basis with selected modifications such as capitalizing property and equipment and recording any related debt (without accruing certain items such as trade receivables, prepaid assets, and deferred taxes). These modifications are selective rather than mandatory; consequently, if note disclosure is provided, the basis of accounting should be fully explained.
The modified-cash basis can involve so many modifications that the statements become GAAP-like; then the CPA needs to decide whether he or she should just present the statements in accordance with GAAP.
Tax-Basis of Accounting
Generally most tax-basis financial statements are prepared in accordance with federal tax guidelines (which include the cash and accrual bases of accounting depending on the business).
Where possible, the CPA should consider preparing tax-basis financial statements without disclosure. This option is appealing because there are no disclosures and no cash flow statement to prepare, and the resulting statements agree with the tax return.
Reporting and Work Paper Considerations
Remember to title your financial statements appropriately (e.g., statement of assets, liabilities and equity – income-tax basis). Accordingly, the engagement letter and representation letter (for review engagements) should incorporate the OCBOA financial statement titles.
Disclosures, if provided, should be prepared using GAAP as a guide and then modify the notes to dovetail with the OCBOA used. (Many notes required by GAAP would not be pertinent to or needed for OCBOA statements.)
AICPA OCBOA Coming
The AICPA is presently working on a new OCBOA that can be used in place of GAAP. At this time, we don’t know what this basis of accounting will entail, but it will allow CPAs to present financial statements on a simplified basis (avoiding thorny issues like variable interest entities).