Other Comprehensive Basis of Accounting (OCBOA) refers to any accounting framework other than U.S. Generally Accepted Accounting Principles (GAAP) that is used to prepare an entity’s financial statements. Common OCBOAs include cash-basis, tax-basis, and statutory (regulatory) bases. OCBOA financial statements are often used when GAAP statements are not required by lenders, regulators, or investors and when users prefer a simpler or more directly relevant view of performance and position.
Key advantages
– Simpler and easier for many users to understand than GAAP.
– Lower preparation and reporting cost compared with full GAAP in many cases.
– Can be tailored to the needs of users (e.g., tax reporting alignment, regulatory compliance).
– May reduce audit procedures when scope is limited to OCBOA statements.
Key disadvantages and risks
– Reduced comparability with GAAP financial statements and with other entities that use GAAP.
– Potentially inadequate disclosures for outside users; important information can be omitted.
– Users unfamiliar with the selected basis may misinterpret results and financial position.
– Lenders or regulators may require reconciliations to GAAP or additional information.
Common types of OCBOA
– Cash-basis accounting: Revenue and expenses recognized when cash is received or paid.
– Tax-basis accounting: Financial statements prepared using the method required for federal or state income tax reporting.
– Statutory/regulatory basis: Accounting required by a regulatory authority (for example, certain insurance-company statutory statements).
– Contractual or definitive-criteria basis: Financial statements prepared following a formal set of criteria that is well-documented and commonly accepted in practice.
Regulatory and professional context
– Auditing literature (for example, Statement on Auditing Standards No. 62—Special Reports, historically) recognizes OCBOA as a set of alternative bases distinct from GAAP. Professional accountants should follow current auditing, compilation, or review standards applicable to engagements involving OCBOA financial statements (see AICPA SSARS and applicable auditing standards).
– Users and preparers should confirm whether lenders, taxing authorities, or regulators accept a particular OCBOA.
When OCBOA is appropriate
– GAAP is not required by loan covenants, regulators, investors, or other stakeholders.
– The entity’s users expect or prefer tax-based or cash-based reporting (e.g., closely held companies, small nonprofits, or entities managed on a cash basis).
– Regulatory requirements demand a statutory or regulatory basis.
– Management seeks reduced reporting complexity and expense and user needs can be met by OCBOA statements.
Required financial statements under OCBOA
– Typically: Balance sheet (or statement of assets, liabilities, and equity) and income statement (or statement of operations).
– Unlike GAAP financial statements, OCBOA statements generally do not require a separate statement of cash flows (though preparers may include one if useful).
– Notes/disclosures are still strongly recommended and often essential for a useful picture.
Recommended disclosures and presentation items
To mitigate the comparability and transparency risks of OCBOA, include comprehensive disclosures. At a minimum:
– Clear disclosure of the basis of accounting used (e.g., “These financial statements are prepared on the cash-basis of accounting”).
– Description of major accounting policies and significant departures from GAAP.
– Reconciliation to GAAP where useful or where requested by users (e.g., conversion adjustments).
– Contingent liabilities, commitments, and legal matters.
– Subsequent events and significant subsequent transactions.
– Related-party transactions and significant concentrations of risk.
– Any regulatory requirements or loan covenant considerations that affect the financial statements.
– If tax-basis, a statement that the statements are prepared on the basis of accounting used for income tax purposes and that they differ from GAAP.
Practical steps for an entity preparing OCBOA financial statements
1. Confirm the need and acceptance
• Confirm with lenders, regulators, investors, and other users that OCBOA is acceptable.
• Document approvals or agreements accepting OCBOA reporting.
2. Select the specific OCBOA
• Choose cash-basis, tax-basis, statutory basis, or a well-defined alternative criteria basis based on user needs and any regulatory constraints.
3. Define accounting policies
• Document all accounting policies and any departures from GAAP.
• Ensure policies are consistently applied and are clearly disclosed.
4. Maintain supporting records
• Even under cash-basis or tax-basis, retain sufficient documentation (invoices, bank statements, tax returns) to support balances and disclosures.
• Consider maintaining supplementary ledgers to facilitate reconciliations and audits.
5. Prepare the financial statements
• Prepare the balance sheet and income statement under the chosen basis.
• Consider preparing a statement of changes in equity or retained earnings if informative.
• If helpful, prepare a GAAP reconciliation schedule for major items (e.g., receivables, prepaids, deferred taxes).
6. Prepare notes and disclosures
• Include the recommended disclosures above. Tailor notes to the users’ needs and to the entity’s business risks.
7. Review with stakeholders
• Review draft statements and disclosures with lenders, boards, or other key users to ensure they meet information needs.
8. Coordinate with the auditor or accountant
• Discuss the engagement type (compilation, review, or audit) and the effect of OCBOA on procedures and the report.
• For compilations/reviews, follow SSARS requirements; for audits, follow applicable auditing standards when auditing OCBOA statements.
Practical steps for auditors/accountants working with OCBOA engagements
1. Establish the engagement scope
• Confirm whether the service is a compilation, review, or audit, and obtain an engagement letter that outlines the basis of accounting to be used.
2. Evaluate acceptability of the basis
• Determine whether the chosen OCBOA is acceptable and adequately described to users. If not acceptable, discuss alternatives with management.
3. Assess disclosures
• Evaluate whether disclosures are adequate for the intended users, including a clear statement of the basis of accounting and material differences from GAAP.
4. Plan audit or review procedures with the basis in mind
• Audit procedures and evidence needs differ when financial statements are prepared on an OCBOA; plan to address material misstatements as defined under the chosen basis.
5. Consider the opinion or report language
• For audits, the auditor’s report should include a statement that the financial statements are prepared on an OCBOA and, if relevant, note the omission of a GAAP-required statement (for example, cash flows).
• For compilations, include the required language in the accountant’s compilation report indicating that no assurance is provided and that statements are prepared on an OCBOA.
6. If a GAAP reconciliation is needed or requested
• Assist management in preparing reconciliations between OCBOA and GAAP so users can understand the differences.
Practical examples and common conversions
– Cash-basis to accrual (GAAP) reconciliation: add accounts receivable, inventories, prepaid expenses, accrued expenses, and fixed-asset depreciation adjustments.
– Tax-basis to GAAP reconciliation: adjust for tax-only treatments (e.g., tax depreciation vs. book depreciation, tax-exempt revenue differences).
– Statutory basis to GAAP: align statutory valuation rules (reserves, asset valuation) to GAAP valuations where needed for user comparability.
Checklist — Minimum items to include before issuing OCBOA financial statements
– Management decision and written acceptance by principal users that OCBOA is acceptable.
– Selection and documentation of the OCBOA method.
– Trial balances and account reconciliations under chosen basis.
– Draft financial statements (balance sheet and income statement).
– Comprehensive notes disclosing basis, policies, contingencies, subsequent events, and related-party matters.
– Reconciliation schedules to GAAP (if users request).
– Engagement letter and agreed-upon level of assurance with the accountant/auditor.
– Retention of supporting documentation.
When to consider converting to GAAP
– If major stakeholders (lenders, investors, regulators) require GAAP.
– If the entity grows in complexity (more inventory, receivables, long-term contracts, or complex transactions).
– If comparability with peers or standardized reporting is necessary.
– If an audit under GAAP will be required for a future transaction (e.g., sale, public offering).
Further reading and professional guidance
– Financial statement preparers and auditors should consult current AICPA guidance (SSARS for compilations/reviews; applicable auditing standards for audits) and any applicable statutory/regulatory accounting requirements.
– For an introductory overview, see Investopedia’s article on Other Comprehensive Basis of Accounting (Mira Norian).
Bottom line
OCBOA offers a practical, often less costly alternative to GAAP for entities whose users do not require GAAP-based reporting. Properly used, OCBOA can produce useful, understandable financial statements — but only if management documents the basis chosen, provides comprehensive disclosures, coordinates with users and accountants, and maintains sufficient records to support the presentation. When in doubt about acceptability or user needs, consult your accountant or auditor before issuing OCBOA financial statements.
Source
– Investopedia: “Other Comprehensive Basis of Accounting (OCBOA)” (Mira Norian). Additional guidance: AICPA SSARS and applicable auditing standards.