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OCBOA Financial Statements

when to restate financial statements


IN CERTAIN INSTANCES CPAs SHOULD CONSIDER preparing and reporting on financial statements using an “other comprehensive basis of accounting” (OCBOA). Tax-basis and cash-basis, including modified-cash-basis, financial statements are the most widely used OCBOA statements.

A MAJOR ADVANTAGE OF OCBOA STATEMENTS is that many clients and external users understand them better than GAAP-basis statements. In addition, OCBOA statements may cost less to prepare compared with GAAP-basis ones: It’s not uncommon to save clients up to 20% to 30% in time and cost.

ONE OF THE ISSUES CPAs FACE WITH OCBOA STATEMENTS is the adequacy of disclosures within them. A statement of cash flows is not required, but statement titles should clearly indicate the basis of accounting the practitioner used. The notes to the statements should include disclosures related to contingent liabilities, going-concern considerations and risks and uncertainties.

SAS NO. 62 CONTAINS REPORTING GUIDANCE FOR WHEN a client engages a practitioner to audit OCBOA financial statements. CPAs typically will need to make certain modifications to the standard audit report when using it to report on OCBOA statements.

WITH THE GROWING COMPLEXITY OF PREPARING GAAP -based financial statements, the use of an OCBOA may be a logical alternative that meets the needs of both the client and the external statement users. Recent regulatory changes also may lead to an increase in the growing popularity of OCBOA statements.

THOMAS A. RATCLIFFE, CPA, PhD, is dean of the Sorrell College of Business and Eminent Scholar in Accounting and Finance at Troy State University in Troy, Alabama. He is a member of the AICPA accounting and review services committee. His e-mail address is

ne of your small business tax clients asks you to prepare and report on a set of financial statements. Because you’re familiar with the company, you know it has entered into an interest rate swap to lock in a low rate. The company also has a significant amount of goodwill and other intangible assets that may be subject to impairment as well as considerable fixed assets still subject to depreciation. It wants financial statements the company’s owners and executives can easily understand. You wonder whether there is a way to comply with the client’s request that is both cost-effective and less complicated than GAAP-based financial statements. Before you turn down the engagement, you might want to consider preparing and reporting on the financial statements using an “other comprehensive basis of accounting” (OCBOA). In situations where GAAP-basis statements aren’t necessary because of loan covenants, regulatory requirements or similar circumstances, an OCBOA may just be the answer.

In this article, CPAs will find guidance on preparing and reporting on OCBOA statements, their advantages and some caveats related to their use. Practitioners also will find advice that should be useful in preparing and

reporting on modified-cash-basis and tax-basis financial statements—the most widely used forms of OCBOA.


Under SAS no. 62, Special Reports, an OCBOA is any one of

A statutory basis of accounting (for example, a basis of accounting insurance companies use under the rules of a state insurance commission).

Income-tax-basis financial statements.

Cash-basis and modified-cash-basis financial statements.

Financial statements prepared using definitive criteria having substantial support in accounting literature that the preparer applies to all material items appearing in the statements (such as the price level basis of accounting).

Because tax-basis and cash-basis—including modified-cash-basis—financial statements are the most widely used OCBOA statements, the guidance in this article will focus on them. Exhibit 1. below, lists some reminders CPAs should find useful in preparing and reporting on any type of OCBOA.

Exhibit 1 : Practical Reminders on OCBOAs

CPAs may audit, review and compile OCBOA financial statements.

OCBOA financial statements are simpler and more cost-effective to prepare, and easier for clients to understand when compared with GAAP-basis ones.

Disclosures in OCBOA financial statements should parallel those in GAAP-basis statements or communicate the same information.

The same disclosure requirements apply in compiled and reviewed OCBOAs that apply in audited OCBOAs.

Modifications to the “pure” cash basis of accounting are acceptable if they are equivalent to the accrual basis and the modifications are logical.

CPAs should not go too far in modifying cash-basis statements so the essential result is GAAP-basis statements with GAAP departures.

Tax-basis OCBOAs may include nontaxable revenue and nondeductible expenses.

CPAs must modify titles to OCBOA financial statements to show the basis of accounting.

GAAP-basis captions may be used within OCBOA financial statements.

There is no requirement for a statement of cash flows in OCBOA financial statements.

A policy note to the financial statements should describe the OCBOA.

CPAs face no requirement to quantify the differences between GAAP and an OCBOA in describing the basis of accounting.

Audit, review and compilation reports should indicate the financial statements were prepared using an OCBOA.

Audit reports on OCBOA financial statements must be modified for OCBOA departures, inconsistencies and going-concern issues. Review and compilation reports should be modified for OCBOA departures, but there is no requirement to modify these reports for inconsistencies and going-concern issues.

Changing the basis of accounting in the financial statements from GAAP to an OCBOA (or vice versa) necessitates the restatement of financial statements presented for comparative purposes.


Category: Forex

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