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June 1990

Practice issues on OCBOA financial statements.

by Carmichael, Douglas R.

    Abstract- Audits of financial statements which use an accounting basis other than Generally Accepted Accounting Principles (OCBOA) need to make sure to specify when statements are being prepared using OCBOA. Guidance on this issue can be obtained by reading Statement of Auditing Standard 62. Generally, there are various categories of OCBOA including regulatory basis, tax basis, and cash basis. In addition, OCBOA also addresses a broad category defined as a specific set of factors that is applied to every material item in financial statement. Various issues related to OCBOA are discussed, including: whether current value basis is an OCBOA; determining whether selected tax basis is an OCBOA; and determining how accountants should report OCBOA.

Categories of OCBOA

There are four categories of OCBOA. Three bases of accounting are specifically named in the SAS: regulatory basis, cash basis, and tax basis. However, the fourth is a broad conceptual category described as "a definite set of criteria having substantial support that is applied to all material items in the financial statements." One example of this category is provided in SAS 62-the general price-level basis of accounting. However, there is no additional guidance for evaluating whether a particular basis of accounting has "substantial support," is "applied to all material items," or is sufficiently established to qualify as having a "definite set of criteria."

Is Current Value Basis an OCBOA?

A frequent question in practice is whether the current value basis of accounting qualifies as an OCBOA. Some auditors believe that current value financial statements are particularly useful for certain industries such as real estate, where assets can appreciate rapidly.

Since SAS 62 provides no additional guidance or examples for establishing when a basis of accounting qualifies as an OCBOA, it is necessary to reason by analogy from the single example provided by the SAS.

Substantial Support. APB Statement 3 on price-level adjusted financial statements was issued by the Accounting Principles Board, the predecessor of the FASB. APB Opinions that have not been superseded by actions of the FASB are considered authoritative under the AICPA's Code of

Professional Conduct, Rule 203. However, APB Statements are not recognized as authoritative under the Rule. Nevertheless, an APB Statement provides substantial support because the APB was a group of highly regarded, expert accountants that followed a due process procedure. Thus, one could conclude that a basis of accounting defined and established by such a group would meet the criteria of having substantial support.

AICPA AU Sec. 411 includes the following category as the second ranked source of established accounting principles:










The AICPA's AcSEC is generally recognized as being in this category. Thus, an AcSEC pronouncement could provide substantial support for an OCBOA. Industry or trade group publications on accounting are not generally recognized as being in this category, and such a publication would generally not provide substantial support.

Definite Criteria. A definite set of criteria seems to be analogous to the concept of "reasonable criteria" under the AICPA's attestation standards, which require that an assertion be capable of reasonably consistent estimation or measurement using those criteria. AT Sec. 100.17 states the following:






Under APB Statement 3, price level adjusted financial statements met this requirement because they were based on GAAP financial statements and underlying accounting records adjusted by price-level indices in accordance with the guidance in Statement 3.

All Material Items. Application to all material items in the financial statements is the third requirement. Under Statement 3, complete financial statements-a balance sheet, income statement, and statement of changes in financial position-were prepared. In contrast, for example, the supplementary financial information on a constant dollar basis once required by the FASB to be presented for certain entities would not be an OCBOA because only certain financial statement items, i.e., inventory, cost of sales, fixed assets, and depreciation were adjusted.

Putting It All Together

Does the current value basis of preparing financial statements meet the requirements and qualify as an OCBOA? Because no group or body comparable to AcSEC has provided guidance on how to implement the current value basis, it seems that the current value basis at this time does not have substantial support and therefore is not an OCBOA. If AcSEC were to provide guidance on how to implement the current value basis in a complete set of financial statements, then that basis would be an OCBOA.

Is Selected Tax Basis an OCBOA?

Tax basis financial statements are specifically recognized as an OCBOA by SAS 62. If a corporation issues tax basis financial statements as its primary statements, the corporation may be able to minimize alternative minimum tax (AMT) problems.

The issue has arisen in practice that a company's management, to avoid AMT complications, wants to use the tax basis only for certain items in the financial statements. For example, if a lease is treated as a capital lease under GAAP, but as an operating lease for tax purposes, the related depreciation and interest expense in the GAAP financial statements may be less than the rental expense deduction for certain years. Because of the book income adjustment required for the AMT calculation, additional taxes may be owed because of this difference.

Some company managements have suggested preparing financial statements using the tax basis for accounting for leases, but using GAAP for other items. These managements do not want to issue full tax basis financial statements. Can selective use of tax basis for financial statements, i.e., modified tax basis statements, qualify as an OCBOA?

The selective application of tax basis to certain financial statement items does not appear to meet the requirement of SAS 62 that the other basis be applied to all material items in the financial statements. Accordingly, this approach would not qualify as an ODBOA.

How Do You Report?

Neither of the accounting bases discussed above qualify as an OCBOA, nor are they GAAP. If the auditor is engaged to audit and report on this type of information, SAS 62, paragraphs 27 to 30, apply. This guidance relates to reporting on special-purpose financial statements prepared in conformity with a basis of accounting that is non-GAAP and non-OCBOA.

In these circumstances, the auditor must be able to conclude that the basis of accounting meets the criteria of the attestation standards referred to earlier concerning reasonableness and consistency of similar measurements and disclosures by competent persons. SAS No. 62, paragraph 28, observes that such criteria do not meet the requirement of having substantial support even though the criteria may be definite.

When reporting on stand-alone financial statements prepared in accordance with criteria that are definite but non-GAAP and non-OCBOA, the report must include a paragraph that restricts its distribution. If the presentation supplements audited historical financial statements on which the auditor is reporting, the restrictive paragraph is not necessary.

Don't Give Up the Ghost

The AICPA's auditing standards division is preparing an auditing interpretation that provides an example of a report on current-value financial statements that supplement historical-cost financial statements of a real estate entity.

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