What is a Special Purpose Framework?

A special purpose framework is a non-GAAP financial reporting framework that employs either a cash, tax, regulatory, contractual, or other basis of accounting. These frameworks are designed for a more specialized audience than one of the general-purpose frameworks, such as generally accepted accounting principles (GAAP).

The nature of a special purpose framework can alter the content and format of an entity's financial statements and accompanying disclosures. The type of special purpose framework should be stated in the compilation, review, or audit report that an auditor issues; additional disclosures may be needed.

Types of Special Purpose Frameworks

Several common types of special purpose frameworks are noted below.

Tax Basis of Accounting

The tax basis of accounting prepares financial statements according to the rules used in filing income tax returns. Revenue and expense recognition follow tax regulations rather than accounting standards like GAAP or IFRS. This framework simplifies the reconciliation between financial and tax reporting, saving time and costs. It is popular among privately held companies that are primarily focused on minimizing tax obligations. However, it may not reflect the true economic activities of a business from an investor’s perspective.

Regulatory Basis of Accounting

The regulatory basis of accounting is designed to comply with the financial reporting requirements set by a regulatory agency. Entities like banks, utilities, and insurance companies often use this framework when mandated by government regulators. The statements are structured to ensure compliance and meet specific regulatory objectives, rather than general financial transparency. Because it focuses on regulatory requirements, it might omit or modify information important to outside stakeholders. Regulatory basis reporting can differ significantly from GAAP-based reporting, depending on industry rules.

Contractual Basis of Accounting

The contractual basis of accounting involves preparing financial statements according to terms set forth in a contract, such as a loan agreement or bond covenant. These statements are tailored to meet the specific information needs of the parties to the contract. The accounting rules followed are not standard but are dictated by the contract’s provisions. It ensures that the reporting entity meets its obligations under the agreement and maintains access to financing or other benefits. However, such statements are often highly specialized and not intended for general external use.