Other comprehensive basis of accounting
/What is the Other Comprehensive Basis of Accounting?
An other comprehensive basis of accounting (OCBOA) is a non-GAAP accounting framework that is used to generate financial statements. The use of OCBOA may apply when financial statements are needed for a specific purpose, or when the preparer wants to use a simpler system than GAAP that requires fewer disclosures. It is frequently less expensive to use an OCBOA to prepare financial statements. A downside of using an OCBOA is that the resulting information tends to be skimpier or more summarized than would have been the case if GAAP had been used.
Types of Other Comprehensive Bases of Accounting
Several common examples of other comprehensive bases of accounting are noted below.
Cash Basis of Accounting
The cash basis of accounting recognizes revenues and expenses only when cash is received or paid. This method does not record accounts receivable or accounts payable, which simplifies the bookkeeping process. It is commonly used by small businesses and sole proprietors who do not need GAAP-compliant financial statements. However, it can result in misleading financial results since income and expenses may not align with the periods in which they were incurred. The cash basis is not acceptable under GAAP for publicly traded or larger businesses but is permissible under OCBOA for certain types of entities.
Modified Cash Basis of Accounting
The modified cash basis combines aspects of both the cash and accrual methods of accounting. Revenue and expenses are generally recorded on a cash basis, but certain items like fixed assets, loans, and income taxes may be recorded on an accrual basis. This hybrid approach allows for better financial insight while maintaining simplicity. It is often used by businesses that want to track longer-term assets and liabilities without fully adopting accrual accounting. The modified cash basis is acceptable under OCBOA, provided disclosures explain the modifications used.
Income Tax Basis of Accounting
Under the income tax basis, financial statements are prepared using the same principles as the tax return filed with the IRS. Revenues and expenses are recognized based on tax rules, which may differ significantly from GAAP. This method can be advantageous for small businesses seeking to align financial and tax reporting. It simplifies preparation and may reduce accounting costs since no conversion from tax to GAAP is needed. However, financial statements prepared using this basis may lack comparability and may not reflect economic reality as well as GAAP statements.
Regulatory Basis of Accounting
The regulatory basis is used when an entity is required to follow specific accounting rules set by a regulatory body, such as a state insurance commission or public utility commission. This method is commonly applied by utilities, financial institutions, and insurers to comply with industry regulations. The financial statements reflect accounting practices that meet the needs of regulators, which may differ significantly from GAAP. Reports under this basis focus more on solvency, reserves, or other measures relevant to oversight. Users of these statements must understand the regulatory framework to properly interpret the financial data.
Contractual Basis of Accounting
The contractual basis is used when a business must prepare financial statements in accordance with the terms of a specific agreement, such as a loan covenant or a partnership agreement. The accounting rules are defined by the contract rather than by standard accounting frameworks. This approach allows for customized financial reporting but can lead to non-standard presentation and recognition practices. Since the basis is tailored to a contract, it may include specific rules for asset valuation, revenue recognition, or expense classification. Users must carefully review the contract terms to understand the underlying accounting logic.