Preparing Tax Basis Financial Statements

The most frequent application of OCBOA is to prepare tax-basis financial statements for various entities. This course is a great way to brush up on the current standards and identify key issues in preparing and reporting on tax-basis financial statements. Controllers as well as audit and tax staff who prepare taxbasis financials will benefit.

Highlights include: coverage of tax-basis versus GAAP accounting; financial statement presentation and disclosure issues; and solutions to challenges faced by sole proprietors, S Corps, partnerships, and other taxable entities.

Objectives:

Identify the requirements to produce tax-basis financial statements in conformity with all applicable current professional standards

Overview

Course Objectives

• Be aware of the authoritative guidance for preparing and reporting on tax basis financial statements.
• Understand the general nature of OCBOA financial statements.
• Be aware of accounting issues that arise in preparing tax basis financial statements.
• Understand common disclosures issues related to tax basis financial statements.
• Learn about compilation of tax basis financial statements.

Introduction
SAS No. 62, Special Reports, (AU section 623.04) recognizes “the basis of accounting the reporting entity uses or expects to use to file its income tax return for the period covered by the financial statements” as an other comprehensive basis of accounting. That basis is referred to as the income tax basis of accounting. It is typically is based on federal income tax laws found in the Internal Revenue Code (IRC), along with related regulations, revenue rulings, and procedures. These laws and regulations generally deal with the determination of taxable income, and therefore, focus on the measurement of revenues and expenses (and in some cases, on the determination of the basis of assets and liabilities). However, income tax laws generally do not address financial statement presentation or disclosure considerations. This course discusses the authoritative guidance for preparing and reporting on tax basis financial statements.

Organization
This course covers the authoritative guidance for preparing tax basis financial statements. In addition, this course covers the reporting requirements that are applicable when an accountant compiles prospective financial statements. The course is a combination of discussion, examples to illustrate the concepts, plus thoughtful questions and answers and cases to test the understanding of the concepts covered in the course.

The course is organized as follows:

Chapter 1: OCBOA Financial Statements – Overview and Authoritative Guidance – Explores the authoritative guidance for OCBOA financial statements, in general, and income tax basis financial statements in particular.

Chapter 2: Financial Statement Considerations – This chapter covers key financial statement issues in preparing OCBOA financial statements, including presentation, titles, and supplementary information.

Chapter 3: Income Tax Basis – Accounting Issues – Discusses the key accounting issues in income tax basis financial statements, including IRS accounting methods.

Chapter 4: Income Tax Basis – Disclosure Issues – This chapter covers the key disclosure issues in income tax basis financial statements, including the summary of significant accounting policies and other common disclosures.

Chapter 5: Compiling Income Tax Basis Financial Statements – This chapter concentrates on the unique aspects of a compilation of tax basis financial statements and on identifying and describing report preparation for other comprehensive bases of accounting.

Conclusion This manual is designed to be a permanent reference tool. We hope your reading of this manual enriches your professional learning experience. Note. We use the terms he and she alternately throughout the course (except when a particular person is mentioned) since both sexes are well represented in the accounting and auditing areas.

Chapter 1

OCBOA Financial Statements – Overview and Authoritative Guidance

Learning Objectives

• Understand the general nature of OCBOA financial statements.
• Be aware of the key issues in preparing OCBOA financial statements.
• Recognize basic guidance found in AU Section 623.
• Be aware of other sources of guidance for OCBOA financial statements.

Introduction

The income tax basis of accounting is considered an other comprehensive basis of accounting. The term other comprehensive bases of accounting (OCBOA) refers to bases of accounting other than generally accepted accounting principles (GAAP). The primary guidance for OCBOA financial statements comes from SAS No. 62, Special Reports, (AU Section 623). Unlike GAAP, there is no standard-setting organization for OCBOA. Instead, preparers and accountants have interpreted the audit guidance in AU Section 623 for purposes of preparing OCBOA financial statements. AU Section 623.03 states that “an independent auditor’s judgment concerning the overall presentation of financial statements should be applied within an identifiable framework.” Ordinarily, that framework is provided by GAAP; but AU Section 623 allows a comprehensive basis of accounting other than GAAP to be used. AU Section 623.04 recognizes the following OCBOAs:

• The basis of accounting the reporting entity uses to comply with the requirements or financial reporting provisions of a governmental regulatory agency whose jurisdiction the entity is subject.
• The basis of accounting the reporting entity uses or expects to use to file its income tax return for the period covered by the financial statements.
• The cash receipts and disbursements basis of accounting, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes.
• A definite set of criteria having substantial support that is applied to all material items appearing in financial statements, such as the price-level basis of accounting.

Income Tax Basis
The income tax basis of accounting typically is based on federal income tax laws. Income tax laws generally do not address financial statement presentation or disclosure considerations, however. Typically, entities that use the tax basis of accounting are either

• Profit oriented enterprises (such as small, closely held companies for which conversion to GAAP would be costly).
• Partnerships whose partnership agreements require the use of the tax basis of accounting.
• Not-for-profit organizations seeking relief from the requirements of FASB Statement No. 116, Accounting for Contributions Received and Contributions Made and FASB Statement No. 117, Financial Statements of Not-For-Profit Organizations.

Guidance for OCBOA Financial Statements
The primary guidance for OCBOA financial statements is found in SAS No. 62 (AU Section 623). AU Section 623, and related interpretations, address the general definition of the term other comprehensive bases of accounting, financial statement titles, and financial statement disclosures. In addition, AU Section 623 provides guidance for the auditor’s report. SSARS No. 1, Compilation and Review of Financial Statements (AR Section 100), and related interpretations, contain additional guidance concerning compilation and review of OCBOA financial statements. Finally, AICPA Technical Practice Aids provide guidance for several OCBOA preparation and reporting circumstances.

Observation: Although SAS No. 62 is an audit standard, AR Section 100 specifically references AU Section 623 as authoritative guidance for compiling or reviewing OCBOA financial statements.

AU Section 623
AU Section 623.03 states that “an independent auditor’s judgment concerning the overall presentation of financial statements should be applied within an identifiable framework.” Ordinarily, that framework is provided by GAAP and the auditor’s judgment in forming an opinion is applied accordingly; but AU Section 623 allows a comprehensive basis of accounting other than GAAP to be used.

Financial Statement Titles
AU Section 623.07 also addresses the issue of financial statement titles. Terms such as balance sheet, statement of financial position, statement of income, statement of operations, and statement of cash flows, or similar unmodified titles are generally understood to be applicable only to GAAP financial statements. Accordingly, you should modify the titles of OCBOA financial statements. For example, cash basis financial statements might be titled statement of assets and liabilities arising from cash transactions, or a statement of revenue collected and expenses paid, and a financial statement prepared on a statutory or regulatory basis might be titled statement of income – statutory basis.

Disclosures
When reporting on OCBOA financial statements, the financial statements, including the accompanying notes, should include all informative disclosures that are appropriate for the basis of accounting used. Notes accompanying OCBOA financial statements should include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. However, the effects of the differences between GAAP and OCBOA used need not