Other Comprehensive Basis of Accounting (OCBOA) includes financial statements prepared using a system of accounting that differs from GAAP. The most common forms of OCBOA are tax-basis and cash-basis financial statements. Additionally, OCBOA encompasses statutory bases required by certain industries, such as those used by insurance companies to meet state regulations, as well as financial statements founded on well-supported criteria in popular literature.
Key Takeaways
- Generally accepted accounting principles (GAAP) constitute the standardized method for creating financial statements based on principles enacted by the Financial Accounting Standards Board (FASB); public U.S. companies are mandated to adhere to GAAP.
- Other Comprehensive Basis of Accounting (OCBOA) is a recognized non-GAAP accounting protocol used to generate financial statements.
- Examples of OCBOA include the income tax basis of accounting, the cash basis of accounting, and the modified cash basis of accounting.
- Financial statements prepared under OCBOA can be more straightforward to analyze and often come at a lower preparation cost than those under GAAP.
- OCBOA does not require a statement of cash flows, a significant deviation from GAAP, and is often critiqued for potentially insufficient disclosures.
Understanding OCBOA
Two paramount advantages of OCBOA-prepared financial statements are their ease of comprehension compared to GAAP statements, which can be highly intricate, and their cost efficiency. A crucial distinction between GAAP-basis and OCBOA-basis financial statements is that OCBOA statements do not mandate a cash flow statement.
However, a notable critique of OCBOA statements is the inadequacy of disclosures. Therefore, it is recommended that organizations adopting OCBOA provide comprehensive disclosures, including the accounting basis used, contingent liabilities, and external risks and uncertainties.
Under the Statement on Auditing Standards (United States) No. 62, Special Reports, an OCBOA includes:
- Statutory basis of accounting (e.g., accounting for insurance companies under state regulations).
- Income-tax-basis financial statements.
- Cash-basis and modified-cash-basis financial statements.
- Financial statements prepared using definitive criteria that are robustly supported in accounting literature and applied uniformly to all significant items.
Special Considerations
In scenarios where GAAP-based statements are not essential, such as due to loan covenants, regulatory mandates, or other specific situations, an OCBOA alternative might be optimal.
OCBOA financial statements may be more suitable based on user expectations and needs. Regulatory entities might mandate their usage, aligning with budgets and managerial decisions. Costs can be driven down, typically requiring less intricate auditing procedures and disclosures.
Even though OCBOA deviates from GAAP standards, it maintains its professionalism and coherence. Consider the following points:
- Professional standards are imperative for OCBOA statements.
- OCBOA statements are subject to audits, compilations, or reviews.
- No requirement for a cash flow statement exists for OCBOA statements.
- The accounting basis used needs explicit disclosure, and all statements should bear distinct titles from GAAP-basis titles.
- Disclosures ought to be comparable to those of a GAAP statement, adequately providing relevant details or substantive information.
- If modifying an OCBOA basis, alterations should not be so far-reaching as to render the statements effectively GAAP with divergences.
By understanding and leveraging the principles of OCBOA, organizations can benefit from simplified, cost-effective financial reporting while still maintaining financial transparency and reliability.
Related Terms: GAAP, financial statements, accounting principles, disclosure requirements, contingent liabilities, loan covenants.
