Difference between GAAP and OCBOA

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Introduction

Generally, financial statements are prepared using the GAAP system of accounting. The alternative is the cash basis and tax basis. However, there is a system known as Other Comprehensive Basis of Accounting (OCBOA) which includes a statutory accounting basis like the one used by insurance companies in order for them to comply with the guidelines of the commission of state insurance.

Under the cash accounting basis, transactions are recorded according to an organization’s cash disbursements and receipts. Revenue is recognized by the organization when cash is received as opposed to when the income is earned. Expenses on the other hand are recognized when they are paid instead of when the obligation is incurred. In practice, accountants hardly use the pure cash basis of accounting; instead, they exclusively use for clients like trusts, estates and civic ventures. Generally, for profit and non -profit organizations apply the OCBOAs.

The modified basis of cash accounting is a hybrid approach which combines features of the cash and accrual method basis. There should be substantial modifications that CPAs make in accounting literature. For example, SAS 62 cites two modifications which meet this criteria; fixed assets depreciation and income taxes accrual. Nevertheless, other modifications can be used by accountants so long as they have significant support and they are logical in the literature of accounting. For this to materialize, accountants are supposed to report on the same basis on accounts interrelated. For instance, when a fixed asset is recorded, he is expected to record depreciation on these assets.

Considerations of a CPA in preparing financial statements under OCBOA

Before adopting to prepare financial statements on the basis of OCBOA, accountants should;

  1. check that the client has a choice to prepare the financial statements on the OCBOA basis
  2. Make a decision on the OCBOA type of financial statements which will best meet the needs of the company. Generally, OCBOA statements are normally prepared on the basis of income tax or modified cash basis.
  3. Use the guidance of SAS 62 and professional judgment to help in the preparation of financial statements under OCBOA

Differences

  • The financial statements prepared under OCBOA are easier to understand compared to those prepared under GAAP which may be quite complex to understand. For instance, it is not unusual for the manager or owner of a private company to understand fully issues of measurement that are shown in the tax returns while having minimal knowledge of the complexities of disclosure and measurement in the GAAP basis of preparing financial statements.
  • Preparing financial statements using OCBOA is less expensive compared to when they are prepared under GAAP. Most of the principal measurements that are associated with GAAP do not exist. Under the tax basis however, the CPA already addresses tax returns measurement issues for the client. As such, practitioners may save 20-30 % due to the reduced cost and time in preparation and reporting on financial statements of OCBOA.
  • Many users of financial statements like insurances and banks now accept OCBOA statements.
  • Unlike in GAAP, a cash flow statement is not required when preparing accounts under OCBOA.
  • One main disadvantage of statements prepared under OCBOA is that there are inadequate disclosures. Consequently, it is recommended that comprehensive disclosures be made by the company which has adopted OCBOA including the used basis of accounting, uncertainties, contingent liabilities and risks.
  • When using OCBOA statements, CPAs normally find disclosures to be quite simple as they do not include items, transactions or events which are basically a part of the GAAP-basis. For instance, since statements of tax basis fail to show deferred taxes, accountants need not prepare disclosures of deferred taxes which is a requisite by GAAP. However, practitioners should note that there isn’t a disclosure advantage when they have reviewed or compiled OCBOA financial statements compared to auditing them.

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