What Is Other Comprehensive Basis of Accounting?
Let me explain what Other Comprehensive Basis of Accounting, or OCBOA, really is. It's a way to prepare financial statements using an accounting system that's not GAAP. The most common examples you'll see are tax-basis and cash-basis financial statements. OCBOA also covers statutory bases, like what insurance companies use to meet state insurance commission rules, and even statements based on defined criteria well-supported in popular literature.
Key Takeaways
You need to know that GAAP is the standard method for creating financial statements, based on principles from the Financial Accounting Standards Board, and public U.S. companies must follow it. OCBOA, on the other hand, is a non-GAAP protocol for generating those statements. Examples include income tax basis, cash basis, and modified cash basis. Statements under OCBOA are easier to analyze than GAAP ones and often cost less to prepare. Unlike GAAP, OCBOA doesn't require a statement of cash flows, but it's seen as having insufficient disclosures.
Understanding OCBOA
When I look at the advantages, two stand out for financial statements prepared under OCBOA: they're easier to understand than the complex GAAP statements, and they can cost a lot less to prepare. A big difference is that OCBOA doesn't need a statement of cash flows, which GAAP does require.
One criticism you'll hear about OCBOA statements is that their disclosures aren't adequate. That's why I recommend that if your company adopts OCBOA, you make comprehensive disclosures, including the basis of accounting used, contingent liabilities, and risks and uncertainties.
OCBOA Definitions Under Auditing Standards
- A statutory basis of accounting, for example, what insurance companies use under state insurance commission rules.
- Income-tax-basis financial statements.
- Cash-basis and modified-cash-basis financial statements.
- Financial statements prepared using definitive criteria with substantial support in accounting literature, applied to all material items, such as price level basis.
Special Considerations
In cases where you don't need GAAP-basis statements due to loan covenants, regulatory requirements, or similar reasons, OCBOA might be the better choice. These statements can be more useful for certain entities depending on who the users are and what they expect. They might be required by a regulatory agency or linked to budgets and management decisions. Plus, costs can be lower because audits may involve less complex procedures and disclosures.
Even though OCBOA deviates from the more common GAAP standards, it has its own rules. Professional standards still apply to OCBOA statements. They can be audited, compiled, or reviewed. No statement of cash flows is required. You must disclose the basis of accounting used, and all statements need titles that distinguish them from GAAP. Disclosures should match those in GAAP statements, providing either the required details or information that conveys the same substance. If you modify an OCBOA basis, don't go so far that it basically becomes a GAAP statement with departures.
