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The OCBOA solution: bottom-line relief for small business clients.


Use of financial statements prepared according to other comprehensive bases of accounting (OCBOA) is growing. Judith H. O'Dell, CPA, and Jacob J. Cohen, CPA, explain when and how OCBOA statements can be used to meet the needs of small business clients. O'Dell is chairman of the technical issues committee the private companies practice section (PCPS) of the American Institute of CPAs division for CPA. firms. She is a shareholder of Beucler, Kelly & Co., Ltd., in Wayne, Pennsylvania. Cohen is a former member of the PCPS technical issues committee and chairman of the PCPS taskforce on OCBOA. He is a shareholder of Walped, Smullian & Blumenthal, PA., in Baltimore.

Consider this dilemma: A CPA firm has as clients several small, closely held businesses with little or no unsecured debt. Their owners are very involved in day-to-day operations and carry fairly accurate mental pictures of their companies' financial health. They demand up-to-date, relevant financial information. Their main concern is how much tax they will have to pay. As many accounting practitioners know, financial statements prepared according to generally accepted accounting principles can be unnecessarily complex and often prohibitively expensive for these clients.

For practitioners, the solution is to advise these clients to present their financial statements on an income tax basis. This can be the most effective way to communicate the information the clients need to make business decisions.


As standards proliferate, a growing number of practitioners and small businesses are turning to OCBOA financial statements. A recent national survey of member firms by the PCPS shows use of OCBOA statements by local practitioners is widespread and increasing. Of the 2,175 practitioners surveyed, 81% use OCBOA for privately held clients; 36% say they have GAAP clients who could benefit from using OCBOA.

The survey found OCBOA financial statements are used most often by clients in professional services, medical practice, retailing, real estate, not-for-profit organizations and leasing. For these clients, OCBOA statements meet a growing need for uncomplicated, timely financial reporting. These statements provide reliable information on an organization's financial transactions. And for the client, they may be easier to interpret than GAAP statements.

Practitioners and their clients with privately held businesses need to understand the differences between OCBOA and GAAP-and when it is appropriate to use nonGAAP financials.


If accounting is the language of business, then OCBOA financial statements are to GAAP what a child's speech is to an adult's. Young children don't use their parents'complex vocabularies, yet they are able to communicate effectively. This is because parents are familiar with their children's habits and needs and are able to piece together the essential meaning of their words.

This is true of an OCBOA financial statement used by an owner involved in the day-to-day operations of his or her business. For the owner who doesn't need a sophisticated financial statement to understand the company's financial position, OCBOA statements make sense; they communicate essential information simply and effectively.

Income tax basis financials are probably the most commonly used OCBOA statements. They are prepared using the same rules a company uses to prepare its income tax returns. Income tax basis can be cash, full accrual or modified accrual; the method should be disclosed in the notes to the financial statements.

Statements prepared using accrual income tax basis have the following characteristics:

* Receivables and payables are recorded.

* Internal Revenue Code section 263A costs are included in inventory.

* IRC section 179 and tax methods of depreciation are used.

* Pension accruals are recorded at the amounts determined to be deductible.

* Deferred compensation is expensed as paid.

Some accountants argue these statements are misleading because unfunded pension and deferred compensation arrangements aren't recorded; in addition, leases meeting the criteria of Financial Accounting Standards Board Statement no. 13, Accounting for Leases, aren't capitalized. However, many small companies don't have defined benefit pension plans or deferred compensation arrangements. For those that do, the arrangements can be terminated or otherwise controlled by the owners. Since such arrangements must be disclosed in OCBOA financial statements, it's difficult to label OCBOA "misleading." Information is available for those who need it.

For many small companies, the book-to-tax differences are minimal, and the client is spared the expense of two sets of depreciation schedules and a deferred tax calculation. As a result, the client receives needed information in a comprehensible form.

Cash basis financials are used less frequently than tax basis statements, largely because they are relevant to a smaller group of clients. For some simple businesses, such as not-for-profit organizations and local governments, cash basis financial statements provide a clear response to a key management question: "Where did my money go?" Practitioners using cash basis statements should be certain, however, that they provide the information the client needs and are appropriate to the organization's structure. MAKING THE DECISION When deciding whether OCBOA is appropriate for an entity, practitioners should determine whether the client meets certain criteria under which OCBOA statements may make sense. These include determining if the client

* Has a cash flow parallel to its income and expenses (for cash basis statements).

* Is not highly leveraged.

* Has commitments owner-controlled.

* Has a simple ownership structure.

Conversely, practitioners should is covered by professional standards. The exhibit below gives additional sources of information on OCBOA financial statements.


According to the PCPS survey, the main barrier to wider use of OCBOA financials is third-party resistance. Many bankers and regulators understand only GAAP financial statements. In most cases, this resistance is appropriate; for complicated financing transactions and unsecured debt, bankers must have a common basis on which to make decisions. Many bankers and financial analysts use sophisticated computer programs to analyze a client's financial statements. In order for the client's statements to be comparable with those of other companies, they must be presented according to GAAP

In some situations, banker resistance to OCBOA may be unfounded. Many bankers work closely with small business customers and have a good understanding of their overall financial positions. For example, in the case of a medical practice seeking a fully secured equipment loan, a banker who knows the practice should find income tax basis statements acceptable.

Another misconception propagated by some practitioners is that OCBOA is in competition with GAAP It is not. OCBOA statements are neither better nor worse than GAAP financials. They are simply different. Their appropriateness depends solely on the CPA!s judgment regarding their use by the client and any third party.


For CPAs to combat resistance from third-party users, they need to communicate OCBOA's key benefits.

* OCBOA can be a cost-effective alternative to GAAP. For some small, closelyheld companies, GAAP statements would not be materially different from income tax basis statements, yet the added cost of GAAP is often significant. By using OCBOA, these companies can avoid unnecessary CPA fees.

* OCBOA statements can be more timely because they may be simpler to prepare and rely less heavily on outside parties, such as actuaries, for information.

* OCBOA statements are reliable. They are prepared according to published professional standards. And, within a CPA firm, they are subject to the same stringent quafity control safeguards as GAAP statements. As with GAAP, the accountant's report accompanying the statements indicates the scope of his work and whether he has formed an opinion. * OCBOA financials are often easier to explain to bankers and clients. They communicate vital information in a less sophisticated manner.

* OCBOA statements are flexible. If a third party using OCBOA financial statements needs more information about a company's financial position, it can be made available in footnote disclosures.


As standards become more complex, the profession needs to be aware that the needs of small businesses and large corporations are different. When used responsibly, OCBOA is a reliable alternative to GAAP OCBOA can communicate essential financial information at a lower cost. The bottom-line result is relief from "standards overload" for CPAs and some of their clients. 2

Sources of information on OCBOA GUIDES 1. Other Comprehensive Bases of Accounting. "TIP" Series, no. 1. William Rea Lalli. (New York: American institute of CPAS), 1989. To order copies in New York, call (800) 248-0445; outside New York, call (800) 334-6961. 2. A/CPA Financial Statement Manual. Sections 11, 100-11, 700. Updated quarterly. To order copies, call (212) 575-5515. ARTICLES 3. Tax Basis Financial Statements-Potential for Savings." The CPA Journal. Douglas R. Carmichael and Akshay K. Talwar (December 1989), pp. 28-36. To order reprints, call Jack Wicks: (212) 973-8300. 4. "PCPS Technical Issues Committee Pushes OCBOA." The CPA Journal (October 1989), pp. 10-11. To order reprints, call Jack Wicks: (212) 9738300. 5. "What's So Special About Special Reports?" Journal of Accountancy. Jerry Serlin and Mimi Blanco-Best (October 1989), pp. 60-74. To order reprints, write to Marie MacBryde, AICPA, 1211 Avenue of the Americas, New York, New York 10036-8775. CONFERENCE TAPE 6. National Accounting and Auditing Advanced Technical Symposium. "OCBOA SAS 62." June 26,1990 (San Francisco), and July 10, 1990 (Boston), 9:55 a.m.-11:35 a.m. For more information, call (800) 242-7269 or (212) 575-5696. HOT LINES 7. AICPA Technical Hotline. In New York, call (800) 522-5430; outside New York, call (800) 223-4158. Call between 9:00 a.m. and 4:45 p.m. EST. ADDITIONAL RESOURCES 8. AICPA library information available on accounting practices for various industries). In New York, call (800) 522-5434; outside New York, call (800) 223-4155.
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Author:Cohen, Jacob J.
Publication:Journal of Accountancy
Date:Feb 1, 1991
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