There are several widely-used alternatives to U.S. GAAP, which are collectively referred to in the accounting language as special purpose frameworks. A special-purpose framework on the FAR CPA Exam is a non-GAAP financial reporting framework designed for a more specialized audience than a general-purpose framework, such as the generally accepted accounting principles (GAAP). They employ either cash, tax, regulatory, contractual, or other bases of accounting. These are other frameworks that also are referred to as other comprehensive bases of accounting (OCBOA). When preparing financial statements based on other comprehensive bases of accounting, the statement of cash flows is not usually prepared. The important thing is that the statements are descriptive about the basis of accounting that has been used. This will often mean a descriptive title or a title you’re used to, with the addition of the basis used in the title, such as “Statement of Assets and Liabilities - Modified Cash Basis.”
Cash Basis of Accounting
This is a method of recording accounting transactions for revenue and expenses only when the corresponding cash is received or payments are made. Thus, a revenue is recorded when a billed product or service is paid for by a customer, and a payable is recorded only when it is paid by the company.
Many small business owners use the cash basis without even realizing it, when they are recording business transactions primarily with a checkbook. There isn’t really a balance sheet under pure cash accounting, and an “income statement” would be titled something like “Statement of Cash Receipts and Disbursements.”
Modified Cash Basis of Accounting
This is a method that combines elements of the cash basis and accrual accounting. Sales and expenses for long-term assets are recorded on an accrual basis and those of short-term assets on a cash basis. This is done usually by capitalizing and depreciating assets or recognizing accounts receivable & accounts payable, and accruing income taxes due.
The statements would be titled something like “Statement of Assets and Liabilities - Modified Cash Basis” and “Statement of Revenues, Expenses, and Retained Earnings - Modified Cash Basis.”
Tax Basis of Accounting
These statements obviously focus on presenting the information based on tax rules. There is a range of reporting certain aspects from a cash basis to full accrual.
Again, the financial statement titles should specify the basis used, such as “Statement of Revenues and Expenses - Income Tax Basis.”
There are specific regulatory frameworks that have specific guidelines for financial reporting; these are considered an OCBOA, but you are not required to know all of them for the FAR CPA Exam.
Keeping with the idea that financial statements need to be clear about the basis they were prepared on, a title you might see for an income statement prepared under a regulatory basis might be “Statement of Income - Regulatory Basis.”
If you have any queries, feel free to comment in the section below. Happy Learning!
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