OCBOA: PREPARING AND REPORTING ON CASH, MODIFIED CASH, AND TAX BASIS FINANCIAL STATEMENTS CMCT/13/01

Transcription

1 OCBOA: PREPARING AND REPORTING ON CASH, MODIFIED CASH, AND TAX BASIS FINANCIAL STATEMENTS CMCT/13/01

2 Course Overview Overall learning objectives After completing this course, you should be familiar with: What another comprehensive basis of accounting (OCBOA) is and the types of businesses that might consider issuing OCBOA financial statements; The AICPA s new OCBOA Financial Reporting Framework for Small- and Mediumsized Entities FRF for SMEs ; The authoritative and nonauthoritative guidance generally used to prepare OCBOA financial statements; Common issues in preparing OCBOA financial statements; How to prepare OCBOA financial statements using the cash, modified cash, and income tax bases of accounting; The basic aspects involved in accepting and planning an OCBOA engagement; and How to perform and report on an OCBOA engagement. For many businesses, preparing financial statements using an OCBOA can provide an alternative to the complexity of U.S. GAAP. This course will provide you with a comprehensive review of preparing and reporting on OCBOA financial statements. You will learn the unique aspects of various OCBOA options using example financial statements, disclosures, and practice illustrations. The course will also examine the basic concepts involved in accepting and planning an OCBOA engagement and reporting on compiled, reviewed, and audited OCBOA financial statements. Course organization This course will help you clarify the fundamental principles underlying other comprehensive bases of accounting by highlighting the key points, concepts, and requirements you will need to consider when preparing and reporting on OCBOA financial statements. Unlike U.S. GAAP found in the FASB Accounting Standards Codification, there is no authoritative accounting literature covering OCBOA financial statements; however, we will use the auditing literature and best practices, along with examples, illustrations, and hands-on applications to provide you with an overall framework for the application of an OCBOA. The course is organized as follows. Chapter 1 OCBOA: Other Comprehensive Basis of Accounting. We will begin with an overall look at what an OCBOA is and the types of businesses that might consider issuing OCBOA financial statements. This should provide us with a good foundation to then review the authoritative and nonauthoritative guidance generally used to prepare and report on OCBOA financial statements. Chapter 2 FRF for SMEs. Chapter 2 presents a brief review of the AICPA s new OCBOA, Financial Reporting Framework for Small- and Medium-sized Entities -- FRF for SMEs. Chapter 3 Common Issues in Preparing OCBOA Financial Statements. Chapter 3 presents a review of some of the more common issues in preparing OCBOA financial statements. i

3 Chapter 4 Pure Cash Basis and Modified Cash Basis Financial Statements. In Chapter 4, we will learn how to prepare OCBOA financial statements using the pure cash and modified cash bases of accounting. Chapter 5 Income Tax Basis Financial Statements. In Chapter 5, we will learn how to prepare OCBOA financial statements using income tax bases of accounting. Chapter 6 Introduction to OCBOA Financial Statement Engagements. In Chapter 6, we will step off from the accounting side of OCBOA and review the basic aspects of accepting and planning OCBOA financial statement engagements. Chapter 7 Performing and Reporting on OCBOA Financial Statement Engagements. In Chapter 7, we will examine the basic concepts involved in performing and reporting on OCBOA financial statement engagements. We will also briefly review some of the more common peer review deficiencies seen in OCBOA financial statement engagements. This product is intended to serve solely as an aid in continuing professional education. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any tax and accounting opinion or return position, and must be supplemented for such purposes with other current authoritative materials. The information in this manual has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Surgent McCoy CPE, LLC, its authors, and instructors are not engaged in rendering legal, accounting, or other professional services and will not be held liable for any actions or suits based on this manual or comments made during any presentation. If legal advice or other expert assistance is required, seek the services of a competent professional. Revised March 2013 ii

4 OCBOA: Other Comprehensive Basis of Accounting Learning objectives 1 II. What is an OCBOA? 1 A. Pure cash basis 1 B. Modified cash basis 2 C. Income tax basis 2 D. FRF for SMEs 2 III. Businesses that might consider issuing OCBOA financial statements 3 A. Businesses that might consider using an OCBOA 3 IV. Authoritative and nonauthoritative guidance covering other comprehensive bases of accounting 4 A. AU-C Section 800 Special Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks 5 1. Applying AU-C Section 800 to OCBOA 5 B. SSARS No Applying SSARS No. 19 to OCBOA 6 C. AICPA Practice Aid Preparing and Reporting on Cash- and Tax-Basis Financial Statements 6 D. AICPA Technical Practice Aids 6 1. Section 1310, Statement of Cash Flows 6 2. Section 1500, Financial Statements Prepared under an Other Comprehensive Basis of Accounting 7 3. Section 1800, Notes to Financial Statements 8 4. Section 9030, Accounting Changes 8 V. Practice Exercise 10 Practice Exercise 1 10 VI. Practice Exercise -- Suggested Solution 11 Practice Exercise i

5 FRF for SMEs Learning objective 1 II. The AICPA s reaction 1 III. Another financial reporting framework? 3 IV. FRF for SMEs from 30,000 feet 3 A. No official or authoritative status 3 B. No definitive requirements 3 C. Small- and medium-sized entity not defined 3 D. No industry-specific guidance 4 E. Minimal maintenance 4 F. Private Company Council (PCC) 4 G. IFRS for SMEs 4 H. AICPA now an accounting standard setter 4 I. Potential disadvantages 4 J. $64,000 question 4 V. FRF for SMEs vs. U.S. GAAP 4 A. Goodwill accounting 4 B. Variable interest entities 4 C. Lease accounting 5 D. Interest rate swaps 5 VI. FRF for SMEs Exposure Draft 5 VII. Written comments received 5 A. National Association of State Boards of Accountancy (NASBA) 6 B. PricewaterhouseCoopers 6 C. California Society of CPAs 7 D. Georgia Society of CPAs 7 E. Maryland Association of CPAs 7 F. Michigan Association of CPAs 7 G. Missouri Society of CPAs 8 H. New Jersey Society of CPAs 8 VIII. FRF for SMEs chapters 8 A. Chapter 1 Financial Statement Concepts 8 1. The objective of financial statements 9 2. Benefit vs. cost constraint 9 3. Materiality 9 4. Qualitative characteristics 9 5. Elements of financial statements 9 6. Recognition criteria Measurement 10 B. Chapter 2 General Principles of Financial Statement Presentation and Accounting Policies Going concern Basis of presentation 10 C. Chapter 3 Transition 11 D. Chapter 4 Risks and Uncertainties The nature of an entity s operations Use of estimates Significant estimates Concentrations 13 E. Chapter 5 Accounting Changes, Changes in Accounting Estimates, and Correction of Errors 14 F. Chapter 6 Measurement Uncertainty 14 G. Chapter 7 Current Assets and Current Liabilities Debt 15 H. Chapter 8 Statement of Income 16 2-i

6 1. Income from investments 16 I. Chapter 9 Balance Sheet 16 J. Chapter 10 Statement of Cash Flows 17 K. Chapters IX. Practice Exercise 18 Practice Exercise 1 18 X. Practice Exercise -- Suggested Solution 19 Practice Exercise ii

7 Common Issues in Preparing OCBOA Financial Statements Learning objective 1 II. OCBOA presentation issues 1 A. OCBOA financial statements 1 1. Statement of cash flows 2 B. OCBOA financial statement titles 2 C. OCBOA financial statement captions 3 D. Changing from U.S. GAAP to an OCBOA 3 E. OCBOA and consolidation accounting 3 III. OCBOA disclosure issues 3 A. Fair presentation 3 B. OCBOA financial statement disclosures 4 1. Summary of significant accounting policies 4 2. Disclosures similar to those required by U.S. GAAP 6 3. Additional disclosures necessary for OCBOA financial statements to be fairly presented 7 IV. Disclosure checklist 9 V. Practice Exercise 12 Practice Exercise 1 12 VI. Practice Exercise -- Suggested Solution 13 Practice Exercise i

8 Pure Cash Basis and Modified Cash Basis Financial Statements Learning objective 1 II. The pure cash basis of accounting 1 A. Advantages and disadvantages of the pure cash basis of accounting 3 1. Advantages of using the pure cash basis to account for business transactions 3 2. Disadvantages of using the pure cash basis to account for business transactions 4 B. Indirect cash transactions 5 C. Pure cash basis disclosures 5 III. The modified cash-basis of accounting 8 A. When is the modified cash basis really U.S. GAAP? 9 IV. Modified cash basis financial statements 10 A. Advantages and disadvantages of the modified cash basis of accounting 13 B. Modified cash basis disclosures 13 V. Practice Exercises 16 Practice Exercise 1 16 Practice Exercise 2 17 VI. Practice Exercises -- Suggested Solutions 18 Practice Exercise 1 18 Practice Exercise i

9 Income Tax Basis Financial Statements Learning objective 1 II. IRS accounting methods 1 III. Cash method of accounting 2 A. Income 2 1. Delaying receipt of income 2 2. Checks 3 3. Debts paid by another person or canceled 3 4. Repayment of income 3 B. Expenses 3 1. Prepaid expenses 3 C. Excluded entities 4 1. Exceptions 4 D. Gross receipts test 4 1. Aggregation rules 4 2. Change to accrual method 5 E. Qualified PSC 5 1. Function test 5 2. Ownership test 5 3. Change to accrual method 5 IV. Tax basis financial statements prepared using the cash method of accounting 6 V. Accrual method of accounting 10 A. Income Estimated income Change in payment schedule Advance payment for services Service agreements Postponement not allowed Guarantee or warranty contracts Prepaid rent Financial statements Advance payment for sales Additional disclosures 12 B. Exception for inventory goods Substantial advance payments 13 C. Expenses Economic performance Workers compensation and tort liability Taxes Other liabilities Interest Compensation for services Exception for recurring items Prepaid expenses Related persons 15 VI. Tax basis financial statements prepared using an accrual method of accounting 16 VII. Inventory 23 A. Items included in inventory Merchandise C.O.D. sales Containers 23 B. Items not included in inventory 24 C. Inventory costing methods Specific identification method FIFO LIFO 24 5-i

10 4. Differences between FIFO and LIFO 25 D. Valuing inventory Goods that cannot be sold Cost method Lower of cost or market method Retail method 27 E. Perpetual or book inventory 28 F. Loss of inventory Forgiveness of indebtedness by creditors or suppliers Disaster loss 29 VIII. Uniform capitalization rules 29 A. Activities subject to the rules 29 B. Producing property 29 C. Tangible personal property 29 D. Exceptions Qualified creative expenses 30 E. Personal service corporation 30 F. Inventories 30 IX. Change in accounting method 31 A. Approval required 31 B. Approval not required 31 X. Other issues to consider 31 A. Nondeductible items 31 B. Results of IRS examinations 32 C. U.S. GAAP accrual vs. IRS accrual 32 XI. Summary 32 A. IRS accounting methods 33 B. Cash method of accounting 33 C. Accrual method of accounting Advance payments 34 D. Inventory 34 E. Uniform capitalization rules 35 5-ii

11 Introduction to OCBOA Financial Statement Engagements Learning objective 1 II. Accepting an OCBOA engagement 1 A. CCC It all begins with quality control 1 B. Competence 1 C. Compliance with legal and relevant ethical requirements 2 D. Consideration of client integrity 2 III. The client acceptance process 3 A. Interview the prospective client 3 B. Assess the client s commitment to the appropriate application of the OCBOA being used 3 C. Assess the client s commitment to implementing and maintaining effective internal control 3 D. Assess the client s financial viability 3 E. Communicate with predecessor accountants or auditors 4 F. Review your independence and objectivity 4 G. Consider other issues 5 H. Documentation 5 I. Client Engagement Acceptance Forms 5 IV. Planning an OCBOA engagement 5 A. The engagement planning process 5 B. Preliminary activities 6 C. Establishing an understanding with the client 6 D. OCBOA compilation engagement letter 6 E. OCBOA compilation engagement letter components Objectives of the engagement Management s responsibilities Your responsibilities Limitations of the engagement Other matters 14 F. OCBOA review engagement letter 14 G. OCBOA review engagement letter components Objectives of the engagement Management s responsibilities Your responsibilities Limitations of the engagement Other matters 20 H. OCBOA audit engagement letter 20 I. OCBOA audit engagement letter components Objective and scope of the engagement Your responsibilities Management s responsibilities Limitations of an audit Other aspects of the engagement 26 J. Planning activities Overall planning activities Detailed planning activities 27 6-i

12 Performing and Reporting on OCBOA Financial Statement Engagements Learning objectives 1 II. Compiling OCBOA financial statements 1 A. Candy Baskets.com 2 B. Keeping track of the numbers 2 C. Performing an OCBOA compilation engagement 2 D. Documentation of a compilation engagement 3 E. Reporting on an OCBOA compilation engagement 8 1. Title and independence 9 2. Addressee and entity 9 3. Introductory paragraph 9 4. Management s responsibilities 9 5. Your responsibilities Objective of the engagement Sign and date it 10 III. Reviewing OCBOA financial statements 10 A. Performing an OCBOA review engagement 10 B. Review procedures Analytical procedures Inquiries and other review procedures 12 C. Management representations 12 D. Documentation in a review engagement 16 E. Financial statements 16 F. Reporting on a review engagement Title and independence Addressee and entity Introductory Paragraph The business owner s (or management s) responsibilities Your responsibilities SSARSs requirements Your conclusion NOT opinion Sign and date it 18 IV. Auditing OCBOA financial statements 18 A. Performing an OCBOA audit engagement 19 B. The audit process Understanding your client s business and the environment it operates in Understanding your client s internal control 20 C. Identifying and assessing the risks of material misstatement Significant risks 21 D. Audit procedures Financial statement level Tests of controls Substantive procedures Management representations 23 E. Evaluating the sufficiency and appropriateness of audit evidence 25 F. Forming your opinion on the financial statements 26 G. Documentation in an audit engagement 26 H. Financial Statements 27 I. Reporting on an audit engagement Title and independence Addressee and entity Introductory paragraph Management s responsibility for the financial statements 29 7-i

13 5. Auditor s responsibility Your opinion Basis of accounting Sign and date it 30 V. Common OCBOA peer review deficiencies 31 7-ii