Tax Basis Financial Statements

OCBOA: PREPARING AND
REPORTING ON CASH,
MODIFIED CASH, AND
TAX BASIS FINANCIAL
STATEMENTS
CMCT/14/01
Course Overview
Overall learning objectives
After completing this course, you should be familiar with:
•
What a “special purpose framework” (the new term for OCBOA) is and the types of
businesses that might consider issuing special purpose framework financial statements;
•
The AICPA’s new special purpose framework – Financial Reporting Framework for
Small- and Medium-sized Entities (FRF for SMEs™);
•
The authoritative and nonauthoritative guidance generally used to prepare special
purpose framework financial statements;
•
Common issues in preparing special purpose framework financial statements;
•
How to prepare special purpose framework financial statements using the cash, modified
cash, and tax basis of accounting;
•
The basic aspects involved in accepting and planning special purpose framework
financial statement engagements; and
•
How to perform and report on special purpose framework financial statement
engagements, including some of the more common special purpose framework peer
review deficiencies seen in practice.
Course organization
For many businesses, preparing financial statements using a special purpose framework (SPF) may
provide an alternative to the complexity of U.S. GAAP. This course will provide you with a comprehensive
review and hands-on application for preparing and reporting on special purpose framework financial
statements. You will learn the unique measurement and disclosure requirements of various SPF options
using example financial statements and illustrative disclosures. The course will also guide you through
SPF engagements from acceptance and planning to reporting, highlighting common practice issues. You
will also be introduced to the AICPA’s new SPF for small and medium-sized entities – FRF for SMEs™.
The course is organized as follows.
Chapter 1 – Special Purpose Frameworks. Chapter 1 begins the course with an overall look at what a
special purpose framework is and the types of businesses that might consider issuing SPF 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 SPF financial statements.
Chapter 2 – FRF for SMEs™. Chapter 2 presents an overview of the AICPA’s new SPF, Financial
Reporting Framework for Small- and Medium-sized Entities (FRF for SMEs™).
Chapter 3 – Common Issues in Preparing Special Purpose Framework Financial Statements.
Chapter 3 presents a review of some of the more common issues encountered in preparing SPF financial
statements.
Chapter 4 – Pure Cash Basis and Modified Cash Basis Financial Statements. In Chapter 4, we will
learn how to prepare SPF financial statements using the pure cash basis and modified cash basis of
accounting.
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Chapter 5 – Tax Basis Financial Statements. In Chapter 5, we will learn how to prepare SPF financial
statements using the tax basis of accounting.
Chapter 6 – Introduction to Special Purpose Framework Financial Statement Engagements. In
Chapter 6, we will step off from the accounting side of SPFs and review the basic aspects of accepting
and planning SPF financial statement engagements.
Chapter 7 – Performing and Reporting on Special Purpose Framework Financial Statement
Engagements. In Chapter 7, we will examine the basic concepts involved in performing and reporting on
SPF financial statement engagements. We will also briefly review some of the more common peer review
deficiencies seen in SPF financial statement engagements.
Chapter 8 – Latest Developments. Chapter 8 is reserved for additional materials to be added
throughout the year as appropriate. As this course went to press there were no latest developments to
include.
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 May 2014
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Special Purpose Frameworks
Learning objectives
I. Introduction
II. What is a special purpose framework?
A. Pure cash basis
B. Modified cash basis
C. Tax basis
D. Other basis
E. FRF for SMEsTM
III. Businesses that might consider using a SPF
A. Common types of businesses using SPFs
IV. Authoritative and nonauthoritative guidance covering special purpose frameworks
A. AU-C Section 800
1. Applying AU-C Section 800 to SPFs
B. SSARS No. 19
1. Applying SSARS No. 19 to SPFs
C. AICPA Practice Aid – Preparing and Reporting on Cash- and Tax-Basis Financial
Statements
D. AICPA Technical Practice Aids
1. Section 1310, Statement of Cash Flows
2. Section 1500, Financial Statements Prepared under an Other Comprehensive Basis of
Accounting
3. Section 1800, Notes to Financial Statements
4. Section 9030, Accounting Changes
V. Practice Exercise
Practice Exercise 1
VI. Practice Exercise -- Suggested Solution
Practice Exercise 1
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FRF for SMEsTM
Learning objective
I. Introduction
II. So why another framework?
III. FRF for SMEsTM from 30,000 feet
A. No official or authoritative status
B. Not a “bright-line” approach
C. Small- and medium-sized entity not defined
D. No industry-specific guidance
E. Minimal maintenance
F. AICPA now an accounting standard setter?
G. Potential disadvantages
H. $64,000 question
IV. FRF for SMEsTM
A. First things first – What is a SME?
B. Okay, what about size limits?
C. So what is FRF for SMEsTM?
D. Canadian little GAAP
E. Tone it down please
F. User needs and cost-benefit constraint
V. Comparison of FRF for SMEsTM with U.S. GAAP
A. “Fair value”
B. Going concern
C. Impairment
D. Other comprehensive income
E. Industry-specific guidance
F. Consolidation of subsidiaries
G. Variable interest entities
H. Income taxes
I. Leases
J. Intangible assets
K. Goodwill
L. Financial assets and liabilities
M. Interest rate swaps
N. Stock-based compensation
O. Inventory
VI. Key chapters in FRF for SMEsTM
VII. Chapter 3 – Transition
A. Opening statement of financial position
1. Business combinations
2. Financial assets and liabilities
3. Asset retirement obligations
B. Prohibited retrospective application
1. Derecognition of financial assets and financial liabilities
2. Estimates
3. Noncontrolling Interests
C. Disclosures
VIII. Chapter 6 – Special Accounting Considerations for Certain Financial Assets and
Liabilities
A. Recognition and measurement
B. Presentation
1. Compound financial instruments
2. Offsetting
C. Derecognition
1. Financial assets and financial liabilities
2. Other derecognition guidance
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D. Disclosures
1. Financial assets
2. Transfers of financial assets
3. Financial liabilities
4. Derivatives
5. Income items
IX. Chapter 19 – Revenue
A. Revenue recognition
1. Persuasive evidence of an arrangement exists
2. Delivery has occurred, or services have been rendered
3. The seller’s price to the buyer is fixed or determinable
4. Ultimate collection is reasonably assured
5. Multiple-element arrangements
B. Construction accounting
1. Additional contract revenue
C. Gross vs. net
1. Principal and gross revenue recognition
2. Agent and net revenue recognition
D. Presentation
E. Disclosures
1. Revenue recognition policy
2. Major categories of revenues
3. Multiple-element sales transactions
4. Construction accounting
X. Chapter 21 – Income Taxes
A. Taxes payable method
1. Measurement
2. Intraperiod allocation
B. Deferred income taxes method
1. Measurement
2. Intraperiod allocation
C. Presentation
1. Income tax expense
2. Income tax liabilities and assets
D. Disclosures
1. Taxes payable method of accounting
2. Deferred income taxes method of accounting
E. Practical application
1. Definition of a tax position and nexus
2. Determining the initial unit of account for a tax position
3. Asset capitalization
4. Change in timing of deductibility
5. Information becomes available before the financial statements are available to be issued
6. Basic deferred tax recognition
7. Change in tax rates
8. Attribution of income taxes to the entity or its owners
9. Attribution of income taxes to the entity or its owners
10. Financial statements of a group of related entities
XI. Chapter 24 – Interests in Joint Ventures
A. Recognition
B. Presentation
C. Disclosures
XII. Chapter 25 – Leases
A. Lease classification
1. Renewals, extensions, or changes in the provisions
B. Lessee Accounting 101
1. Capital leases
2. Operating leases
C. Lessor Accounting 101
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1. Direct financing leases
2. Sales-type leases
3. Collectability and recoverability issues
4. Presentation of direct financing and sales-type leases
5. Operating leases
D. Additional lease guidance
1. Participation by a third party
2. Subleases
3. Sale and leaseback
4. Leases involving land and buildings
5. Related party leases
E. Disclosures
1. Capital lease – lessee
2. Operating lease – lessee
3. Direct financing or sales-type lease – lessor
4. Operating lease – lessor
XIII. Chapter 26 – Related Party Transactions
A. Related parties and related party transactions
B. Measurement
C. Disclosures
1. Describing relationships
2. Describing transactions
3. Transaction amounts
4. Representations about market value
D. Disclosure example
XIV. Chapter 29 – New Basis (Push-Down) Accounting
A. What is “push-down” accounting?
B. Is push-down accounting required?
C. Overall objective
D. Revaluation adjustment
E. Income tax benefits
F. Disclosures
1. In the period that push-down accounting has been first applied
2. In the fiscal period that push-down accounting has been applied and the following fiscal
period
G. Practical application
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Common Issues in Preparing Special
Purpose Framework Financial Statements
Learning objective
I. Introduction
II. SPF presentation issues
A. SPF financial statements
1. Statement of cash flows
B. SPF financial statement titles
C. SPF financial statement captions
D. Changing from U.S. GAAP to a SPF
E. SPF and consolidation accounting
III. SPF disclosure issues
A. Fair presentation
B. SPF financial statement disclosures
1. Summary of significant accounting policies
2. Disclosures similar to those required by U.S. GAAP
3. Additional disclosures necessary for SPF financial statements to be fairly presented
IV. Disclosure checklist
V. Practice Exercise
Practice Exercise 1
VI. Practice Exercise -- Suggested Solution
Practice Exercise 1
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Pure Cash Basis and Modified Cash Basis
Financial Statements
Learning objective
I. Introduction
II. The pure cash basis of accounting
A. Advantages and disadvantages of the pure cash basis of accounting
1. Advantages of using the pure cash basis to account for business transactions
2. Disadvantages of using the pure cash basis to account for business transactions
B. “Indirect” cash transactions
C. Pure cash basis disclosures
III. The modified cash-basis of accounting
A. When is the modified cash basis really U.S. GAAP?
IV. Modified cash basis financial statements
A. Advantages and disadvantages of the modified cash basis of accounting
B. Modified cash basis disclosures
V. Practice Exercises
Practice Exercise 1
Practice Exercise 2
VI. Practice Exercises -- Suggested Solutions
Practice Exercise 1
Practice Exercise 2
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Tax Basis Financial Statements
Learning objective
I. Introduction
II. IRS accounting methods
III. Cash method of accounting
A. Income
1. Delaying receipt of income
2. Checks
3. Debts paid by another person or canceled
4. Repayment of income
B. Expenses
1. Prepaid expenses
C. Excluded entities
1. Exceptions
D. Gross receipts test
1. Aggregation rules
2. Change to accrual method
E. Qualified PSC
1. Function test
2. Ownership test
3. Change to accrual method
IV. Tax basis financial statements prepared using the cash method of accounting
V. Accrual method of accounting
A. Income
1. Estimated income
2. Change in payment schedule
3. Advance payment for services
4. Service agreements
5. Postponement not allowed
6. Guarantee or warranty contracts
7. Prepaid rent
8. Financial statements
9. Advance payment for sales
10. Additional disclosures
B. Exception for inventory goods
1. Substantial advance payments
C. Expenses
1. Economic performance
2. Workers’ compensation and tort liability
3. Taxes
4. Other liabilities
5. Interest
6. Compensation for services
7. Exception for recurring items
8. Prepaid expenses
9. Related persons
VI. Tax basis financial statements prepared using an accrual method of accounting
VII. Inventory
A. Items included in inventory
1. Merchandise
2. C.O.D. sales
3. Containers
B. Items not included in inventory
C. Inventory costing methods
1. Specific identification method
2. FIFO
3. LIFO
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4. Differences between FIFO and LIFO
D. Valuing inventory
1. Goods that cannot be sold
2. Cost method
3. Lower of cost or market method
4. Retail method
E. Perpetual or book inventory
F. Loss of inventory
1. Forgiveness of indebtedness by creditors or suppliers
2. Disaster loss
VIII. Uniform capitalization rules
A. Activities subject to the rules
B. Producing property
C. Tangible personal property
D. Exceptions
1. Qualified creative expenses
E. Personal service corporation
F. Inventories
IX. Change in accounting method
A. Approval required
B. Approval not required
X. Other issues to consider
A. Nondeductible items
B. Results of IRS examinations
C. U.S. GAAP accrual vs. IRS accrual
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Introduction to Special Purpose Framework
Financial Statement Engagements
Learning objective
I. Introduction
II. Accepting a SPF engagement
A. CCC – It all begins with quality control
B. Competence
C. Compliance with legal and relevant ethical requirements
D. Consideration of client integrity
III. The client acceptance process
A. Interview the prospective client
B. Assess the client’s commitment to the appropriate application of the SPF being used
C. Assess the client’s commitment to implementing and maintaining effective internal
control
D. Assess the client’s financial viability
E. Communicate with predecessor accountants or auditors
F. Review your independence and objectivity
G. Consider other issues
H. Documentation
I. Client Engagement Acceptance Forms
IV. Planning a SPF engagement
A. The engagement planning process
B. Preliminary activities
C. Establishing an understanding with the client
D. SPF compilation engagement letter
E. SPF compilation engagement letter components
1. Objectives of the engagement
2. Management’s responsibilities
3. Your responsibilities
4. Limitations of the engagement
5. Other matters
F. SPF review engagement letter
G. SPF review engagement letter components
1. Objectives of the engagement
2. Management’s responsibilities
3. Your responsibilities
4. Limitations of the engagement
5. Other matters
H. SPF audit engagement letter
I. SPF audit engagement letter components
1. Objective and scope of the engagement
2. Your responsibilities
3. Management’s responsibilities
4. Limitations of an audit
5. Other aspects of the engagement
J. Planning activities
1. Overall planning activities
2. Detailed planning activities
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Performing and Reporting on
Special Purpose Framework
Financial Statement Engagements
Learning objectives
I. Introduction
II. Compiling SPF financial statements
A. Candy Baskets.com
B. Keeping track of the numbers
C. Performing a SPF compilation engagement
D. Documentation of a compilation engagement
E. Reporting on a SPF compilation engagement
1. Title and independence
2. Addressee and entity
3. Introductory paragraph
4. Management’s responsibilities
5. Your responsibilities
6. Objective of the engagement
7. Sign and date it
III. Reviewing SPF financial statements
A. Performing a SPF review engagement
B. Review procedures
1. Analytical procedures
2. Inquiries and other review procedures
C. Management representations
D. Documentation in a review engagement
E. Financial statements
F. Reporting on a review engagement
1. Title and independence
2. Addressee and entity
3. Introductory Paragraph
4. The business owner’s (or management’s) responsibilities
5. Your responsibilities
6. SSARSs requirements
7. Your conclusion – NOT opinion
8. Sign and date it
IV. Auditing SPF financial statements
A. Performing a SPF audit engagement
B. The audit process
1. Understanding your client’s business and the environment it operates in
2. Understanding your client’s internal control
C. Identifying and assessing the risks of material misstatement
1. Significant risks
D. Audit procedures
1. Financial statement level
2. Tests of controls
3. Substantive procedures
4. Management representations
E. Evaluating the sufficiency and appropriateness of audit evidence
F. Forming your opinion on the financial statements
G. Documentation in an audit engagement
H. Financial Statements
I. Reporting on an audit engagement
1. Title and independence
2. Addressee and entity
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3. Introductory paragraph
4. Management’s responsibility for the financial statements
5. Auditor’s responsibility
6. Your opinion
7. Basis of accounting
8. Sign and date it
V. Common SPF peer review deficiencies
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Latest Developments
This chapter is reserved for additional materials to be added throughout the year as appropriate. As this
course went to press there were no latest developments to include.
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