Comprehensive Guide to Other Comprehensive Basis of Accounting (OCBOA)

What Is Other Comprehensive Basis of Accounting?

Other Comprehensive Basis of Accounting (OCBOA) refers to financial statements prepared using accounting methods distinct from Generally Accepted Accounting Principles (GAAP). Common OCBOA frameworks include tax-basis and cash-basis accounting. Additionally, OCBOA encompasses statutory accounting methods, such as those mandated for insurance companies by state insurance regulators, as well as financial statements crafted under specific, well-established criteria recognized in accounting literature.

Key Highlights

• GAAP is the standard accounting framework established by the Financial Accounting Standards Board (FASB) and is mandatory for publicly traded companies in the United States.
• OCBOA represents non-GAAP accounting methods used to prepare financial statements.
• Examples of OCBOA include income tax basis, cash basis, and modified cash basis accounting.
• Financial statements under OCBOA tend to be simpler to interpret and often incur lower preparation costs compared to GAAP statements.
• Unlike GAAP, OCBOA does not require a statement of cash flows, though this can lead to concerns about the sufficiency of disclosures.

Deep Dive into OCBOA

Financial statements prepared under OCBOA offer two primary benefits: enhanced clarity compared to the often complex GAAP statements and potentially reduced preparation expenses. A notable distinction is that OCBOA does not mandate a cash flow statement, simplifying the reporting process.

However, OCBOA statements have faced criticism for potentially inadequate disclosures. To address this, companies adopting OCBOA are encouraged to provide detailed disclosures, including the accounting basis used, contingent liabilities, and any significant risks or uncertainties.

According to the Statement on Auditing Standards No. 62 (USA), OCBOA encompasses:

• Statutory accounting bases, such as those used by insurance companies under state regulations.
• Income tax basis financial statements.
• Cash basis and modified cash basis financial statements.
• Financial statements prepared using specific, well-supported criteria consistently applied to all material items, like the price-level basis of accounting.

Important Considerations

In scenarios where GAAP-based financial statements are not required—due to loan agreements, regulatory conditions, or other factors—OCBOA often serves as a preferred alternative.

OCBOA statements can be particularly advantageous depending on the intended users and their informational needs. They might be mandated by regulatory bodies or linked to internal budgets and management decisions. Additionally, the simpler nature of OCBOA audits can reduce costs due to less complex procedures and disclosure requirements.

While OCBOA differs from the widely adopted GAAP standards, it still adheres to professional guidelines:

• Professional standards govern the preparation and auditing of OCBOA statements.
• OCBOA financials can be audited, reviewed, or compiled.
• Cash flow statements are not required under OCBOA.
• The accounting basis must be clearly disclosed, and financial statements should be titled distinctly from GAAP-based reports.
• Disclosures should be comprehensive, either mirroring GAAP-required disclosures or providing equivalent information to convey the substance effectively.
• Modifications to an OCBOA basis should not be so extensive that they effectively transform the statements into GAAP with exceptions.

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