100 Background Information

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1 Page 1 of 27 Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Accounting and Financial Statements (US GAAP) Cash, Tax, and Other Bases of Accounting Chapter 1 An Introduction to OCBOA Financial Statements 100 Background Information 100 Background Information Bases of accounting other than GAAP [referred to in the authoritative literature as special purpose frameworks or other comprehensive bases of accounting or (OCBOAs)] are a widely used alternative to the numerous and sometimes complex accounting requirements prescribed by generally accepted accounting principles (GAAP). Also contributing to the use of OCBOAs is the availability of inexpensive accounting software, which allows individuals more familiar with tax laws than GAAP to maintain records and prepare financial statements with relative ease. 1 Unfortunately, limited authoritative guidance on applying other comprehensive bases of accounting exists References to OCBOAs appear in Statements on Auditing Standards (SASs) and Statements on Standards for Accounting and Review Services (SSARS). AU-C 210, Terms of Engagement [formerly SAS No. 84 (AU 315) and SAS No. 108 (AU 311)], requires the auditor to determine the acceptability of the financial reporting framework applied in the preparation of the financial statements. Ordinarily, that framework is provided by GAAP; but AU-C 800, Special Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks [formerly SAS No. 62 (AU 623)], and SSARS No. 19 (AR 60.04) allow special purpose frameworks to be used. AU-C 800 describes the following special purpose frameworks: Cash Basis. A basis of accounting used by the reporting entity to record cash receipts and disbursements. It includes modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets), commonly known as the modified cash basis. Regulatory Basis. A basis of accounting used by the reporting entity to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission). Tax Basis. A basis of accounting the reporting entity uses to file its tax return for the period covered by the financial statements. Contractual Basis. A basis of accounting used by the entity to comply with an agreement between the entity and one or more third parties other than the auditor.

2 Page 2 of 27 Other Basis. A basis of accounting utilizing a definite set of logical and reasonable criteria that is applied to all material items within the financial statements. 2 According to AU-C , the cash, tax, regulatory, and other bases of accounting are commonly referred to as other comprehensive bases of accounting. While AU-C 800 predominantly uses the term special purpose framework, this Guide continues to predominantly use the term other comprehensive basis of accounting or OCBOA SSARS No. 19 (AR 60.04) revised the definition of OCBOA as it relates to compilation and review engagements, indicating that an OCBOA is a definite set of criteria, other than U.S. GAAP or International Financial Reporting Standards (IFRS), having substantial support underlying the preparation of financial statements prepared according to such basis. While that definition added a reference to IFRS, as discussed in paragraph , this Guide does not address IFRS. Additionally, SSARS No. 19 indicates that ordinarily a modification would have substantial support if the method is equivalent to the accrual basis of accounting for that item and if the method is not illogical AU-C 800 provides the primary guidance for disclosures in OCBOA financial statements. When special purpose financial statements contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP, AU-C states that the financial statements should include informative disclosures similar to those required by GAAP. In addition, it states that additional disclosures, beyond those specifically required by the framework, related to matters that are not specifically identified on the face of the financial statements, or other disclosures, might be necessary for the financial statements to achieve fair presentation. The discussion beginning at paragraph addresses the applicability of this guidance to compiled or reviewed financial statements. FASB Codification GAAP measurement and disclosure requirements can be found in the FASB Accounting Standards Codification. The FASB Accounting Standards Codification (FASB ASC or the Codification) is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). Other accounting literature not included in the Codification is nonauthoritative. Clarity Project of the Auditing Standards Board In response to growing concerns about the complexity of auditing standards and to converge U.S. GAAS with International Standards on Auditing, the Auditing Standards Board has been working on the Clarity Project to revise all existing standards and to design a format under which all new standards will be issued. In October 2011, the AICPA issued: SAS No.122, Statements on Auditing Standards: Clarification and Recodification. This represents a completely new set of auditing standards revised in format, structure, style, and content from the existing standards. It supersedes all existing SASs through SAS No. 121, except: SAS No. 51, Reporting on Financial Statements Prepared for Use in Other Countries. (Subsequently superseded by SAS No. 124.)

3 Page 3 of 27 SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. (Subsequently superseded by SAS No. 126.) SAS No. 65, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements. (Currently being redrafted and will be superseded when the clarified version is issued.) SAS No. 87, Restricting the Use of an Auditor's Report. (Subsequently superseded by SAS No. 125.) SAS No. 117 on compliance audits and SAS Nos on supplementary information. These standards were previously issued in clarified format and are already effective. SAS No. 123, Omnibus Statement on Auditing Standards Amends SAS Nos. 117, 118, and 122 to address matters that arose after the clarified standards were finalized. SAS No. 124, Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another Country. This is the clarified and recodified version of SAS No. 51, Reporting on Financial Statements Prepared for Use in Other Countries. All auditing interpretations corresponding to a SAS were considered in the development of the clarified standards and incorporated as necessary. Generally, the interpretations have been withdrawn, except for certain interpretations that were retained and revised to reflect the issuance of SAS No Going forward, the ASB will continue to issue SASs to create, amend, or supersede the auditing standards as necessary Effective Date With a few exceptions, all of the clarified standards are effective for audits of financial statements for periods ending on or after December 15, Generally early adoption of SAS Nos is not permitted. However, an auditor may implement aspects of SAS Nos early as long as he or she continues to comply with existing standards. See the discussion of the implementation approach in this Guide beginning at paragraph SAS No. 125 In December 2011, the ASB issued SAS No. 125, Alert That Restricts the Use of the Auditor's Written Communication. SAS No. 125 supersedes SAS No. 87 (AU 532), Restricting the Use of an Auditor's Report, and amends, among other standards, AU-C 260, The Auditor's Communication With Those Charged With Governance, and AU-C 265, Communicating Internal Control Related Matters Identified in an Audit. SAS No. 125 is effective for the auditor's written communications related to audits of financial statements for periods ending on or after December 15, 2012.

4 Page 4 of SAS No. 126 In July 2012, the ASB issued SAS No. 126, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern (Redrafted), which supersedes SAS No. 59 of the same name. In issuing SAS No. 126, the ASB followed the format of the other clarified SASs, but did not converge with the ISAs, pending the FASB's anticipated development of accounting guidance addressing going concern. (At the time this Guide was completed, the FASB had indicated on its Projects webpage that an exposure draft would be issued in the fourth quarter of 2012.) Accordingly, SAS No. 126 does not change or expand SAS No. 59 in any significant respect. SAS No. 126 has the same effective date as the other clarified auditing standards Form and Structure of the Standards The clarified standards were developed using formatting techniques, such as bulleted lists, that make them easier to read and understand. In addition, each clarified standard is divided into the following topics: Introduction. Includes matters such as the purpose and scope of the guidance, subject matter, effective date, and other introductory material. Objectives. Establishes objectives that allow the auditor to understand what he or she should achieve under the standards. The auditor uses the objectives to determine whether additional procedures are necessary for their achievement and to evaluate whether sufficient appropriate audit evidence has been obtained. Definitions. Provides key definitions that are relevant to the standard. Requirements. States the requirements that the auditor is to follow to achieve the objectives unless the standard is not relevant or the requirement is conditional and the condition does not exist. Application and Other Explanatory Material. Provides further guidance to the auditor in applying or understanding the requirements. While this material does not in itself impose a requirement, auditors should understand this guidance. How it is applied will depend on professional judgment in the circumstances considering the objectives of the standard. The requirements section references the applicable application and explanatory material. Also, when appropriate, considerations relating to smaller and less complex entities are included in this section A standard may also contain exhibits or appendices. Appendices to a standard are part of the application and other explanatory material. The purpose and intended use of an appendix is explained in the standard or in the title and introduction of the appendix. Exhibits to standards are interpretive publications. Interpretive publications are not auditing standards and do not contain requirements. Rather, they are recommendations on applying the standards in particular circumstances that are issued under the authority of the Auditing Standards Board. Auditors are required to consider applicable interpretive publications when planning and performing the audit.

5 Page 5 of New AU Section Organization Within the AICPA Professional Standards, the clarified standards (SAS Nos ) use AU-C section numbers instead of AU section numbers. AU-C is being used temporarily to avoid confusion with references to existing AU sections, which remain effective through The AU-C identifier will revert to AU in 2014, when the clarified standards are fully effective for all engagements. The organization of the new AU-C sections is as follows: Preface. Glossary. AU-C Section : General Principles and Responsibilities. AU-C Section : Risk Assessment and Response to Assessed Risks. AU-C Section : Audit Evidence. AU-C Section : Using the Work of Others. AU-C Section : Audit Conclusions and Reporting. AU-C Section : Special Considerations. AU-C Section : Special Considerations in the United States Exhibits and Appendixes An exhibit to SAS No. 122 contains a two-part cross-reference of AU-C and AU section numbers. One part of the cross-reference shows which existing AU sections are encompassed by each new AU-C section. The other part of the cross-reference shows, for each existing AU section, where the corresponding guidance can be found in the new AU-C sections.

6 Page 6 of Preface AU-C Preface, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards, contains the principles underlying an audit conducted in accordance with generally accepted auditing standards (the principles). These principles are not requirements and are not authoritative. They provide a framework that is helpful in understanding and explaining an audit and are organized to provide a structure for the codification of SASs. The structure addresses the purpose of an audit, responsibilities of the auditor, performance of the audit, and reporting Implementation of the Clarified Auditing Standards With a few exceptions, all of the clarified auditing standards are effective for audits of financial statements for periods ending on or after December 15, Generally early adoption of SAS Nos (the clarified standards) is not permitted. However, an auditor may implement aspects of the clarified standards early as long as he or she continues to comply with existing standards Implementation in this Guide The majority of the requirements in the clarified standards are consistent with the requirements in the pre-clarified standards. Thus, the changes to the standards, although extensive, do not create many substantive changes in practice. Therefore, the discussions throughout this Guide and references to authoritative auditing literature have been updated for the clarified standards If there has been a change in the standards that will cause a change in practice, the authors have provided a discussion of both the pre-clarified and clarified auditing standards, including appropriate references to the pre-clarified authoritative literature. Therefore, unless a difference is specifically highlighted, the auditor using the updated guidance in this Guide is also continuing to comply with existing standards. As a result, auditors may use this edition of the Guide both before and after the effective date of the clarified standards Significant Changes to OCBOA Engagements AU-C 800 supersedes the portion of SAS No. 62 that provides the current guidance for auditing OCBOA financial statements. Some of the changes under the new standard that impact OCBOA audit engagements include: Changed definition of an OCBOA. AU-C 800 as initially issued eliminated the use of a definite set of criteria having substantial support that is applied to all material items appearing in financial statements, such as the pricelevel basis of accounting. However, as discussed in paragraph 100.2, that definition was added back (excluding the mention of the price-level basis of accounting, which has been eliminated in the clarified auditing standard). The contractual basis is added as one type of OCBOA that is not separately defined in SAS No. 62. New terminology. Throughout the new standard, the use of the term other comprehensive basis of accounting has generally been replaced by the term special purpose framework, although use of the existing term is still appropriate for the cash, tax, regulatory, and other bases of accounting. Acceptability of the Reporting Framework. AU-C requires the auditor to determine whether the special purpose framework used to prepare the entity's financial statements is acceptable by obtaining an understanding

7 Page 7 of 27 of (a) the purpose for which the financial statements are prepared, (b) the intended users, and (c) the steps taken by management to determine that the framework is acceptable in the circumstances. Preconditions for the Audit. AU-C requires the auditor to obtain management's agreement that it acknowledges and understands its responsibility to include all informative disclosures that are appropriate for the special purpose framework used to prepare the financial statements. Management's acknowledgment and understanding should also cover any additional disclosures necessary to achieve fair presentation in the financial statements. The auditor should evaluate whether such disclosures are necessary. Regulatory and Contractual Bases. When the special purpose framework is the regulatory or contractual basis, certain performance, reporting, and/or presentation requirements exist under AU-C 800. Those requirements are discussed in Chapters 6, 7, and 9. Reporting. Several new requirements exist in the area of reporting that impact all types of special purpose frameworks pursuant to AU-C 800. Those requirements are discussed in Chapter Exhibit 1-1 provides a cross-reference between the clarified auditing standard requirements of AU-C 800 and the pre-clarified auditing guidance for OCBOA engagements. Exhibit 1-1 Audits of Financial Statements Prepared Using a Special Purpose Framework Requirements/Guidance Clarified AU- C Reference Pre-clarified Reference Definitions: Special purpose framework a a financial reporting framework other than GAAP that is one of the following bases of accounting Cash basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support. Tax basis. A basis of accounting that the entity uses to file its tax return for the period covered by the financial statements. Regulatory basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject. AU-C AU AU-C a AU c AU-C b AU b AU-C c AU a Contractual basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor. AU-C d AU b b

8 Page 8 of 27 Requirements/Guidance Other basis. A basis of accounting that utilizes a definite set of logical and reasonable criteria that is applied to all material items appearing in financial statements. Reference to financial statements in AU-C 800 means a complete set of special purpose financial statements, including the related notes. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the form and content of the financial statements and what constitutes a complete set of financial statements. Clarified AU- C Reference Pre-clarified Reference AU-C e AU d AU-C AU Requirements: Considerations When Accepting the Engagement AU-C 210, Terms of Engagement, requires the auditor to determine whether the financial reporting framework used in the preparation of the financial statements is acceptable. For an audit of special purpose financial statements, the auditor should obtain an understanding of the purpose for which the financial statements are prepared, AU-C N/A b the intended users, and the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances. AU-C 210 requires the auditor to establish whether the preconditions for an audit are present, including whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable. When auditing special purpose financial statements, the auditor should obtain management's agreement that it acknowledges and understands its responsibility to include all informative disclosures that are appropriate for the special purpose framework used to prepare the entity's financial statements, including A description of the special purpose framework, including a summary of significant accounting policies, and how the framework differs from GAAP, the effects of which need not be quantified. Informative disclosures similar to those required by GAAP, in the case of special purpose financial statements that contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP. A description of any significant interpretations of the contract on which the special purpose financial statements are based, in the case of special purpose financial statements prepared in accordance with a contractual basis of accounting. Additional disclosures beyond those specifically required by the framework that may be necessary for the special purpose financial statements to achieve fair presentation. Considerations When Planning and Performing the Audit AU-C AU-C a AU-C b AU-C c AU-C d N/A b N/A b N/A b N/A b N/A b AU-C 200, Overall Objective of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, requires the auditor to comply with all AU-C sections pertinent to the audit. Accordingly, in planning and performing an audit of special purpose financial statements, the AU-C AU

9 Page 9 of 27 Requirements/Guidance auditor should adapt and apply all AU-C sections relevant to the audit as necessary in the circumstances of the engagement. AU-C 300, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, requires the auditor to obtain an understanding of the entity's selection and application of accounting policies. In the case of special purpose financial statements prepared in accordance with a contractual basis of accounting, the auditor should obtain an understanding of any significant interpretations of the contract that management made in the preparation of those financial statements. An interpretation is significant when adoption of another reasonable interpretation would result in a material difference in the information presented in the financial statements. Forming an Opinion and Reporting Considerations When forming an opinion and reporting on special purpose financial statements, the auditor should apply the requirements of AU-C 700, Forming an Opinion and Reporting on Financial Statements. When, in forming an opinion, the auditor concludes that a modification to the auditor's opinion on the financial statements is necessary, the auditor should apply the requirements of AU-C 705, Modifications to the Opinion in the Independent Auditor's Report. AU-C 700 requires the auditor to evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. In an audit of special purpose financial statements, the auditor should evaluate whether the financial statements are suitably titled, include a summary of significant accounting policies, and adequately describe how the special purpose framework differs from GAAP. The effects of these differences need not be quantified. In the case of special purpose financial statements prepared in accordance with a contractual basis of accounting, the auditor should also evaluate whether the financial statements adequately describe any significant interpretations of the contract on which the financial statements are based. Clarified AU- C Reference AU-C AU-C AU-C AU-C Pre-clarified Reference N/A b AU ; AU AU ; AU N/A b AU-C 700 requires the auditor to evaluate whether the financial statements achieve fair presentation. In an audit of special purpose financial statements when the special purpose financial statements contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP, the auditor should evaluate whether the financial statements include informative disclosures similar to those required by GAAP. The auditor should also evaluate whether additional disclosures, beyond those specifically required by the framework, related to matters that are not specifically identified on the face of the financial statements or other disclosures are necessary for the financial statements to achieve fair presentation. AU-C 700 addresses the form and content of the auditor's report. In the case of an auditor's report on special purpose financial statements AU-C AU AU-C AU The explanation of management's responsibility for the financial statements should also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances, when management has a choice of financial reporting frameworks in the preparation of such financial statements. The auditor's report should also describe the purpose for which the financial statements are prepared or refer to a note in the special purpose financial statements that contains such information, when the financial statements are prepared in accordance with a regulatory or contractual basis of accounting. AU-C a AU-C b N/A b AU c

10 Page 10 of 27 Requirements/Guidance Except for the circumstances described in AU-C , the auditor's report on special purpose financial statements should include an emphasis-of-matter paragraph, under an appropriate heading that Clarified AU- C Reference Pre-clarified Reference AU-C AU d indicates that the financial statements are prepared in accordance with the applicable special purpose framework, refers to the note to the financial statements that describes that framework, and states that the special purpose framework is a basis of accounting other than GAAP. Except for the circumstances described in AU-C , the auditor's report on special purpose financial statements should include an other-matter paragraph, under an appropriate heading that restricts the use of the auditor's report when the special purpose financial statements are prepared in accordance with AU-C AU g a contractual basis of accounting, a regulatory basis of accounting, or an other basis of accounting when required pursuant to AU-C (bullets a-b). If the special purpose financial statements are prepared in accordance with a regulatory basis of accounting, and such financial statements together with the auditor's report are intended for general use, the auditor should not include the emphasis-of-matter or other-matter paragraphs required by AU-C Instead, the auditor should express an opinion about whether such financial statements are presented fairly, in all material respects, in accordance with GAAP. Additionally, in a separate paragraph, the auditor should express an opinion about whether the financial statements are prepared in accordance with the special purpose framework. AU-C N/A b If the auditor is required by law or regulation to use a specific layout, form, or wording of the auditor's report, the auditor's report should refer to GAAS only if the auditor's report includes, at a minimum, each of the following elements AU-C AU A title. An addressee. An introductory paragraph that identifies the special purpose financial statements audited. A description of the responsibility of management for the preparation and fair presentation of the special purpose financial statements. A reference to management's responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances when required by AU-C a. A description of the purpose for which the financial statements are prepared when required by AU-C b.

11 Page 11 of 27 Requirements/Guidance A description of the auditor's responsibility to express an opinion on the special purpose financial statements and the scope of the audit, which includes (1) a reference to GAAS and, if applicable, the law or regulation and (2) a description of an audit in accordance with those standards. Clarified AU- C Reference Pre-clarified Reference An opinion paragraph containing an expression of opinion on the special purpose financial statements and a reference to the special purpose framework used to prepare the financial statements (including identifying the origin of the framework) and, if applicable, an opinion on whether the special purpose financial statements are presented fairly, in all material respects, in accordance with GAAP when required by AU-C An emphasis-of-matter paragraph that indicates that the financial statements are prepared in accordance with a special purpose framework when required by AU-C An other-matter paragraph that restricts the use of the auditor's report when required by AU-C The auditor's signature. The auditor's city and state. The date of the auditor's report. If the prescribed specific layout, form, or wording of the auditor's report is not acceptable or would cause an auditor to make a statement that he or she has no basis to make, the auditor should reword the prescribed form of report or attach an appropriately worded separate report. AU-C N/A b Notes: a The phrase special purpose framework is a new term used by the clarified auditing standards. The pre-clarified auditing standards refer to such a framework as an other comprehensive basis of accounting (or OCBOA). AU-C indicates that the cash, tax, regulatory, and other bases of accounting are commonly known as other comprehensive bases of accounting. b The requirement or guidance is new under the clarified auditing standards. c The pre-clarified guidance includes the requirement, but related only to the regulatory basis of accounting Other Significant Changes Other clarified SASs also have an impact on the audit of OCBOA (and other) financial statements. Some of the more significant changes include:

12 Page 12 of 27 New audit reports. The new authoritative guidance for reporting is covered by several clarified SASs including, Forming an Opinion and Reporting on Financial Statements, Modifications to the Opinion in the Independent Auditor's Report, and Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's Report. The audit report will look quite different once the clarified SASs are effective. Changes to the engagement letter. The clarified SAS, Terms of Engagement, provides certain changed requirements for the written agreement between the auditor and company management. Revisions to the management representation letter. The clarified SAS, Written Representations, supersedes SAS No. 85 and provides changes to the management representation letter See the discussion beginning at paragraph for an explanation of how the clarified auditing standards have been incorporated within the Guide. Chapter text as well as the illustrative reports, engagement letters, management representation letters, and all other impacted forms and checklists have been revised to comply with the clarified auditing standards. Clarified SSARS Project Proposed Clarified SSARS, Association With Unaudited Financial Statements There is currently a hole in the SSARS literature, as the guidance in AR was not carried forward by SSARS No. 19. Once the clarified auditing standards become effective for audits of periods ending on or after December 15, 2012, there will also be a hole in the auditing literature. Since May 2010, the ARSC has been working on a standard that will address association. Most recently, at the ARSC's May 2012 meeting, a proposed SSARS, Association With Unaudited Financial Statements, was discussed. The SSARS Association ED was voted for exposure and exposed in June Comments are requested by November 30, The new proposed SSARS addresses the accountant's responsibility when the accountant is associated with financial statements that have not been compiled, reviewed, or audited (i.e., unaudited financial statements). The accountant is considered to be associated with the unaudited financial statements when: The accountant permits the use of the accountant's name in a report, document, or written communication containing unaudited financial statements that have not been prepared in whole or part by the accountant, or The accountant prepares, in whole or in part, unaudited financial statements for the entity, even though the accountant does not append his or her name to the unaudited financial statements When the accountant's name is associated with unaudited financial statements the accountant did not prepare, the accountant should: a. Read the unaudited financial statements.

13 Page 13 of 27 b. Consider whether the statements appear free from material inconsistencies with other knowledge or information of which the accountant may be aware. c. After performing a. and b., if the accountant decides to allow the use of the accountant's name, the accountant should request that the entity clearly indicate that the financial statements were not compiled, reviewed, or audited When the accountant's name is associated with unaudited financial statements the accountant prepared and the client did not engage the accountant to perform a compilation or review, the accountant should request that the entity clearly indicate that the financial statements were not compiled, reviewed, or audited This proposed SSARS is expected to be effective for unaudited financial statements with which the accountant is associated on or after December 15, Early implementation will be required if the accountant early implements the proposed revised Interpretation No , Nonattest Services. (See the discussion of the proposed changes to ET in section 902.) Otherwise, early implementation would be permitted. As of the date of this Guide, ARSC plans to vote this SSARS final in February Accountants can monitor the status of this project at Clarified SSARS, Compilation of Financial Statements, Exposure Draft ARSC has exposed clarified compilation standards that, if approved, would be effective for compilations of financial statements of periods ending on or after December 15, Early implementation is required if the accountant early implements the proposed revised Interpretation No , Nonattest Services. (See the discussion of the proposed changes to ET in section 902.) Otherwise, early implementation would not be permitted. The exposure draft would supersede AR 60, AR 80, AR 110, AR 300, and AR Some of the more significant changes from current compilation standards include the following Changing the Standard to be engagement driven versus submission driven. The proposed SSARS would only require a compilation if the accountant is engaged to perform that service. This means an accountant can prepare financial statements, submit them to his or her clients, and, if they are not engaged to compile, they do not have to follow the compilation standard. This change is consistent with the proposed changes to ET discussed in section 902 that would clarify that preparing financial statements is a nonattest service. Separating the normal recurring compilation guidance and the more specialized compilation guidance into separate sections. The proposed SSARS would result in AR 70, Association with Unaudited Financial Statements; AR 80, Compilation of Financial Statements (Revised); and AR 85, Compilation of Financial Statements Special Considerations. Separating requirements from application and other explanatory material. This is consistent with the format used for the recent clarified auditing standards.

14 Page 14 of 27 Distinguishing between emphasis-of-matter and other-matter paragraphs and designating when these types of paragraphs should be used. Requiring an emphasis-of-matter paragraph when the financial statements have been prepared in accordance with a special purpose framework. Changing the term OCBOA to special purpose framework to be consistent with the auditing standards. Changing all reports. In addition to using sections with headings, the accountant's compilation report should name the city and state of the issuing office. If the financial statements are prepared in accordance with an OCBOA (or a contractual basis of accounting) and omit substantially all disclosures, the report must highlight in a separate paragraph that the OCBOA (or the contractual basis of accounting) is different than GAAP. If such financial statements include disclosures, the report should reference the note to the financial statements that describes the OCBOA (or contractual basis of accounting). Also, there are additional reporting requirements if management of the entity has a choice of financial reporting frameworks or when the financial statements are prepared in accordance with a regulatory or contractual basis of accounting. Engagement letters must be signed by the accountant or accounting firm and management or those charged with governance Future editions of this Guide will update the status of this exposure draft. Accountants may also monitor the SSARS Clarity Project at Proposed Clarified SSARS, Review of Financial Statements The ARSC is also currently working on a proposed clarified review standard. An exposure draft is expected in late The clarified review SSARS is expected to be effective for reviews of financial statements for periods ending on or after December 15, OCBOA and Accounting Standards Overload On and off for decades, the AICPA has examined the issue of standards overload. A solution often mentioned is the use of OCBOA financial statements. One of the earliest examinations was performed by the AICPA's Special Committee on Accounting Standards Overload. In 1981, that committee was formed to consider alternative means of

15 Page 15 of 27 providing relief from accounting standards that were not cost-effective, particularly for small, closely held companies. In its final report published in 1983, the committee concluded: Small, nonpublic entities can gain some measure of relief from accounting standards overload by issuing compiled, reviewed, or audited financial statements prepared on a comprehensive basis of accounting other than GAAP in accordance with existing disclosure and measurement standards and with the existing reporting requirements for CPAs In 1995, the Private Companies Practice Section of the AICPA appointed the Special Task Force on Standards Overload. Recognizing the increasing use of OCBOA and the confusion surrounding required disclosures (especially in light of disclosure only accounting standards), the committee's August 1996 report included a recommendation that standard setters provide more specific guidance on disclosures in OCBOA financial statements. In response to that request, the Audit Issues Task Force of the Auditing Standards Board issued Interpretation 14 of AU Private Company Financial Reporting Task Force Report In 2004, the AICPA appointed a Private Company Financial Reporting Task Force to gather information regarding the needs of users of financial statements of larger or public entities versus the needs of users of financial statements of smaller, nonpublic entities. The Task Force conducted a survey which found that certain types of financial statement users were more likely to accept OCBOA financial statements for privately-held, for-profit companies. Specifically, 93% of creditor/lenders, 72% of surety/bonding firms, and 58% of investor/venture capital firms have accepted OCBOA financial statements. The survey also indicated that the size of the company is a factor in the decision to accept OCBOA financial statements for the majority of the financial statement users that do accept them The Task Force concluded that GAAP should specifically address the needs of private company financial statement users. That conclusion was based on findings that indicated many GAAP requirements are not relevant for nonpublic companies and, in some cases, it would be more useful to require different accounting for nonpublic entity transactions. As a result of those findings, the AICPA and FASB began working together to explore the development of accounting standards for privately held companies. In 2006, the two organizations issued a joint proposal intended to improve the financial reporting process for private companies. Subsequently, a joint committee was formed (the Private Company Financial Reporting Committee) to serve as a resource to the FASB to ensure that the views of private company constituents were considered during the standard-setting process. The Private Company Financial Reporting Committee (PCFRC) began making recommendations regarding accounting standards proposals to the FASB in Blue Ribbon Panel In December 2009, the AICPA and the Financial Accounting Foundation (FAF) announced the formation of the Blue Ribbon Panel to address how U.S. accounting standards can best meet the needs of users of private company financial statements. The purpose of the panel was to provide recommendations on the future of standard setting for private companies, including whether separate, standalone accounting standards for private companies are needed. After a series of meetings were held in 2010, the Blue Ribbon Panel delivered its report to the FAF early in The report called for fundamental changes to the system of standard setting, including creating a new board to be overseen by the FAF that would focus on making exceptions and modifications to U.S. GAAP for private companies that better respond to the needs of the private company sector. The report also recommended the creation of a differential framework (that is, a set of decision criteria) to facilitate a standard setter's ability to make appropriate, justifiable exceptions and modifications. The FAF then embarked on an outreach program and released its proposal in

16 Page 16 of 27 the fall of that year. Roundtable meetings were held during the first quarter of 2012 for additional input and, in May 2012, the FAF announced its decision to establish the Private Company Council Private Company Council At the time this Guide was completed, the Private Company Council (PCC) was still in the process of being formed. In June 2012, the FAF issued a request for nominations for candidates to serve on the PCC and over 100 nominations were received. At the present time, the FAF Board of Trustees continues to review the candidates nominated The PCC membership will ultimately comprise individuals with backgrounds and experience in using, preparing, and auditing private company financial statements, including users of private company financial statements, including bank lenders, equity investors, and/or sureties, preparers of private company financial statements from a variety of industries and companies of various sizes, and CPA practitioners from national, regional, and local firms The responsibilities of the PCC will be two-fold: a. To determine whether modifications or exceptions to existing nongovernmental U.S. GAAP are required to address the needs of users of private company financial statements based on criteria mutually agreed to by the PCC and the FASB. b. To serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB's technical agenda FASB Private Company Decision-making Framework In response to the Blue Ribbon Panel's recommendation, the FAF instructed the FASB to undertake a differential framework project (see the discussion in paragraph ), which the FASB is now calling its private company decision-making framework project. The objective of the project is to develop a framework (set of decision criteria) for making decisions about whether and when to adjust the requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for financial accounting standards that apply to private companies. The creation of the PCC is an integral part of this FASB project. At the end of July 2012, the FASB released its initial staff recommendations on whether and when it will be appropriate to adjust financial reporting requirements for private companies. The recommendations are contained in a paper entitled, Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies, and the FASB has issued an invitation to comment on the recommendations. The comment period will be open through October 31, 2012.

17 Page 17 of The FASB and the PCC must first agree on the proposed decision-making framework before it will be implemented. The framework will guide the PCC as it determines whether any modifications or exceptions to existing GAAP are needed for private companies. Further information about this project and a link to the initial staff's recommendations can be accessed from the FASB's Project page at AICPA Financial Reporting Framework for Small- and Medium-sized Entities In May 2012, the AICPA announced its plans to develop an other comprehensive basis of accounting financial reporting framework (FRF) to meet the needs of certain privately held small- and medium-sized entities (SMEs), as well as the users of those entities' financial statements. The AICPA envisions that this SME framework will provide a less complicated and less costly system of accounting for SMEs that do not need GAAP financial statements. Since the AICPA announced its development of the FRF for SMEs, it has published a short question-and-answer document about the framework, which is available on the Private Company Financial Reporting page of the AICPA website at At the time this Guide was completed, the AICPA had indicated that a draft version of the framework is scheduled for release in the fourth quarter of 2012, with the finalized framework expected in the first half of It is anticipated that the FRF for SMEs will meet the criteria for the other basis type of OCBOA mentioned in paragraph and discussed further beginning at paragraph International Financial Reporting Standards In 2008, the Council of the AICPA designated the International Accounting Standards Board as the body to establish international financial reporting standards for both private and public entities pursuant to Rule 202, Compliance With Standards, and Rule 203, Accounting Principles, of the AICPA Code of Professional Conduct. This gives AICPA members the option of using International Financial Reporting Standards as an alternative to U.S. generally accepted accounting principles. This Guide is not designed to address issues related to financial statements prepared in accordance with International Financial Reporting Standards. 1 There is an ongoing debate within the profession about whether accountants need to be thoroughly versed in GAAP before they can prepare OCBOA financial statements. Because presentations and disclosures similar to GAAP may be required or, at the very least, be necessary to make OCBOA presentations useful to readers, the authors believe accountants should not accept an engagement to prepare OCBOA financial statements unless they have a good foundation in generally accepted accounting principles. 2 Other basis was not included in AU-C 800 when it was originally issued. It will be added as part of a proposed SAS, Omnibus Statement on Auditing Standards 2012, exposed at the end of August 2012 and expected to be effective at the same time as the original AU-C 800 (that is, for audits of financial statements for periods ending on or after December 15, 2012). Throughout this Guide, the authors have assumed that the use of the other basis will be allowed as proposed. Practitioners can monitor the status of this exposure draft on the AICPA's website at Thomson Reuters/PPC. All rights reserved. END OF DOCUMENT Thomson Reuters/RIA. All rights reserved.

18 Page 18 of 27 Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Accounting and Financial Statements (US GAAP) Cash, Tax, and Other Bases of Accounting Chapter 1 An Introduction to OCBOA Financial Statements 101 Deciding When to Use a Special Purpose Framework 101 Deciding When to Use a Special Purpose Framework Special purpose framework, or OCBOA, financial statements are beneficial to clients for many reasons. Because accountants do not need to consider the measurement requirements of GAAP, OCBOA financial statements often can be prepared on a more timely basis and at less cost to the client. For example, if depreciation is the only difference between GAAP and the client's tax basis, using the income tax basis can eliminate the need to prepare two sets of depreciation schedules. OCBOA financial statements also may provide information in a format familiar to the client. For example, cash basis financial statements can answer the basic question Where did the money go? The AICPA's Compilation and Review Alert 1996/1997 provided the following guidance on characteristics of entities that generally are good candidates for cash or tax basis financial statements: a. There are no third-party users of the financial statements (for example, the entity is a small closely held business with no third-party debt). b. The entity's debt is secured rather than unsecured. c. The entity's creditors do not require GAAP financial statements. d. The cost of complying with GAAP would exceed the benefits (for example, a small construction contractor who would be required to account for long-term contracts using the percentage of completion method and would be required to compute deferred taxes). e. The owners and managers are closely involved in the day-to-day operations of the business and have a fairly accurate picture of the entity's financial position.