#09 – Other Financial Statement Presentations (2.7, 10.12)

Question 0

OCBOA – General OCBOA Presentation Guidelines

Answer 0

Financial statements titles should different the OCBOA financial statements form accrual basis financial statements

Required financial statements are the equivalents of the accrual basis balance sheet and income statement

Financial statements should explain changes in equity accounts

Statements of cash flows not required

Disclosures similar to those of GAAP financial statements and should include:
– summary of significant accounting policies
– informative disclosures similar to GAAP financial statements disclosures
– disclosures related to items not shown on the face of the financial statements e.g. related party transactions, subsequent events, and uncertainties.

Question 1

Other Comprehensive Basis of Accounting (OCBOA)

Answer 1

1. Cash Basis and Modified Cash Basis of Accounting
2. Tax Basis of Accounting
3. A definite set of criteria have substantial support that is applied to all material financial elements, such as price-level adjusted financial statements
4. Regulatory basis of accounting

Question 2

OCBOA – Cash Basis Financial Statement

Answer 2

Not suitable for entities with complex operations

Revenue recognized when cash received, expenses recognized when cash paid

Cash basis financial statements
1. Statement of cash and equity
    – Pure cash basis financial statements: cash is only asset and equity = cash
2. Statement of cash receipts and disbursements
    – Revenues received
    – Debt and equity proceeds
    – Proceeds from assets sale
    – Expenses paid
    – Debt repayments
    – Dividend payments
    – Payments for purchases of assets

Question 3

OCBOA – Modified Cash Basis Financial Statements

Answer 3

Hybrid of cash basis and accrual basis accounting
– Accrual basis modifications can not be extensive

Common modifications
– Capitalizing and depreciating fixed assets
– Accrual of income taxes
– Recording liabilities for long-term and short-term borrowings and the related interest income
– Capitalizing inventory
– Reporting investments at fair value and recognizing unrealized gains and losses

Presentation
– Statement of Assets and liabilities - Modified cash basis/Statements of Assets and Liabilities Arising from Cash Transactions
– Statement of Revenues and Expenses and Retained Earnings – Modified Cash Basis/Statement of Revenues Collected and Expenses Paid

Question 4

OCBOA – Income Tax Basis Financial Statements

Answer 4

Can be used by entities with complex operations

Have to do special accounting for nontaxable revenues and expenses not reported on the tax return. Can report them as:
– separate line item in the revenue and expense sections of the statements of revenues and expenses, or
– additions and deductions to net income, or
– disclosure in a note.

Presentation
– Statement of Assets and Liabilities and Equity - Income Tax Basis
– Balance sheet - Income Tax Basis
– Statement of Revenues and Expenses and Retained Earnings – Income Tax Basis
– Statement of Income – Income Tax Basis

Question 5

Personal Financial Statements

Answer 5

For individuals or groups of related individuals

Prepared to organize and plan financial affairs

Can be used for obtaining credit, and for tax, estate, and retirement planning purposes.

Assets and liabilities presented
– at estimated current value (not historical cost)
– on accrual basis

Presentation of assets and liabilities made in order of liquidity, and maturity, with no current and concurrent classifications

Personal net worth = difference between total assets and liabilities

Optional statement of change in net worth
– Shows sources of changes in net worth
– Distinguishes between realized and unrealized changes in net worth

Question 6

Personal Financial Statements – Assets and Liabilities

Answer 6

Assets recorded at estimated current fair value
– Estimated current fair value = present value of projected cash receipts
– Life insurance loans payable are netted against the cash surrender value of life insurance
– A business interest that constitutes a large part of an individual’s total assets should be presented as a single amount of estimated current value separately from other investments.
– Vested pension plan benefits are reported at fair value

Liabilities are reported at estimated current amount
– Generally GAAP presentation used
– Deferred tax liability reported for estimated taxes due

Question 7

Personal Financial Statements – Disclosure

Answer 7

Disclosures should be sufficient

Should include:
– Individuals covered by the statements
–individuals’ assets and liabilities at current estimated values
– Methods used in determining estimated current values
– Descriptions of intangible assets
– Face amount of life insurance policies owned by the individuals
– Nature of joint ownership of assets held by these and other individuals
– Tax information
– Maturities, interest rate, and other pertinent details relating to receivables and debt.

Question 8

Liquidation Basis of Accounting

Answer 8

Used when liquidations is imminent

Applies to public and private companies and not-for-profit organizations

Applied prospectively at the time liquidation is deemed imminent

Covered entities
– Entities in bankruptcy that are expected to liquidate
– Benefit plans terminated by their sponsors
– Limited-life entitles that are not following the reestablished liquidation plan from the entity’s inception, which results in the entity not received fair value of its assets.

Question 9

Liquidation Basis of Accounting – Imminent Liquidation

Answer 9

Likelihood of entity returning from liquidations is remote, and

a. Approve liquidation plan whose execution is unlikely to be blocked, or
b. Liquidation plan imposed by other forces e.g. involuntary bankruptcy

Question 10

Liquidation Basis of Accounting – Measuring Assets, Liabilities, and Accruals

Answer 10

On effective date that liquidation basis applied, cumulative effect adjustment required to account for any differences due to remeasurement under liquidation basis

Assets, liabilities, and accrual remeasured on subsequent reporting dates

Assets measured and presented at amount of cash proceeds expected from liquidation
– Don’t assume fair value since assets may not be disposed of in an orderly manner.

Liabilities should be measured and recognized accounting to US GAAP
– adjustments can be made to reflect changes in assumptions stemming from the decision to liquidate

Accruals
– Costs that are expected to be incurred during and at the end of the liquidation process must be accrued, as well as income expected to be earned during the period of time the entity is in liquidation.
– Present each amount separately and at non discounted values

Question 11

Liquidation Basis of Accounting – Presentation and Dsiclosures

Answer 11

Must present
– Statement of Net Assets in Liquidation
– Statement of Changes in New Assets in Liquidation

Financial Statements for period between last balance sheet as a going concern and data at which liquidation becomes imminent.

Disclose:
– Statement that financial statements are prepared using liquidation basis, including the determination that liquidation is imminent and the facts and circumstances surrounding the adoption of the liquidation basis.
– Plan for liquidation
– Significant assumptions and methods used to measure assets and liabilities
– Expected time frame for completing the liquidation process
– Type and amount of costs and income accrued, and the period over which these costs and revenues are expected to occur

Question 12

Liquidation Basis of Accounting – IFRS

Answer 12

IFRS requires an entity to prepare financial statements on the going concern basis unless management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so.

Unlike GAAP, IFRS does not provide explicit guidance regarding when or how to apply the liquidation basis of accounting.