FAR 1E - SPF

Question 1

How do you convert from cash basis to accrual basis?

Answer 1

✅Accruals increase → Expense recorded before payment 💰 (Expense higher than cash paid)
✅Prepaids increase → Cash received before income recorded 📅 (Income lower than cash received)

Question 2

How do income tax basis FS and GAAP FS differ?

Answer 2

✅Timing of revenue & expense recognition 🕒
✅GAAP follows accrual accounting → Recognizes when earned/incurred
✅Income tax basis → Follows tax rules, not always when earned/incurred

Question 3

What are examples of Special Purpose Frameworks (SPF)?

Answer 3

1️⃣ Cash receipts & disbursements basis 💵
2️⃣ Income tax basis (used for tax reporting) 📝
3️⃣ Regulatory basis (compliance with government agency requirements) 🏛️

Question 4

What is modified cash basis accounting?

Answer 4

✅Cash basis + some accrual elements (e.g., taxes, payroll) 🔄
✅Simpler than GAAP but gives more detail than pure cash basis 🏦
✅Not GAAP-compliant unless no material differences exist ❌

Question 5

How to calculate ending A/R?

Answer 5

✅Beginning A/R + Sales - Collections = Ending A/R

Question 6

What statements are included in Special Purpose Framework (SPF) - Cash basis?

Answer 6

✅Statement of Cash Receipts & Disbursements 📑
❌ No Balance Sheet, P&L, CFS, SCI

Question 7

Key principles to remember:

Answer 7

✅Accruals ↑ → Expense recognized before payment → Expense > Cash Paid 🔼
✅Prepaids ↑ → Cash received before income → Income < Cash Received 🔽
✅Always think about cash vs. expense timing 🕒

Question 8

What is a contract liability?

Answer 8

✅Deferred revenue account 📅
✅Represents cash received for work not yet performed 💰
✅Similar to “Unearned Revenue” in GAAP

Question 9

What is OCBOA?

Answer 9

✅Stands for Other Comprehensive Basis of Accounting 📑
✅Used when financial statements are not fully GAAP-compliant ❌
✅Includes cash basis, modified cash basis, tax basis, and regulatory basis

Question 10

What disclosures are required when using a Special Purpose Framework (SPF)?

Answer 10

✅A description of the framework used (e.g., cash basis, tax basis) 📝
✅How the framework differs from GAAP ⚖️
✅Explanation of significant policies affecting revenue/expense recognition 📊

Question 11

What footnote disclosures should accompany SPF statements?

Answer 11

📖Basis of accounting used & how it differs from GAAP
📅Description of primary measurement & recognition methods
✅Any policy elections made under SPF (e.g., recognition timing)

Question 12

Which industries commonly use Special Purpose Frameworks?

Answer 12

🏡 Real Estate – Often uses tax basis accounting for depreciation & amortization
🎭 Nonprofits – May use modified cash basis for donations & grants
🏛️ Governments – Can use regulatory basis accounting for compliance

Question 13

When must SPF comply with external regulatory requirements?

Answer 13

🏦Banks & lenders may require SPF adjustments to align with GAAP
⚖️Government contracts may require regulatory basis adjustments
📜IRS & tax filings must follow income tax basis reporting

Question 14

What is the regulatory basis of accounting?

Answer 14

🏛️Used when an entity must comply with a government regulator’s requirements
⚡Often seen in government reporting, insurance companies, and utilities
📊May differ significantly from GAAP

Question 15

How do tax adjustments impact SPF financial statements?

Answer 15

🍽️Nondeductible expenses (meals, entertainment) must still be recorded
💰Tax-exempt income (e.g., municipal bond interest) may be included in revenue
🚫Deferred taxes are not recognized under cash or tax basis reporting

Question 16

When is a Special Purpose Framework acceptable?

Answer 16

✅When external users (banks, investors) allow it
🏛️When required by tax or regulatory authorities
✅When GAAP compliance is not necessary (e.g., private small businesses)

Question 17

How Do SPF & GAAP Differ in Asset & Liability Recognition?

Answer 17

📊GAAP: Assets/liabilities recorded when earned/incurred
💰SPF (Cash Basis): Only recorded when cash is received/paid
📅SPF (Tax Basis): Based on tax return treatment (e.g., immediate expensing for tax purposes)

Question 18

What adjustments are needed when converting from GAAP to SPF?

Answer 18

🔄Remove accrual-based revenues & expenses if switching to cash basis
🏗️Eliminate GAAP-required estimates (e.g., bad debt, depreciation methods)
🏬Adjust inventory/cost recognition to match tax reporting

Question 19

How are advance payments (Erhaltene Anzahlungen) treated under Swiss GAAP FER vs. US GAAP?

Answer 19

✅ Swiss GAAP FER / Obligationenrecht (OR):
📑 Recorded as “Erhaltene Anzahlungen” (Advance Payments Received) under liabilities 💰
📅 Recognized as revenue only when goods/services are delivered 🚚

✅ US GAAP:
📑 Recorded as “Customer Deposits” or “Deferred Revenue” under liabilities 📊
📅 Recognized as revenue when the performance obligation is fulfilled under ASC 606

Question 20

How is deferred revenue (Passive Rechnungsabgrenzungsposten - PRAP) accounted for under Swiss GAAP FER vs. US GAAP?

Answer 20

✅ Swiss GAAP FER / Obligationenrecht (OR):
📑 Recorded as “Passive Rechnungsabgrenzungsposten (PRAP)” (Deferred Revenue) 📆
📊 Revenue is recognized in the period in which the service is performed

✅ US GAAP:
📑 Recorded as “Unearned Revenue” or “Deferred Revenue” 📊
📅 Revenue is recognized over time based on ASC 606 (Revenue Recognition)

Question 21

What are unearned fees?

Answer 21

✅ Either Erhaltene Anzahlungen or Passive Rechnungsabgrenzungen
💰 Cash received before services are performed
📅 Recorded as a liability (Deferred Revenue/Unearned Revenue) until earned
🔄 Recognized as revenue when the service is provided

Question 22

What is constructive receipt of income?

Answer 22

📅 Income is taxed when it is readily available to the taxpayer
🚫 Actual receipt is NOT required if there are no substantial restrictions

✅ Example:
💰🏦 Interest credited to a bank account is taxable even if not withdrawn

Question 23

How do you adjust cash receipts to determine revenue on an accrual basis?

Answer 23

✅ Accrual basis revenue is recognized when earned, while cash basis revenue is recorded when received.
✅ Contract liability (Deferred Revenue) represents cash received for work not yet performed.
✅ To determine accrual revenue:

Subtract ending contract liability from cash receipts to find the revenue earned.
Example: If a company receives $10 but only earns $2 of revenue, the liability is $8.
The revenue earned is: 10−8=2

Question 24

What is the hybrid method for determining taxable income?

Answer 24

🔄 A combination of the cash and accrual methods.
📊 If inventory is a material income-producing factor, the accrual method must be used for COGS and gross profit.
💰 The cash method can still be used for all other accounts not related to COGS and gross profit.

🚀 Key Takeaway: Businesses with significant inventory must use accrual for inventory-related accounts but may use cash for other income and expenses.

Question 25

When are Cash to Accrual Adjustments the Same as Indirect Cash Flow Adjustments? (reverse from Accrual to Cash)

Answer 25

✅ For expenses and liabilities, cash to accrual adjustments follow the same logic as the indirect method of the statement of cash flows (SCF). - Increase in Accrued Expenses (Liabilities) → Add (more expenses incurred but not yet paid) - Decrease in Accrued Expenses → Subtract (past liabilities were paid off) - Increase in Prepaid Expenses → Subtract (cash paid in advance for future periods) - Decrease in Prepaid Expenses → Add (previously prepaid expenses are now recognized) 💡 Rule of Thumb: ✔ Expenses & liabilities → Same as SCF adjustments ❌ Revenues & assets → Opposite of SCF adjustments

Question 26

When are Cash to Accrual Adjustments Opposite to Indirect Cash Flow Adjustments? (reverse from Accrual to Cash)

Answer 26

❌ For revenues and assets, cash to accrual adjustments are opposite to the indirect method of SCF. - Increase in Accounts Receivable → Add (more revenue was earned but not yet received) - Decrease in Accounts Receivable → Subtract (cash received relates to past revenue) - Increase in Unearned Revenue (Contract Liability) → Subtract (cash received for future work) - Decrease in Unearned Revenue → Add (previously deferred revenue now recognized) 💡 Rule of Thumb: ✔ Expenses & liabilities → Same as SCF adjustments ❌ Revenues & assets → Opposite of SCF adjustments

Question 27

How to Convert Between Cash and Accrual Basis?

Answer 27

✅ Add: Increases in A/R for Rev & accrued expenses for expenses (earned/incurred but not yet paid) ✅ Subtract: Increases in prepaids (expense) & unearned revenue (revenue) (cash received but not yet earned) ✅ Think: "Did cash move first or was revenue/expense recorded first?"

Question 28

How do you adjust from accrual basis to cash basis?

Answer 28

✅ Subtract revenue or expense: Increases in A/R & accrued expenses (because they haven't been paid yet) ✅ Add revenue or expense: Increases in prepaids & unearned revenue (since cash moved, but revenue wasn't earned yet) ✅ Shortcut: "If cash hasn’t moved yet, remove it for cash basis!" 🚀