Cash-basis and tax-basis statements in compilations and reviews

In this lesson you will

Identify the special purpose frameworks defined in AR-C 60.07
List the disclosures special purpose statements must include
Draft the framework paragraph for compilation and review reports
Apply the extra reporting rules for contractual-basis statements

Which frameworks count

AR-C 60.07 defines a special purpose framework as a financial reporting framework other than GAAP that is one of these bases:

Cash basis: records cash receipts and disbursements, with modifications that have substantial support (for example, recording depreciation)
Tax basis: the basis the entity uses to file its tax return for the period
Regulatory basis: used to comply with a regulator's requirements
Contractual basis: used to comply with an agreement with third parties other than the accountant
Other basis: a definite set of logical, reasonable criteria applied to all material items, such as the AICPA's Financial Reporting Framework for Small- and Medium-Sized Entities

AR-C 60.07 notes the cash, tax, regulatory and other bases are commonly called other comprehensive bases of accounting. A "modified cash basis" that books receivables but not payables, or depreciation in one year and not the next, has no substantial support and is not a special purpose framework; treat the inconsistency as a departure.

What management must disclose

Under AR-C 80 and AR-C 90.13, management agrees before acceptance to provide, for special purpose statements:

a description of the framework, including a summary of significant accounting policies, and how it differs from GAAP (the effects need not be quantified)
informative disclosures similar to GAAP when the statements contain items the same as or similar to GAAP items
for a contractual basis, a description of significant interpretations of the contract
additional disclosures beyond the framework's requirements needed to achieve fair presentation

AR-C 70 requires prepared statements under a special purpose framework to describe the framework on the face or in a note. Use titles that fit the basis, such as "Statement of Assets, Liabilities and Equity (Income Tax Basis)" rather than "Balance Sheet." AR-C 90 asks you to consider, in forming your conclusion, whether terminology, including statement titles, is appropriate. See the cash and tax basis guide.

Compilation reports

AR-C 80.18 requires you to modify the compilation report (unless substantially all disclosures are omitted) when the statements lack the framework description, the policy summary, the description of differences from GAAP, or the GAAP-like disclosures. AR-C 80.21 requires a separate paragraph that states the statements are prepared under the special purpose framework, refers to the note describing it, and states it is a basis other than GAAP. For a contractual basis, the paragraph also states the statements may not be suitable for another purpose. AR-C 80.20 requires the management responsibility statement to mention determining that the framework is acceptable when management had a choice.

Review reports

AR-C 90 parallels the compilation rule for missing disclosures. AR-C 90 requires an emphasis-of-matter paragraph, under an appropriate heading, with the same three statements, plus the "may not be suitable for another purpose" statement for a contractual basis. AR-C 90 also requires an other-matter paragraph restricting the use of the report for contractual-basis statements. AR-C 90 requires you to evaluate whether significant contract interpretations are described.

Common findings

Tax-basis statements titled "Balance Sheet" and "Income Statement."
No note describing differences from GAAP.
Review report missing the emphasis-of-matter paragraph on the framework.
Inconsistent cash-basis modifications presented as a framework.

The tax basis template and cash basis template model the presentation.

Worked example

A tax-basis review for Oak Hollow Farms, LLC

Oak Hollow Farms, LLC files a partnership return and its lender accepts tax-basis statements. You are engaged to review the December 31, 2026 statements.

Draft statements show:

Revenue recognized on the cash method, as filed. Year-end uncollected sales are $146,000.
Equipment depreciated with bonus and MACRS depreciation, as filed. Book depreciation under GAAP lives would be $88,000 lower.
No income tax provision, because the LLC is a pass-through.
Statements titled "Balance Sheet" and "Statement of Operations."
Note 1 says "prepared on the income tax basis" but does not describe how it differs from GAAP.

Review findings:

Titles: the terminology and statement-title consideration in AR-C 90. Management retitles them "Statement of Assets, Liabilities and Members' Equity (Income Tax Basis)" and "Statement of Revenue and Expenses (Income Tax Basis)."
Differences from GAAP: AR-C 90 requires an adequate description; the effects need not be quantified. Management adds a paragraph describing cash-method revenue and tax depreciation. It may omit the $146,000 and $88,000 amounts.
Report: add an emphasis-of-matter paragraph under the heading "Basis of Accounting," referring to Note 1, stating the statements are on the income tax basis, a basis other than GAAP, and that the conclusion is not modified. No restricted-use paragraph is needed, because the tax basis is not a contractual basis.

Self-check

Answer each question before you open the answer.

Must tax-basis statements quantify how they differ from GAAP?
Show answer
No. AR-C 80.18(c) and AR-C 90 require an adequate description of how the framework differs from GAAP, and state that the effects need not be quantified.
What extra report content does a contractual-basis review require?
Show answer
The emphasis-of-matter paragraph must also state that the statements may not be suitable for another purpose and the report must include an other-matter paragraph restricting its use.
A client records receivables but not payables and calls it "modified cash basis." Is this a special purpose framework?
Show answer
No. Cash-basis modifications must have substantial support (AR-C 60.07). Arbitrary, inconsistent modifications do not form a framework, so you treat the presentation as a departure from the stated basis.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error