Understanding OCBOA and Disclosures: A Practical Guide for CPA Aspirants

OCBOA – Other Comprehensive Basis of Accounting – may sound like an intimidating term, but it’s really about using accounting methods other than GAAP that still make financial sense, especially for small or private businesses. In this post, we’ll explore what OCBOA is, when it’s used, and the essential disclosures required under it – with real-life examples and CPA-tested concepts.

📘 What is OCBOA?

OCBOA stands for Other Comprehensive Basis of Accounting. It refers to a non-GAAP method of preparing financial statements.

Examples include:

Cash basis or Modified cash basis
Tax basis (used for preparing tax returns)
Regulatory basis (used for certain industries)
Contractual basis (based on terms of a contract)
Financial reporting framework for SMEs (in some countries)

📌 Remember: OCBOA is often used by entities that do not need to follow GAAP (e.g., small private companies, nonprofits, or entities that only report to tax authorities or regulators).

🧠 Why Use OCBOA?

Cost-effective – Easier and cheaper than GAAP.
Simplified reporting – Especially for small businesses.
Alignment with tax rules – Tax-basis financials align with tax filings.
Regulatory requirement – Some industries (e.g., insurance, utilities) require regulatory-basis financials.

📊 Examples of OCBOA Use

Entity Type	OCBOA Method Used	Why?
Sole Proprietor	Cash Basis	Simpler, no accruals needed
Small LLC	Tax Basis	Matches IRS filings
Insurance Company	Regulatory Basis	Required by regulator
Real Estate Developer	Contractual Basis	Based on specific project agreements

📝 Required Disclosures Under OCBOA

Even though it’s not GAAP, OCBOA financials still need footnote disclosures. Here are the must-haves:

Identify the Basis Clearly
- Example: “The accompanying financial statements have been prepared on the cash basis of accounting.”
Describe the Accounting Policies
- Especially for modified cash or tax basis.
- Example: How depreciation or income taxes are handled.
Disclose departures from OCBOA
- If something was treated unusually, it needs to be explained.
Omit GAAP-specific items
- No need for comprehensive income, EPS, or segment reporting.
Comparative Statements
- Clearly note if comparatives are presented or not.
Title of Statements Should Reflect OCBOA
- Use “Statement of Assets and Liabilities – Cash Basis” instead of “Balance Sheet.”

🧾 Sample Disclosure (Cash Basis)

Note 1 – Basis of Accounting
The financial statements are presented on the cash basis of accounting, which differs from U.S. generally accepted accounting principles. Revenues are recognized when cash is received, and expenses are recorded when cash is paid.

📚 CPA Exam Tip: OCBOA Quick Facts

Feature	GAAP	OCBOA
Required for public companies	✅ Yes	❌ No
Must follow FASB ASC	✅ Yes	❌ No
Disclosures required	✅ Yes	✅ Yes (but fewer)
Basis named in statements	❌ No	✅ Yes

🎯 Summary

OCBOA is a practical alternative to GAAP for certain entities.
Must clearly state the accounting basis used.
Even under OCBOA, disclosures matter for transparency.
CPA candidates should know OCBOA types and the minimum disclosure requirements.

✨ Final Thoughts

OCBOA may not be as widely talked about as GAAP, but it's a real-world necessity. Whether you’re preparing for the CPA exam or managing a small business, understanding OCBOA gives you the flexibility to keep things simple – without sacrificing accuracy or compliance.

Quiz Time

Q1.

Which of the following statements is true regarding the use of OCBOA financial statements?

A) They are accepted by the SEC for publicly traded companies.
B) They do not require any notes to the financial statements.
C) They must disclose the basis of accounting used and significant policies.
D) They are interchangeable with IFRS-compliant statements.

✅ Answer: C
Explanation: OCBOA statements must disclose the basis used and accounting policies.

Q2.

Which of the following bases qualifies as OCBOA?

I. Basis used to comply with a regulatory agency
II. Modified cash basis
III. IFRS basis
IV. Basis used for tax reporting

A) I and IV only
B) I, II, and IV only
C) II and III only
D) I, II, III, and IV

✅ Answer: B
Explanation: IFRS is not an OCBOA. All others are acceptable under OCBOA.

Q3.

A CPA prepares financial statements using the modified cash basis. Which of the following must be included in the financial statements?

A) Statement of retained earnings
B) Full set of GAAP footnotes
C) Statement identifying the OCBOA and policy disclosures
D) Disclosure of segment information

✅ Answer: C
Explanation: OCBOA requires clear disclosure of basis and significant policies.

Q4.

Which of the following would not be recorded under a pure cash basis?

A) Depreciation expense
B) Rent paid in advance
C) Owner's contribution
D) Cash collected for services

✅ Answer: A
Explanation: Depreciation is a non-cash item and not recognized under pure cash basis.

Q5.

Which of the following modifications in a modified cash basis statement makes it closer to accrual?

A) Reporting only when cash is exchanged
B) Recording accounts payable and receivable
C) Ignoring prepayments
D) Recognizing cash distributions as equity deductions

✅ Answer: B
Explanation: Modified cash allows select accruals like A/R and A/P.

Q6.

A small business uses tax basis financials. It reports prepaid rent as an expense in the year paid. This treatment:

A) Complies with GAAP
B) Violates the matching principle
C) Complies with IFRS
D) Complies with OCBOA principles

✅ Answer: D
Explanation: Tax basis allows this. Matching is a GAAP concept, not OCBOA.

Q7.

Under tax basis, which of the following would most likely not appear on the balance sheet?

A) Inventory
B) Accounts receivable
C) Cash
D) Equipment

✅ Answer: B
Explanation: Under tax basis, revenue is recognized when received — no receivables.

Q8.

Under modified cash basis, depreciation is recorded. What impact does this have on the financial statements?

A) It understates cash flow
B) It overstates liabilities
C) It aligns closer with GAAP net income
D) It makes financials non-comparable to any basis

✅ Answer: C
Explanation: Depreciation adds accrual features to otherwise cash-based reports.

Q9.

Which of the following disclosures is unique to OCBOA and not required under GAAP?

A) Summary of accounting policies
B) Identification of the financial statement framework
C) Nature of operations
D) Subsequent events

✅ Answer: B
Explanation: OCBOA must state clearly what basis (e.g., tax basis) is being used.

Q10.

An entity reports its financials using a regulatory basis mandated by a utility commission. What type of accounting framework is being used?

A) Special-purpose framework
B) IFRS framework
C) Full GAAP framework
D) Internal reporting framework

✅ Answer: A
Explanation: Regulatory basis is a type of special-purpose (OCBOA) framework.

Q11.

Which of the following financial statement titles is not appropriate for OCBOA-based financials?

A) Statement of Assets and Liabilities — Cash Basis
B) Balance Sheet — Tax Basis
C) Statement of Financial Position — OCBOA
D) Statement of Net Position — Regulatory Basis

✅ Answer: C
Explanation: “Statement of Financial Position” is a GAAP title. OCBOA must clearly indicate the non-GAAP basis in the title.

Q12.

Under modified cash basis, a business records equipment depreciation. What justification allows this?

A) All expenses must be recorded
B) GAAP convergence is required
C) Certain non-cash items may be recognized if consistently applied and disclosed
D) The IRS requires depreciation

✅ Answer: C
Explanation: Modified cash basis permits selective accruals with consistency and disclosure.

Q13.

Which of the following statements is true regarding OCBOA disclosures?

A) They must match GAAP exactly
B) They are only required for public companies
C) They must explain departures from GAAP
D) They must disclose significant accounting policies used under the chosen basis

✅ Answer: D
Explanation: OCBOA requires clear disclosures of accounting policies under its basis.

Q14.

Which of the following best describes a “regulatory basis” of accounting?

A) The method required by IFRS
B) Any method used by banks for loan decisions
C) A framework required by a government regulator
D) The same as modified accrual basis

✅ Answer: C
Explanation: Regulatory basis is defined by a regulator, such as a utility commission.

Q15.

Which is not typically allowed in a tax-basis income statement?

A) Non-deductible penalties
B) Cash donations over IRS limits
C) Meals exceeding 50% deductibility
D) Unrealized gains on investments

✅ Answer: D
Explanation: Unrealized gains are not taxed and thus excluded from tax-basis income.

Q16.

A CPA prepares cash-basis financial statements. Which of the following would be inappropriate to include?

A) Depreciation expense
B) Capital contributions
C) Cash paid for rent
D) Cash received for services

✅ Answer: A
Explanation: Depreciation is non-cash and doesn’t belong in pure cash-basis reports.

Q17.

Which of the following would be most misleading in OCBOA statements?

A) Using standard GAAP terminology in the statement titles
B) Omitting the basis of accounting used
C) Failing to reconcile to GAAP
D) Preparing only one year of financials

✅ Answer: B
Explanation: OCBOA requires the accounting basis be clearly disclosed; omitting it misleads users.

Q18.

Which of the following may be used as OCBOA for private company financial reporting?

A) Internal performance metrics
B) IFRS for SMEs
C) Regulatory basis for local compliance
D) Balanced scorecard results

✅ Answer: C
Explanation: Regulatory basis is a recognized OCBOA; the others are not formal accounting frameworks.

Q19.

Which of the following elements is optional under OCBOA financial statements?

A) Basis disclosure
B) Description of business
C) Reconciliation to GAAP
D) Summary of accounting policies

✅ Answer: C
Explanation: Reconciliation to GAAP is not required under OCBOA unless specified by a regulator or lender.

Q20.

Under tax-basis reporting, what treatment is most likely for organization start-up costs?

A) Expensed when incurred
B) Capitalized and amortized per IRS rules
C) Deferred until profitability
D) Capitalized indefinitely

✅ Answer: B
Explanation: Tax basis follows IRS rules — startup costs are amortized over 15 years.

Q21.

An OCBOA statement titled “Statement of Revenues and Expenses – Tax Basis” includes an M-1 reconciliation. Why?

A) To adjust for audit differences
B) To reconcile book-to-tax differences
C) To meet investor requirements
D) To meet GAAP disclosures

✅ Answer: B
Explanation: M-1 reconciliation bridges book income and taxable income for transparency.

Q22.

Which of the following is most likely required in the notes of a regulatory-basis financial statement?

A) Reconciliation to GAAP net income
B) Summary of significant accounting policies
C) Inventory valuation method under GAAP
D) Segment reporting by product

✅ Answer: B
Explanation: OCBOA notes must include policies used under the stated basis.

Q23.

Which of the following would never be included under cash-basis net income?

A) Cash received in advance
B) Cash donations
C) Revenue earned but not received
D) Cash received for prior-year sales

✅ Answer: C
Explanation: Earned but unreceived income is excluded from cash-basis financials.

Q24.

Why might a business choose OCBOA over GAAP?

A) OCBOA requires more disclosures
B) GAAP is mandatory for all entities
C) OCBOA is often simpler and more cost-effective
D) OCBOA is more investor-friendly

✅ Answer: C
Explanation: OCBOA is usually simpler and cheaper for private companies with no external filing obligations.

Q25.

Which statement best describes the limitation of OCBOA?

A) It's illegal for nonprofits
B) It is not allowed for SEC-registered firms
C) It cannot be audited
D) It always produces inaccurate results

✅ Answer: B
Explanation: Publicly traded companies must follow GAAP or IFRS, not OCBOA.

Q26.

Which is a core requirement for OCBOA financial statements prepared for third-party use?

A) Use of GAAP titles
B) Inclusion of a cash flow statement
C) Disclosure of the accounting framework used
D) SEC registration

✅ Answer: C
Explanation: The accounting framework (tax basis, cash basis, etc.) must be disclosed.

Q27.

Which of the following is most likely to appear in a cash-basis balance sheet?

A) Accounts receivable
B) Unearned revenue
C) Fixed assets net of depreciation
D) Cash and owner’s equity

✅ Answer: D
Explanation: Cash basis excludes accrual items like receivables and depreciation.

Q28.

Under OCBOA, which financial statement title is acceptable?

A) Statement of Financial Condition — GAAP Basis
B) Statement of Activities — Modified Tax Basis
C) Statement of Income — IFRS
D) Consolidated Net Worth Report — Accrual Basis

✅ Answer: B
Explanation: It clearly states the non-GAAP framework and is properly titled.

Q29.

Which of the following is a risk when users rely on OCBOA statements?

A) They might include too many notes
B) They could be confused with GAAP financials
C) They are too complex for lenders
D) They always use international standards

✅ Answer: B
Explanation: If not clearly labeled and disclosed, OCBOA can be mistaken for GAAP, causing confusion.

Q30.

Which is most likely to be required by a lender evaluating an OCBOA-prepared statement?

A) IFRS reconciliation
B) Full audit opinion
C) Basis of accounting disclosure and management representation letter
D) SEC compliance statement

✅ Answer: C
Explanation: Lenders often require clarity on basis and confirmation from management.