Tax-Basis Financial Statements

Tax-Basis

Financial

Statements

#7345A

COURSE MATERIAL

TABLE OF CONTENTS

TAX-BASIS FINANCIAL STATEMENTS

A. Definition of Special Purpose Framework and Tax Basis

B. New Definition of Tax-Basis Financial Statements

C. When to Use and Not Use Tax-Basis Financial Statements

D. Present Reporting and Disclosure Authority- Tax Basis

E. Items Peculiar to Tax-Basis Financial Statements

F. Disclosure and Financial Statement Requirements- Tax Basis

G. Making Tax-Basis Financial Statements Simpler to Use and Understand

H. Converting to Tax-Basis Financial Statements

I. Cash Flows Statement

J. Tax-Basis Financial Statement Titles

K. Disclosure and Financial Statement Requirements- Tax Basis

L. Authority for Tax-Basis Disclosures

M. Disclosures of Fair Value- Tax Basis

N. Miscellaneous Disclosures- Tax Basis

O. Other Tax-Basis Issues

P. Using Tax Basis Based on a Method That Differs From the Income Tax Return

Q. Combining Financial Statements Prepared in Accordance With the Tax Basis

of Accounting

R. Disregarded Entities and Tax-Basis Financial Statements

S. Tax Basis and the ¡°Uses To File¡± Criterion

T. Tax-Basis Financial Statements- State Tax Basis of Accounting

U. Section 179 Depreciation- Tax Basis

V. Presenting Section 179 and Bonus Depreciation on the Tax-Basis Income Statement

W. Agreements Not to Compete- Tax-Basis Financial Statements

X. Presenting Insolvency in Tax-Basis Financial Statements

Test Your Knowledge

Solutions and Suggested Responses

1

1

2

5

7

7

9

10

39

42

42

44

46

50

52

52

52

Glossary

81

Index

83

58

59

61

62

62

65

68

70

73

77

Table of Contents ? i

NOTICE

This course and test have been adapted from supplemental material and uses the materials entitled Tax-Basis Financial

Statements and is a component of Everything You Never Wanted to Know About GAAP ? 2016 by Steven C. Fustolo, CPA.

Displayed by permission of the author. All rights reserved.

Use of these materials or services provided by Professional Education Services, LP (¡°PES¡±) is governed by the Terms and

Conditions on PES¡¯ website (). PES provides this course with the understanding that it is not providing

any accounting, legal, or other professional advice and assumes no liability whatsoever in connection with its use. PES

has used diligent efforts to provide quality information and material to its customers, but does not warrant or guarantee the

accuracy, timeliness, completeness, or currency of the information contained herein. Ultimately, the responsibility to comply

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your duties or obligations as a licensed professional.

? Professional Education Services, LP 2016

Program Publication Date 9/13/2016

ii ? Table of Contents

TAX-BASIS FINANCIAL STATEMENTS

Course Objectives

After completing this course, you should be able to:

? Recognize some of the M-1 differences that do not apply to tax-basis financial statements.

? Recognize how to account for an accounting change in tax-basis financial statements.

? Recall how to account for and present nontaxable and nondeductible items in tax-basis financial

statements.

? Identify the disclosure requirements for tax-basis financial statements.

? Recognize the appropriate and inappropriate financial statement titles for tax-basis financial

statements.

Given the wave of complexity that has affected the accounting profession over the past decade, using

tax-basis1 financial statements has become increasingly popular with nonpublic businesses.

More than ever, major differences now exist between GAAP and taxable income due to two factors.

First, there has been a continued upheaval in the tax code since the mid-1980s. Second, the FASB has

issued numerous GAAP statements in the post-Enron period.

As a result, small business owners find a continued conflict between balancing a desired lower taxable

income for tax planning with higher financial statement income necessary to appease the bank or third

party investor. In certain cases, tax-basis statements act to bridge this gap so that tax and financial

income are more congruous.

A. DEFINITION OF SPECIAL PURPOSE FRAMEWORK AND TAX BASIS

Before the author continues in this section, the term ¡°income tax basis¡± is a term that was in effect prior

to 2012. From 2012, that term is replaced with the new term ¡°tax basis¡± based on newly issued auditing,

compilation and review standards.

Oddly enough, the rules for non-GAAP frameworks, such as income tax basis, have existed within

auditing literature since inception. SAS No. 62, Special Reports, originally introduced the concept of other

comprehensive basis of accounting (OCBOA), a term that has included income tax basis, cash/modified

cash basis, and regulatory basis of accounting. Parallel guidance was included with the SSARSs.

Effective 2012, the Auditing Standards Board (ASB) reissued all auditing standards under its Clarity

Project. In doing so, the ASB issued SAS Nos. 122-126, which was subsequently supplemented by SAS

Nos. 127 and 128.

__________________________________________________________________________________

1. The previous term ¡°income tax basis¡± is superseded by the term ¡°tax basis¡± under new auditing, compilation, and review

standards.

Tax-Basis Financial Statements ? 1

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