14. Other Comprehensive Basis of Accounting (OCBOA)
As part of its oversight activities, the Oversight Committee of the Financial Accounting Foundation interviewed and requested written comments (collectively, "the interviews") from thought leaders among the FASB's constituencies. There were 107 interviews in total, including 12 with representatives of financial statement users and 17 with regulators (a special class of financial statement users). [FASOversight, p. 1]
While the interviews were not designed to elicit criticisms of financial reporting, in general, or to identify the needs of users of financial information, interviewees did comment on those matters. [FASOversight, p. 1]
Following is a summary of the principal comments received [on the subject] from users and regulators relating to criticisms of financial reporting. . . . [FASOversight, p. 1]
The increase in "Other Comprehensive Basis of Accounting" financial statements increases the lack of comparability of financial information. [Also included in 2(c)] [FASOversight, p. 1]
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Financial accounting standards should be set by a body that is independent in fact and in appearance. Only a private-sector entity can so be independent. To ensure consistency, comparability and understandability, and to prevent the establishment of dual or parallel standards, the APC [Accounting Policy Committee] believes that financial accounting concepts and standards for all economic entities, both public and private, should be promulgated by a single standard-setting body. [Footnote reference omitted] [RMA90, p. 2]
There should be only one set of generally accepted accounting principles applicable to general purpose financial statements for all business and non-business enterprises, regardless of whether the entity is public or private, regulated or non-regulated, large or small. A major objective of financial accounting standards should be to eliminate (or, at least, reduce) the use of alternative accounting methods under similar circumstances. Such alternative practices contribute to a loss of comparability and thus reduce a financial statement user's ability to judge relative risks. Standards should reflect an optimum combination of reliability and relevance, and should apply only to items that are material in size. [Also included in 2(c)] [RMA90, p. 2-3]
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[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of OCBOA statements.
Committee/Staff/Observer
Question 8 deals with the fact that accounting doesn't always get reported in a generally accepted accounting principles format, that at times reporting may adopt a different format, tax basis or cash basis, for example. Frequently it is a less stringent format than necessarily GAAP would be. The question is: is there a role to be played for having financial statements stated on a basis other than what is deemed to be generally accepted accounting principles and if so, under what circumstances do you accept that? [TC 3/11, p. 36]
Participant C-2
Unfortunately, in a small bank dealing in a small business environment, you do end up accepting tax returns or cash basis statements from time to time. But I would not advocate that. I really feel like for us as a credit granting body, one set of standards should be the prescribed procedure because otherwise, comparability becomes very much impaired and you just end up as a lender not knowing exactly what you're looking at in some of these instances, not knowing exactly how to process the information when it gets very far away from the GAAP measurement and recognition rules that we think we know and understand. So we do end up accepting them but not gladly and for competitive reasons. [TC 3/11, p. 36]
Participant C-17
A lot of times you wind up, for cash basis statements, saying okay, now I want to see a list of your receivables. [TC 3/11, p. 36]
Participant C-2
That's right. You supplement it with a lot of additional information at some cost to the institution to gather and you certainly do need additional information. [TC 3/11, p. 36]
Participant C-13
This applies mostly to small companies, but the other instance that comes to mind is where for regulatory purposes institutions prepare statements on other than generally accepted accounting principles. Obviously, insurance companies are the primary example here. You need to be able to assess what the regulatory cap and other aspects of the company are. [TC 3/11, p. 37]
Committee/Staff/Observer
You get the regulatory statements as supplemental to the GAAP statements? [TC 3/11, p. 37]
Participant C-13
No, sometimes the companies will provide them voluntarily but you can go to the State commission and get them. [TC 3/11, p. 37]
Committee/Staff/Observer
You can also get the GAAP statements? [TC 3/11, p. 37]
Participant C-13
Yes, except in the case of some mutual organization. [TC 3/11, p. 37]
Committee/Staff/Observer
If you lend to a foreign company or evaluate a foreign company, will you feel the need for reconciliation to U.S. GAAP? [Also included in 18(a)] [TC 3/11, p. 37]
Participant C-13
That comes later but the answer is yes. [Also included in 18(a)] [TC 3/11, p. 37]
Participant C-17
One of the real values of regulatory statements is that you're sure they're in compliance to whatever the regulators want. It really doesn't matter how great they look on a GAAP basis if they were not in compliance to the regulators, they're not in business. Or their business is going to be severely impacted. [TC 3/11, p. 37-38]
Participant C-11
Regulatory statements can be very dangerous to use. Insurance companies that have had multistate operations, some of them quite famous, have gone broke because they were able to move things from one place to another. I also have used Call Reports with a great deal of caution because again, in this case not just a multistate but a multibank company, the individual Call Report can be an empty element. In other words, it's not the complete story. So GAAP is consolidation and GAAP is important. [TC 3/11, p. 38]
Participant C-5
On the issue of foreign corporates, we do a significant business with U.S. domiciled subsidiaries of foreign corporates and they prepare consolidated reporting in their home country, and we have typically accepted, for competitive reasons, management information using our own internal audit of that management information. We're using management-prepared information and doing our own audit standards against that. Also, we will accept tax returns. We weight them differently than we would a GAAP prepared statement but on the small end they are a workable document. Cash flow is a big component of it and a tax statement in many cases gives me more on cash flow than some of the GAAP reported statements do at the lower end. [Also included in 18(a)] [TC 3/11, p. 38]
Committee/Staff/Observer
Those of you who have cited competition as a problem in going from audits to something less than audits, reviews or compilations, has competition also been an issue in accepting other than GAAP statements? [TC 3/11, p. 38]
Participant C-7
Yes, particularly on the smaller end of our customer base; the reporting requirements basically are income tax driven. The bright side of tax returns at that level is you know it has a conservative bias. That's some comfort on income. [TC 3/11, p. 38]
[Context] Responses to the postmeeting questionnaire of the March 11, 1993 Creditor Discussion Group meeting.
QUESTION 9
At the meeting, participants indicated that they preferred financial statements prepared on the basis of generally accepted accounting principles (GAAP), but sometimes would accept financial statements on an other comprehensive basis of accounting (OCBOA), or tax returns in lieu of financial statements.
a. Under what circumstances would you accept OCBOA statements or tax returns rather than insisting on GAAP financial statements?
4 1. Under no circumstances
4 2. When I am otherwise comfortable with my lending decision, and the company does not want to prepare GAAP statements
6 3. Only for small companies or small loans in which my risk of loss is limited
1 4. Whenever the company refuses to prepare GAAP statements, and I will lose the loan or investment opportunity if I insist on GAAP statements.
Participant C-5: Sometimes
2 5. When making credit decisions pertaining to companies operating in specific industries. If so, please identify the industries:
Participant C-13: Insurance companies, banks and bank holding companies.
Participant C-17: Insurance
5 6. When making ongoing assessments of credit quality for periods for which GAAP statements are not available.
Participant C-21: Quarters?
2 7. To obtain more information than is contained in GAAP statements. If so, what kinds of information do you obtain that is not part of GAAP statements:
0 8. Under any circumstances
2 9. Something else. Please describe:
Participant C-8: When the company is able and willing to provide additional financial data necessary to make a conversion to GAAP.
Participant C-11: Remember - I am not a lender to small companies.
Participant C-4: Will use in addition to GAAP F/S, but not in lieu of.
Participant C-6: Many privately held companies who are not frequent users of credit do not have GAAP statements prepared. Somewhat related to #3 above.
b. If you currently accept or use OCBOA statements for any of the purposes listed in a. above, please indicate below all the type(s) of OCBOA statements that you accept.
4 1. Tax-basis statements
8 2. Call reports or other regulatory reports
Participant C-12: As a supplement to holding company GAAP reports.
2 3. Cash basis statements
3 4. Something else. Please describe:
Participant C-8: Contractor financial statements not prepared using percentage of completion.
Participant C-13: Unreconciled statements prepared under non-U.S. GAAP, when inevitable.
Participant C-9: (A) Quarterly Reports. (B) Statistical Summaries (e.g., issued by finance companies). 2 and 4(B) as additional information not in lieu of GAAP.
c. When you DO accept non-GAAP statements or tax returns in lieu of GAAP financial statements, indicate the frequency of the following related circumstances:
A - Always
F - Frequently
O - Occasionally
S - Seldom
N - Never
O-3,S-1,N-2
1. Additional audit work is requested.
A-1,O-2,S-1,N-2
2. The interest rate required for borrowing is increased to compensate for the increased information risk.
O-4,N-2
3. Amount of available lending is decreased.
Participant C-21: Bank lends based on borrowing needs - would not because we don't have GAAP F/S - we simply would not lend to company if they were of sufficient size that would dictate GAAP F/S necessary.
F-1,N-1
4. Some other action is taken to respond to the use of OCBOA statements.
Please describe:
Participant C-8: Generally, additional scheduling of financial data is required.
Participant C-14: Very rare for us - only when rating commercial finance pools of small credits.
Participant C-21: Again, size of loan and company contribute to decision as to whether GAAP F/S are necessary. Obviously - they would be terrific for all lending situations but not practical.
Participant C-17: Primarily for small firms (cash basis and tax) with supporting schedules or information to estimate the extent of unbilled receivables and unpaid liabilities which are accruing but not done.
[PMQC 3/11, p. 12-15]