Find Answers to Your Cash and Tax Basis Questions

Why do cats purr? Why are pizza boxes square when the pizza is round? Sometimes it’s hard to find a single answer – let alone the right answer – to your questions. Do you know where to turn to when you have a question about the income tax basis or cash basis of accounting? Practitioners frequently ask questions about how to account for transactions using these special purpose frameworks. What they quickly find is a lack of authoritative guidance. Searching and googling can give you umpteen answers. But you need the right one.

The Center for Plain English Accounting, AICPA’s national accounting and auditing (A&A) resource center, often answers questions about the tax and cash bases of accounting. For example, the following two questions were recently posed by members:

How should changing from U.S. GAAP to the tax basis or vice versa be accounted for and reported in the financial statements?

Authoritative literature does not address accounting for a change in accounting basis.

When only current year financial statements are presented, it is common practice to present the effect of the change in the accounting basis by showing beginning retained earnings as previously reported with an adjustment to convert to the new basis. Although not as common in practice, precedent also exists for either showing opening retained earnings on the new basis or showing the effects of the change as a cumulative-effect adjustment in the income statement.

However, if comparative financial statements are presented, the prior year(s) should be restated and presented under the basis to which the company has changed. Restatement is necessary to ensure comparability with all periods presented.

In both cases, the change in accounting basis should be disclosed in the notes to the financial statements.

Is taxable income on the tax returns required to match net income in tax basis financial statements?

No. A typical objective of a set of financial statements is to show a measure of the results of operations for the entity. If an entity has nontaxable revenues and nondeductible expenses, those items would need to be included in tax basis financial statements to provide a complete picture of operations. From a more practical standpoint, excluding those items would result in unbalanced financial statements. For example, if an entity were to receive cash from tax exempt interest, there would be a debit to cash and there would need to be a corresponding credit to complete the entry.

Additionally, depending on the type of organization filing the return, taxable income may or may not appear on the tax return. Showing taxable income in a set of tax basis financial statements is not required, nor is providing a reconciliation between net income and taxable income or disclosing the amounts of nontaxable income and nondeductible expenses included in net income.

Practice Note: While disclosing the amounts isn’t required, the accounting policy note should include a statement reflecting that nontaxable income and nondeductible expense are included in the determination of the equivalent operating results or “net income.”

The Center for Plain English Accounting included those questions and answers, among a number of others, in a report just issued to its members, entitled Common Questions About Special Purpose Frameworks. Non-Center for Plain English Accounting members can access this report free of charge for a limited time. If you are involved with special purpose frameworks such as tax basis and cash basis financial statements, you’ll appreciate the insights this report offers.

The Center for Plain English Accounting is an add-on membership for CPA firms that are members of the AICPA’s Private Companies Practice Section (PCPS). A firm can choose between full membership or small-firm membership (five or fewer professionals), depending upon the level of benefits and membership fee best suited for the firm. Members of the Center for Plain English Accounting receive answers to written technical questions like those above and on many other accounting and auditing topics. They also receive three reports every month covering a variety of A&A topics delivered via email. Reports include advisories about new pronouncements, explanations of difficult concepts and specific guidance on implementation issues that practitioners will likely encounter with clients. In addition, members of the Center for Plain English Accounting are provided access to multiple two-hour NASBA-certified CPE webinars every year.

Practitioners need answers to their difficult A&A questions. The Center for Plain English Accounting is here to help. Ensure your firm has access to top-notch A&A advice by joining the Center for Plain English Accounting.

Bob Durak, Director- Center for Plain English Accounting, Association of International Certified Professional Accountants- Public Accounting.

Credit and debit scale image courtesy of Shutterstock

Find Answers to Your Cash and Tax Basis Questions

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