Practice Aid - OCBOA Financial Statements (PDF)

Practice Aid

Accounting and Financial Reporting

Guidelines for Cash- and Tax-Basis

Financial Statements

PA_Cover_Series.indd 2 5/17/18 3:03 PM

For other uses of this work, please email [email protected] with your request or write to us at 220 Leigh Farm

Road, Durham, NC 27707-8110 USA.

PA-CBT-Front Matter.indd 2 9/21/15 3:42 PM

This document was created by the Association of International Certified Professional Accountants as a free member

benefit which may be freely used and shared by members for personal use. All copyright statements should be

maintained.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.1

Preface

BecauseofthecomplexitiesofaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP),

manysmallerentitieshavedeterminedthatfinancialstatements preparedbyapplyingthecash‐ortax‐basisof

accountingmoreappropriatelysuittheirneeds.UnlikeGAAP,littleauthoritativeguidanceisavailablewithre‐

specttothe

preparationoffinancialstatementswhenapplyingthecash‐ortax‐basisofaccounting.Financial

statementspreparedwhenapplyingthecash‐ortax‐basisofaccountingneedtohavealevelofconsistencyso

thattheyareusefulandnotmisleadingtousersofthefinancialstatements.Additionally,becausefinancial

statements

preparedwhenapplyingthecash‐ortax‐basisofaccountingarenotconsideredappropriateinform

unlessthefinancialstatementsincludeinformativedisclosuressimilartothoserequiredbyGAAPifthefinancial

statementscontainitemsthatarethesameas,orsimilarto,thoseinfinancialstatementspreparedinaccord‐

ance

withGAAP,preparersoffulldisclosurefinancialstatementspreparedwhenapplyingthecash‐ortax‐basis

ofaccountingareoftenfacedwithdifficultquestions.

Thispracticeaidisintendedtoprovidepreparersofcash‐andtax‐basisfinancialstatementswithguidelinesand

bestpracticestopromoteconsistencyandforresolving

theoftendifficultquestionsregardingthepreparation

ofsuchfinancialstatements.Althoughthispracticeaidisthebestsourceforsuchguidance,itisnonauthorita‐

tiveandshouldnotbeusedasasubstituteforthepreparer’sprofessionaljudgment.Thispracticeaidhasnot

beenapproved,disapproved,orotherwiseactedupon

byanyseniorcommitteeoftheAICPA.

Thispracticeaiddoesnotcontainguidancewithrespecttoperforminganaudit,review,orcompilationoffinan‐

cialstatementspreparedwhenapplyingthecash‐ortax‐basisofaccounting.Practitionersengagedtoauditsuch

financialstatementsshouldrefertoStatementsonAuditing

Standards,includingAU‐Csection800,SpecialCon‐

siderations—AuditsofFinancialStatementsPreparedinAccordanceWithSpecialPurposeFrameworks(AICPA,

ProfessionalStandards).PractitionersengagedtoperformarevieworcompilationshouldrefertoStatements

onStandardsforAccountingandReviewServices(SSARSs).Likewise,CPAsinpublicpracticewhopreparefinan‐

cialstatementsforclientsbutarenotengagedtoperformanaudit,review,orcompilationofsuchfinancial

statementsshouldrefertoSSARSs.

PreparedbyMichaelP.Glynn

SeniorTechnicalManager

AuditandAttestStandardsTeam 

EditedbyKellyG.McAuliffe

TechnicalManager

MemberLear ning andCompetency

2©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Acknowledgments

In1998,theAICPApublishedthePracticeAidPreparingandReportingonCash‐andTax‐BasisFinancialState‐

ments.ThatpublicationwaswrittenbyMichaelJ.Ramos,CPA,andeditedbytheAICPAAccountingandPublica‐

tionsTeam.Thatpublicationservedasabasisforthepreparationoftheoriginal

editionofthispracticeaid.

Inadditiontothispracti ceaid,theAICPAhasalsopublishedaseparatepracticeaid,ApplyingOCBOAinState

andLocalGovernmentFinancialStatements,authoredbyMichaelA.(Mike)Crawford,CPA.Mikeservedasan

invaluableresourceinthepreparationoftheoriginaleditionof

thispracticeaid.

TheAICPAalsogreatlyappreciatestheinvaluableinputprovidedbythelateDr.ThomasA.Ratcliffeinthede‐

velopmentofthepreviouseditionofthispracticeaid.

Finally,theAICPAwouldliketothankthe2011/12membersoftheAccountingandReviewServicesCommittee

andthe2011/12

membersoftheAICPAPCPSTechnicalIssuesCommittee,whoprovidedinvaluablei nputre‐

gardingthecontentoftheoriginaleditionofthispracticeaid.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.3

4©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Chapter1

OverviewofCash‐andTax‐BasisFinancialStatements

Introduction

Financialstatements,includingrelatednotes,areastructuredrepresentationofhistoricalfinancialinformation

intendedtocommunicateanentity’seconomicresourcesandobligationsatapointintimeorthechanges

thereinforaperiodoftimeinaccordancewithafinancialreportingframework.

fn1

Allfinancialstatementsare

preparedinaccordancewithafinancialreportingframework.Thetermfinanc ialreportingframeworkisdefined

as“asetofcriteriausedtodeterminemeasurement,recognition,presentation,anddisclosureofallmaterial

itemsappearinginthefinancialstatements.”

fn2

Examplesoffinancialreportingframeworksareaccounting

principlesgenerallyacceptedintheUnitedStatesofAmerica(GAAP),InternationalFinancialReportingStand‐

ardspromulgatedbytheInternationalAccountingStandardsBoard,andspecialpurposeframeworkssuchasthe

cash‐,tax,regulatory‐,contractual‐,andotherbasesthatuseadefinitive

setoflogical,reasonablecriteriathatis

appliedtoallmaterialitemsappearinginthefinancialstatements.Thecash‐,tax‐,regulatory‐,andother‐basis

ofaccountingarecommonlyreferredtoasothercomprehensivebasesofaccounting.

AsGAAPbecomesincreasinglycomplexandlesscostbeneficialforprivate

companies,suchcompaniesconsider

issuingcash‐andtax‐basisfinancialstatementsascost‐effectiveandusefulalternatives.Manyoftheseprivate

companiesaresmallandmedium‐sizedentitiesthatreport toanarrowrangeoffinancialstatementusers.

Thoseusers,unlikeusersofpubliccompanyfinancialstatements,typicallyhaveaccessto

companymanagement

andadditionalfinancialinformationbeyondthatprovidedinthefinancialstatements.

Cash‐ortax‐basisfinancialstatementsmaybeappropriatewhenevertheentityisnotcontractuallyorotherwise

requiredtoissueGAAPfinancialstatements.Thefollowing conditionsmayindicatethatfinancialstatements

preparedwhenapplyingthecash‐or

tax‐basisofaccountingisappropriate:

 Theusersofthefinancialstatements—bothinternalandexternaltotheentity—understandacash‐or

tax‐basispresentationandfinditrelevantfortheirneeds.

 Itiscost‐effectivetopreparecash‐ortax‐basisfinancialstatements.

 Theoperationsoftheentity

areconducivetoacash‐ortax‐basispresentation.

Preparingcash‐ortax‐basisfinancialstatementshasmanybenefits.Asignificantbenefitisduetothefactthat

manysmallerentitiesmaintaintheiraccountingrecordsonacash‐ortax‐basis.Often,accountingandfinance

personnelresponsibleformaintainingthe

booksandrecordscanmoreeasilyunderstandtheconceptsofcashin

fn1

Paragraph.05ofAR‐Csection90,ReviewofFinancialStatements(AICPA,ProfessionalStandards),andparagraph.13ofAU‐C

section200,OverallObjectivesoftheIndependentAuditorandConductofanAuditinAccordanceWithGenerallyAcceptedAuditing

Standards(AICPA,ProfessionalStandards).

fn2

Seefootnote1.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.5

andoutaswellastaxreportingcomparedtoGAAP.Becausetheinternalrecordsareoftenmaintainedonthe

cash‐ortax‐basisofaccounting,itiseasiertopreparethefinancial statementswhenapplyingthatsamebasis.If

thefinancialstatementsarepreparedinaccordancewithGAAP,theaccountingand

financepersonnelwould

“true‐up”thefinancialinformationthrougha seriesofjournalentries.Additionally,manyusersofsmallerentity

financialstatementsfindcash‐ortax‐basisfinancialstatementstobemoreunderstandablethanfinancial

statementspreparedinaccordancewithGAAPbecausethoseusersareoftenaccustomedtopreparingand

con‐

sideringbudgetsonacash‐basisandunderstandtaxissues.

Becausemanysmallerentitiesareappropriatelyconcernedwithminimizingcostsandmaximizing theresources

thatareavailabletofundtheoperationsofthebusiness,resourcesallocatedtoaccountingandfinancialreport‐

ingareoftennotsufficienttomaintainGAAP basis

accountingrecordsandtopreparefinancialstatementsinac‐

cordancewithGAAP.Preparingfinancialstatementswhenapplyingthecash‐ortax‐basis ofaccountinggeneral‐

lyislesscostlythanpreparingGAAPfinancialstatementsbecauseofthefollowing:

 Lesscomplexmeasurementrequirements.Financialstatementspreparedwhenapplyingthecash‐

basis

ofaccountingreflecttransactionsresultingfromcashreceiptanddisbursementtransactionsorevents.

Financialstatementspreparedwhenapplyingthetax‐basisofaccountingreflecttransactionsinthe

samemannerasthosetransactionsarereflectedintheentity’staxreturn.

 Lessextensivedisclosurerequirements.Financialstatementspreparedwhenapplyingthe

cash‐ortax‐

basisofaccountingdonotrequire alloftheextensivedisclosuresrequiredofGAAPstatementsbecause

thestatementsdonotincludesomeoftheitems,events,andtransactionsthataretypicallyincludedin

GAAPbasisfinancialstatements.

ObservationsandSuggestions

Often,preparersofcash‐andtax‐basisfinancialstatementselecttoomitsubstantiallyalldisclosuresrequiredby

thecash‐ortax‐basisofaccounting.Theomissionofdisclosuresisadeparturefromthecash‐ortax‐basisofac‐

countingand,ifsuchdisclosureswereincludedinthefinancialstatements,theymightinfluencetheuser’scon‐

clusionsabouttheentity’sfinancialposition,resultsofoperations,andcashflows.However,theomissionmay

notnecessarilyresultinmisleadingfinancialstatementsprovidedthattheintendedusersareinformedabout

suchmatters.

 Abilitytopreparetaxreturnsandfinancialstatementsfromthesameinformation.Whentax‐basisfinan‐

cialstatementsareissued,asignificantportionofthecostcanbeabsorbedbythepreparationofthetax

return.Additionally,theentity isnotrequiredtomaintaintwosetsofaccountingrecordsto

accountfor

itemssuchasdepreciation,baddebts,andconsolidationmatters.

However,inadditiontothebenefitsoffinancialstatements preparedwhenapplyingacash‐ortax‐basisofac‐

counting,financialstatementpreparersshouldalsobeawareofthelimitationsofsuchfinancial statements.For

example,financialstatementsprepared

whenapplyingthecash‐ortax‐basisofaccountingmaynotmeetthe

needsofcertainuserssuchasregulatorsandcertainlenders.Inaddition,thecash‐basisofaccountingcanbe

easilymanipulatedbyacceleratingordelayingthetimingofthereceiptordisbursementofcashandtherefore

maynot

beacomprehensivemeasureoftheentity’scompleteeco nomiccondition.

Inpractice,themosttypicalindustriesinwhichcash‐ortax‐basisfinancialstatementsareissuedincludethefol‐

lowing:

 Professionalservices

6©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

 Medical

 Retail

 Realestate

 Farming/agricultural

 Construction

 Not‐for‐profit

Cash‐BasisofAccounting

Thecash‐basisofaccountingisabasisofaccountingthattheentityusestorecordcashreceiptsanddisburse‐

ments.Whenapplyingthecash‐basisofaccounting,transactionsarerecognizedbasedonthetimingofcashre‐

ceiptsanddisbursements.Asaresult,

 revenuesarerecognizedonlywhencash

isreceivedratherthanwhenearned,and

 expensesarerecognizedonlywhencashispaidratherthanwhentheobligationisincurred.

Whenapplyingthecash‐basis,cashoutflowstopurchasean“asset”arenotcapitalizedbutinsteadarerecorded

asadisbursementasofthedateofpurchase,

sothereisnodepreciationoramortization.Accrualsarenotmade

andprepaidassetsarenotrecorded.

Thecash‐basisofaccountinginitspurestformisrarelyusedbutmaybeappropriatewhenevertheentity

 isinterestedprimarilyinsourcesandusesofcash.

 hasalimitednumber

offinancialstatementusers.

 hasrelativelysimpleoperationsengagedinoneprimaryactivity.

 doesnothavesignificantamountsofdebt,capitalassets,orotheritemsthatwouldberecognizedinac‐

cordancewiththeaccrualbasis.

Examplesofsomeentitiesthatmayusethecash‐basisofaccounting

includethefollowing:

 Estates

 Trusts

 Civicventures

 Studentactivityfunds

 Politicalcampaignsandcommittees

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.7

Whenapplyingthecash‐basisofaccounting,becausetheonlyassetsoftheentitywouldbecashandcash

equivalentsandtherewouldbenoliabilities,abalancesheetequivalentisoftennotpresented.Theincome

statementequivalentwouldreportcashreceiptsanddisbursementsandotherchangesincashandcash

equiva‐

lentsanddiscloseanyrestrictionsonendingcashandcashequivalents. 

Anydeparturefromthepresentationofcashandcashequivalentbalancesandchangesinsuchbalances,such

asthereportingoflong‐termdebtarisingfromcashtransactions,thecapitalizationanddepreciationofcapital

assetsacquiredwithcash,

orthereportingofinvestmentsorreceivablesandpayablesresultingfromcash

transactions,shouldbeconsideredamodificationtothecash‐basisofaccounting.Suchdeviationsrequireeval‐

uationregardingwhethertheyareappropriatemodificationsofthecash‐basisofaccounting.Appropriatemodi‐

ficationsofthecash‐basisofaccountingare

discussedinthesubsequentsection.

In‐SubstanceTwo‐StepTransactionsorEventsintheCash‐BasisofAccounting

Thepreparerofcash‐basisfinancialstatementsmayencountersingle‐steptransactionsoreventsthatmaynot

directlyinvolveacashinfloworoutflowbutmayneverthelessberecordedasanin‐substancetwo‐stepcash

transactionoreventwhenapplyingthecash‐basisofaccounting.Forexample,managementofan

entitymay

signanotefromabankinordertopurchaseequipment.Thebankmaythendirectlypaythevendorforthepur‐

chaseoftheequipment.Becausetherewasnocashtransaction,theentitymaynotrecordthesingle‐steptrans‐

actioninthefinancialstatements.However,so

asnottobemisleadingtousersofthefinancialstatements,the

preparermaychoosetorecordthetransactionasanin‐substancetwo‐steptransaction.Inaccordancewiththat

treatment,thejournalentriesmaylookasfollows:

CashXX,XXX

 NoteProceeds(Revenue)  XX,XXX

(Torecordnoteproceedsthatwere

paiddirectlytothevendor)

Capitalexpenditure XX,XXX

 CashXX,XXX

(Torecordpurchaseofequipment)

Then,subsequentpaymentsonthenotewouldberecordedasfollows:

Debtserviceexpenditure XXX

 CashXXX

(Torecordprincipalandinterestpaymentonnotepayable)

ModifiedCash‐BasisofAcc ounting

Themodifiedcash‐basisofaccountinginvolveslogicalandconsistentmodificationstotransactionsorevents

thatarederivedfromcashreceiptsorcashdisbursements.Forexample,amodi ficationtothecash‐basisofac‐

countingtoreportcapitalassetsshouldinvolverecordinganddepreciatingonlythosecapitalassetsthatresult

from

cashtransactionsorevents.Themodificationshouldnotinvolvetherecordinganddepreciatingofdonated

capitalassetsbecausethesetransactionsoreventsdonotinvolveaninfloworoutflowofcash.Oncedeprecia‐

blecapitalassetsarisingfromcashtransactionsoreventsarerecordedwhenapplyingamodifiedcash‐basis

of

accounting,suchassetsshouldalsobedepreciatedovertheirestimatedusefullives.Depreciatingcapitalassets

thatwereacquiredwithcashisalogicalallocationofthecash‐basisassets’costsovertheassets’usefullives.

8©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Aneasywaytolookatwhetheramodificationisappropriateistoconsiderwhetherthetransactionorevent

wouldhavebeenrecordediftheentitywaspreparingthecash‐ba sisfinancialstatements.Forexample,ifanen‐

titypurchasedacapitalassetandwaspreparingcash‐basisfinancia lstatements,the

journalentrywouldlook

likethis:

Capitalexpenditure  XXXX

 CashXXXX

(Torecordpurchaseofcapitalasset)

Becausecashispartofthejournalentry,itwouldbeanappropriatemodificationtocapitaliz e theassetandde‐

preciatethecostovertheestimateduseful lifeoftheasset.

Onthe

otherhand,therecordingoftradeaccountsreceivablearisingfromservicesprovidedorgoodssold

wouldnotbeanappropriatemodificationofthecash‐basisofaccountingassumingcashwasnotreceivedatthe

timetheserviceswereprovidedorgoodsweresold.

Modificationstothecash‐basisofaccounting

generallyresultwhencashreceiptsorcashdisbursementsprovide

abenefitoranobligationthatcoversmultiplereportingperiods.Forexample,apreparermayconcludethatfi‐

nancialstatementuserswouldbemisledifcashpurchasesofcapitalassetsarerecordedasdisbursementsor

expendituresintheperiodinwhichthe

assetsarepurchased.Instead,theprep arermayele cttomodifythe

cash‐basisofaccountingtorecordtheassetonthebalancesheetequivalentanddepreciateitovertheestimat‐

edusefullifeoftheasset,thereby,ineffect,spreadingthebenefitofthecashoutflowovermultiplereporting

periods

inamannerthathassubstantialsupportandislogicalandconsistent.

Questionsoftenariseintheapplicationofamodifiedcash‐basisofaccountingregardingwhetherreportedas‐

setsandliabilitiesderivedfromcashtransactionsoreventsshouldeverbewrittendownorwrittenoffonce

theyarerecordedat

theiroriginalcashvalue.Temporarychangesinthefairvalueofanassetorliabilityshould

notberecognizedinapplyingamodifi ed cash‐basisofaccountingandallrecognizedassetsandliabilities should

bemeasuredandreportedattheiroriginalcashvalue(netofanyaccumulateddepreciationoramortization,

if

applicable).Ifanassetorliabilityhasbeenpermanentlyimpairedandhasnofuturecashvalueorrepresentsno

futureobligationagainstcash,itwouldbeappropriatetowrite‐downorwrite‐offsuchamountsinmodified

cash‐basisfinancialstatements.

Asignificantchallengetopreparingfinancialstatementswhenapplying

amodifiedcash‐basisofaccounting is 

developingtheappropriateaccountingpolicythatresultsinfinancialstatementsthatmeettheneedsofthe

primaryusersofthestatementsandconsistentlyapplyingthatpolicytocashtransactionsandeventsinorderto

keepthefinancialstatementsfrombeingmisleadingforthe

purposesforwhichtheyareintended.Thepreparer

mayfindbenefitinspellingoutthelogicbehindthecash‐basismodificationsanddocumentingtheaccounting

policypriortopreparationofthebasicfinancialstatements.

Althoughthereisnosingleacceptedmethodofapplyingamodifiedcash‐basis ofaccounting,modifiedcash

‐

basisfinancialstatementscanbemoremeaningfuliftheyarecomparablewithsimilarfinancialstatements.

Somepreparershaveinappropriatelyconsideredthemodifiedcash‐basisofaccountingasa“free‐for‐all”propo‐

sitioninwhichtheycanunilaterallyandarbitrarilychoosethemodificationsthattheywillapply.Forexample,a

preparermayinappropriatelydecidetopreparefina ncialstatementsapplyingamodifiedcas h‐basis ofaccount‐

ingthatrecordsassetsarisingfromcashtransactionsorevents,including investments,inventories,andcapital

assetsbutdoesnotrecordshort‐termandlong‐termliabilitiesandotherobligationsarisingfromcashtransac‐

tions.Inconsistentuses

ofamodifiedcash‐basisframeworkshouldbeavoidedingeneralusefinancialstate‐

mentsbecausesuchinconsistencieswillnormallyresultinfinancialstatementsthataremisleadingforgeneral

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.9

use.Financialstatementsthatarepreparedusinginconsistentmodificationsmaybeappropriateforspecialpur‐

posesinvolvinglimitedusersbutshouldbelabeledassuchwithcleardisclosureanduseofdescriptiveheadings.

Withtheneedsoftheprimaryfinancialstatementusersinmind,whenpreparingfinancialstatementsapplyinga

modified

cash‐basisofaccounting,thepreparershouldconsidermodifyingthefollowingcashtransactionsor

events,amongothers,bytherecordingofthefollowing:

 Receivablesresultingfromanoutflowofcash,suchasacashadvancetoanemployee

 Investmentsinmarketablesecuritiesacquiredwithcash

 Inventoriesacquired

withcash

 Capitalassetsarisingfromcashtransactionsanddepreciatingtheassetswhereappropriate

 Deferredrevenueresultingfromcashreceipts

 Liabilitiesresultingfromshort‐termcashborrowings

 Long‐termnotesandotherdebtarisingfromcashtransactionsorevents

 Anyothermaterialassets,liabilities,revenues,and

expensesresultingfromcashtransactionsorevents

Ifthefinancialstatementsarepreparedwhenapplyingamodifiedcash‐basisaccountingpolicyinwhichoneor

moreofthepreceding—butnotall—arerecorded,thepreparershouldbepreparedtodefendhowthedecision

tomodifyornotmodifyisalogical

andconsistentapplicationoftheaccountingpolicyanddoesnotresultin

misleadingfinancialstatementsforthepurposesfor whichtheyareintended.

Anumberoftransactionsoreventsarenotappropriatemodificationstothecash‐basisofaccounting.Generally,

thesetransactionsoreventsshouldnotberecordedwhenapplyinga

modifiedcash‐basisofaccountingbecause

theydonotinvolvecashinflowsoroutflows,areillogical,orarenotsubstantiallysupportedintheaccounting

literature.Commontransactionsoreventsthatshouldnotbereportedinfinancialstatementspreparedwhen

applyingamodifiedcash‐basisofaccounting includetherecordingor

adjustingofthefollowing:

 Capitalassetsarisingfromcashtransactionsorevents,butnotrecordingdepreciationwhereappropri‐

ate

 Donatedcapitalassetswherecashoutflowswerenotinvolved

 Accountsreceivablefromservicesprovidedorgoodssoldandotheraccruedreceivables

 Pledgesreceivableorotherreceivableswherecash

outflowswerenotinvolved

 Investmentsforwhichcashoutflowswerenotinvolved

 Accountspayableforgoodsorservicesreceivedwherenocashoutflowwasinvolved

 Accruedincometaxes,accruedinterestexpense,otheraccruedliabilitieswherenocashoutflowwasin‐

volved

10©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

 Subsequentwriteupsorwritedownstofairvaluetorecognizeunrealizedgainsandlossesonmarketa‐

bleinvestments

 Derivativeinstrumentswherecashinflowsoroutflowswerenotinvolvedaswellasthemarktomarket

forfairvaluechanges

Becausemodifiedcash‐basisframeworksdonotinvolvefinancial

statementelementsresultingfromaccruals

andnoncashtransactionsorevents,itisunlikelythatanacceptablemodifiedcash‐basisframeworkwouldever

bemateriallyequivalenttoGAAP.However,itisimportantforfinancialstatementpreparerstoavoidattempting

tomakecertainmodificationstoGAAPfinancialstatementsandthenref erringto

thosefinancialstatementsas

modifiedcash‐basisfinancialstatements.Forexample, financialstatementsthatarepresentedinconformity

withGAAP,exceptthatmaterialleasesarenotcapitalized,arenotconsideredmodifiedcash‐basisfinancial

statements.SuchfinancialstatementsareconsideredGAAPfi nancialstatementswithamaterialdeparturedue

tothefailure

tocapitalizematerialleases.Thepreparerwillneed tousejudgmentindeterminingifmodified

“cash‐basis”statementsaretantamounttofinancialstatementspurportedtobepreparedinaccordancewith

GAAPwithmaterialdeparturestherefrom.

Tax‐BasisofAccounting

Thetax‐basisisabasisofaccountingthattheentityusestofileitsfederalincometaxorfederalinformationre‐

turnfortheperiodcoveredbythefinancialstatements.

Thetax‐basisofaccountingisbasedontheprinciplesandrulesforaccountingfortransactionsunderthefederal

income

taxlawsandregulations.Fewnewmeasurementguidelinesneedtobeestablishedbecausethemethod

isbasedontaxlaws.Thetax‐basisofaccountingcoversarangeofalternativebases,fromcashtofullaccrual,

dependingonthenatureofthetaxpayer,andinsomecircumstances,thetaxpayer’selections.

Anentityneednotbeataxableentitytopreparetax‐basis financialstatements.Anyentitythatfilesareturn

withtheIRS,eitheranincometaxreturnoraninformationreturn,maypreparetax‐basisfinancialstatements.

Therefore,not‐for‐profitorganizations,Ccorporations,Scorporations,partnerships,limi tedliabilitypartner

‐

ships,limitedliabilitycompanies,andsoleproprietorsmayallusethetax‐basisofaccounting.

Thetax‐basisofaccountingismostusefulforsmall,nonpublicentitieswhosefinancialstatementusersarein‐

terestedprimarilyinthetaxaspectsoftheirrelationshipwiththeentity.Forexample,investorsintax‐

driven

partnerships,suchasthosecommonlyemployedintherealestateindustry,maybeprimarilyinterestedinthe

taxconsequencesoftransactions.However,theymaywantmoreinformationthanwouldbeprovidedbyatax

return.

De term iningWhethertoPrepareandIssueCash‐orTax‐BasisFinancialSta t ements

Aslongastheentityisnotcontractuallyorotherwiserequiredtoissuefinancialstatementspreparedinaccord‐

ancewithGAAPoraregulatoryorcontractualbasisofaccounting,theentitymayprepareandissuecash‐ortax‐

basisfinancialstatements.Understa ndingtheneedsofthefinancialstatementusersisan

importantstepinde‐

terminingwhethertoprep areandissuecash‐ortax‐basisfinancialstatements.Iftheusersofthefinancial

statementsunderstandthepresentatio n, andiftheinformationpresentedwhenapplyingthatbasisofaccount‐

ingisrelevanttotheirneeds,thenthepreparermaydeterminethatit

isusefulandappropriatetoprepareand

issuecash‐ortax‐basisfinancialstatements.Thefollowingarecharacteristicsofentitiesthatgenerallyaregood

candidatestopreparecash ‐ortax‐basisfinancialstatements:

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.11

a. Theentity’screditorsdonotneedorrequirefinancialstatementspreparedinaccordancewithGAAP.

b. ThecostofcomplyingwithGAAPwouldexceedthebenefits(forexample,asmallconstructioncontrac‐

torwhowouldberequiredtoaccountforlongtermcontractsusingthepercentageofcompletion

methodand

wouldberequiredtocomputedeferredtaxes). 

c. Theownersarecloselyinvolvedintheday‐to‐dayoperationsofthebusinessandhaveafairlyaccurate

pictureoftheentity’sfinancialposition.

d. Theownersareprimarilyinterestedincashflows(forexample,aprofessionalcorporationofphysicians

that

distributesitscash‐basisearningsthroughsalaries, bonuses,andretirementplancontributions).

e. Theownersareprimarilyinterestedinthetaximplicationsoftransactions(forexample,partnersin a

partnershipwhoareconcernedabouttheeffectsoftransactionsontheirpersonaltaxreturns).

f. Itmaynotbeappropriatetoprepare

andissuecash‐ortax‐basisfinancialstatementsiftheentityisor

soonwillberequiredtoissueGAAP‐basisfinancial statements.Forexample,managementof acompany

thatisanticipatingsellingitsbusinessmayberequiredtoissuefinancialstatementspreparedinaccord‐

ancewithGAAP.

Additionally,financial

statementspreparedwhenapplyingthecash‐ortax‐basisofaccountingshouldnotbeis‐

suediftheresultsaremisleading.Cash‐andtax‐basisfinancialstatementsareintendedtobeacost‐effectiveal‐

ternativetoGAAP,notawaytodeliberatelymisleadfinancialstatementusers.

Example

SituationInWhichitMayNotBePrudenttoIssueTax‐BasisFinancialStatements

 LongStreetPartnershastypicallyissuedtax‐basisfinancialstatements becausethepartnersaremore

interestedinthetaxtreatmentofpartnershiptransactions.Outsidecreditorshavealsoacceptedthe

tax‐basisfinancialstatementsassuitablefor

theirneeds.Duringthecurrentyear,twoeventsoccurthat

significantlyaffectthepartnership:Severallargecustomersexperiencefinancialdifficultyandthepart‐

nership’sreceivablesfromthecustomersareindangerofnotbeingcollected.Ifthefinancialstatements

werepreparedinaccordancewithGAAP ,thepartnershipwouldberequired

torecordavaluational‐

lowanceandrecognizeabaddebtexpense.Underthetaxrules,thepartnershipusesthedirectwrite‐off

method,soataxdeductionmaynotbeallowedinthecurrentyear.

 Thepartnershiphasacknowledgedthatitisobligatedtoperformanenvironmentalremediationat

one

ofitssites.IfthefinancialstatementswerepreparedinaccordancewithGAAP,thepartnershipwould

berequiredtorecognizetheliabilityandaloss.Althoughtheentitymaydisclosetheinformationina

risksanduncertaintiesnote,underthetaxrules,thedeductionisnotalloweduntilthe

amountispaid

andthereforewouldnotbeincludedintheincomestatementequivalent.

 Priortopreparingandissuingtax‐basisfinancialstatements,indeterminingwhethertheproposedfi‐

nancialreportingframeworkisappropriate,thepreparermayconsiderthefollowing:

— Whetherthetax‐basisfinancialstatementscontinuetobe

suitablefortheusers’needs.Inthe

example,theentityhadalonghistoryofissuingtax‐basisfinancialstatements,whichweresuit‐

12©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

ablefortheneedsoftheusers.Theeventsinthecurrentyearmerelyillustratethelimitationsof

tax‐basisfinancialstatements.

— Appropriatenessofdisclosure.Thepreparermaydeterminetoexpandonthei nformationin‐

cludedinthenotestothefinancialstatementsaboutthesetwoevents.Forexample,the

part‐

nershipmightdisclosethenatureoftheenvironmentalremediationliabilityandtheamounts

involved.

— Recognitionmaybeappropriate.Depending onthenatureandmagnitudeoftheitem,itmaybe

appropriatetorecognizeitinthefinancialstatements.Inthisexample,thepartnershipmight

decidetoaccountfor

baddebtsusingtheallowancemethodandtorecognizeacontingentlia‐

bilityfortheremediationobligation.Thiswouldbeadeparturefromthetax‐basisofaccounting

andthemanagementoftheentitymay determinethat,inthecir cumstances,itmaybemore

appropriatetoprepareitsfinancialstatementsin

accordancewithGAAP.

— ConsiderGAAPfinancials.Asaresultofthechangedcircumstances,financialstatementspre‐

paredwhenapplyingthecash‐ortax‐basisofaccountingmaynolongerbeappropriate,andthe

managementoftheentitymaydecidetoprepareitsfinancialstatementsinaccordancewith

GAAP.

DecidingBetweenModifiedCash‐orA ccrualTax‐BasisFinancialSta t emen ts 

Insomesituationsitmaybedifficulttodeterminewhethertoissuemodifiedcash‐oraccrualtax‐basisfinancial

statements.Eachbasishasitsowndistinctadvantagesanddisadvantages.

ModifiedCash‐orAccrualTax‐Basis

AdvantagesandDisadvantagesofEach



Advantages Disadvantages

ModifiedCash‐Basis

 Canbesimplertopreparethantax‐

basis

 Notaffectedbychangesintaxlaws

 Interimfinancialstatementsareeasy

toprepare

 Recognitionandmeasurementprin‐

ciplesarenotwell‐defined

 Notwell‐suitedforentitiesthathave

inventoryorcomplexoperations

Accrual

Tax‐Basis

 Better‐suitedforentitieswithinven‐

toryorcomplexoperations

 Well‐definedrecognitionandmeas‐

urementcriteria

 Decisionsmadefortaxreporting

purposesmayhaveunintendedfi‐

nancialreportingeffects

 Accountingtreatmentsareaffected

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.13

Advantages Disadvantages

bychangesintaxlaws

14©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Chapter2

RecognitionandMeasurementIssuesinFinancialStatementsPreparedWhen

ApplyingtheCash‐orTax‐BasisofAccounting

Thedeterminationofwhatinformationshouldbereportedinthefinancialstatements andwhentorecognize

transactionsorevents(recognition),andhowtorecordtransactionsoreventsandatwhatamounts(measure‐

ment)variesdependingonthetypeofframeworkusedtopreparethefinancialstatements.Thischapterin‐

cludesa

discussionofrecognitionandmeasurementissuesforcash‐,modifiedcash‐,andtax‐basisfinancial

statements.

Cash‐BasisandModifiedCash‐Basis

ObservationsandSuggestions

InaccordancewiththemasterglossaryincludedintheFASBAccountingStandardsCodification

,cashequiva‐

lentsareshort‐term,highlyliquidinvestmentsthathavebothofthefollowingcharacteristics:

 a. Readilyconvertibletoknownamountsofcash

 b. Soneartheirmaturitythattheypresentinsignificantrisksofchangesinvaluebecauseofchangesinin‐

terestrates

Generally,onlyinvestmentswithoriginalmaturitiesofthreemonthsorlessqualifyunderthatdefinition.Origi‐

nalmaturitymeansoriginalmaturitytotheentityholdingtheinvestment.Forexample,bothathree‐monthU.S.

Treasurybillandathree‐yearU.S.Treasurynotepurchasedthreemonthsfrommaturityqualifyascashequiva‐

lents.However,aTreasurynotepurchasedthreeyearsagodoesnotbecomeacashequivalentwhenitsremain‐

ingmaturityisthreemonths.ExamplesofitemscommonlyconsideredtobecashequivalentsareTreasurybills,

commercialpaper,moneymarketfunds,andfederalfundssold(foranentitywithbankingoperations).

Thefollowingrepresentscertainsignificantmeasurementandrecognitionissueswithrespecttothecash‐and

modified‐cashbasesofaccounting.

Investments

Inaccordancewiththecash‐basisofaccounting,entitieswouldreflectpurchasesofinvestmentsascashdis‐

bursementsandsalesofinvestmentsascashreceiptsintheperiodthatthecashisdisbursedorreceived.In‐

vestmentsacquiredvianoncashtransactionsshouldnotberecordedandunrealizedgainsandlossesshould

not

berecognized.

Acommonmodificationtothecash‐basisofaccountingistorecordinvestmentsinmarketablesecuritiesasas‐

sets.Iftheentityprepareditsfinancialstatementsinaccordancewithaccountingprinciplesgenerallyaccepted

intheUnitedStatesofAm erica (GAAP),theinvestments wouldbereflectedinthe

balancesheet.Assuch,the

investmentswouldbeinitially recordedatcostandsubsequentunrealizedchangesinvaluewouldberecorded

toreflectthefairvalueoftheinvestments.Becauseunrealizedgainsandlossesarenottheresultofacash

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.15

transactionorevent,suchunrealizedgainsandlossesshouldnotberecordedinfinancialstatementswhenap‐

plyingamodifiedcash‐basisofaccounting.Instead,theinvestmentswouldremainonthebalancesheetequiva‐

lentatcostunlessanduntiltheybecomeworthlessoraresold.

Receivables

Receivablesshouldnotberecognizedinfinancialstatementspreparedwhenapplyingthecashbasisofaccount‐

ingunlessthereceivablesresultfromanoutflowofcash.Otherreceivablessuchasthosearisingfromsales

transactionsmadeoncreditshouldnotberecorded.

PropertyandEquipment

Underthecash‐basisofaccounting,purchasesofpropertyandequipmentwouldbereflectedinthefinancial

statementsascashdisbursementsintheperiodthetransactionoccurred.Theassetswouldnotbecapitalized

anddepreciationwouldnotberecorded.

Acommonmodificationtothecash‐basisofaccountingistorecord

propertyandequipmentarisingfromcash

transactionsasassets.Oncethemodificationismade,theentityshouldadoptandconsistentlyapplyanalloca‐

tionpolicy(depreciationoramortization)thathassubstantialsupportintheaccountinglitera tureandislogical.

Suchpolicyshouldalsoincluderecordinganyfinancingarrangementsthatare

partofacashtransaction.Aspart

ofthispolicy,managementoftheentityshouldconsiderhowitwouldaddresssingle‐steptransactionsorevents

thatmaynotdirectlyinvolveacashinfloworoutflowbutmayneverthelessberecordedasanin‐substancetwo‐

stepcashtransactionorevent.See

chapter1,“OverviewofCash‐andTax‐BasisFinancialStatements,”fordis‐

cussionofin‐substancetwo‐steptransactions.

Donatedassetsshouldnotberecognizedas“assets”becausetheyarenotderivedfromtheuseofcashorcash

equivalents.

Itwouldbeappropriatetowriteoffany remainingcarrying

valueofpropertyandequipmentoncetheassetsare

nolongerinuseorhavebeenpermanentlyimpaired.

BankOverdrafts

Bankoverdraftsmaybenettedwithothercashbalancesfromthesamebank.Bankoverdraftsshouldnotbe

nettedagainstfundsheldatanotherfinancialinstitution.Iftheentityhasanoverallnegativecashbalancefrom

afinancialinstitution,whenapplyingthecash‐basisofaccounting,thenegativecashbalancewould

beshownas

aliabilityonthebalancesheetequivalent,ifoneis presented.Forexample,ifthenetbalanceinBankAis

$(1,000)andthenetbalanceinBankBis$5,000,thebalancesheetequivalentwouldshowacashassetof

$5,000andthe$(1,000)overdraftas

aliability.Iftheentityhasanoverallglobalnegativecashbalance,theneg‐

ativecashbalancewouldbeshownasnegativecashonhandattheendoftheperiodonthestatementofcash

receiptsanddisbursements.

Borrowings

Whenapplyingthecash‐basisofaccounting,theentityshouldrecordallproceedsfromborrowingsascashre‐

ceiptswhenreceivedandthenreflecttheprincipalrepaidandassociatedinterestascashdisbursementswhen

paid.Ifaloanprovidesdirectfinancingofanasset,neithertheloannortheassetshould

berecorded.However,

16©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

theprincipalandinterestpaymentswouldbereflectedascashdisbursementswhenpaid.Seechapter1fordis‐

cussionofin‐substancetwo‐steptransactions.

Tax‐Basis

Intax‐basisfinancialstatements,transactionsarerecognized andmeasuredinthesamemannerastheyarein

theentity’sfederaltaxreturn.Therefore,theprepareroffinancial statementswhenapplyingthetax‐basisofac‐

countingisrequiredtounderstandthefederaltaxlawsapplicabletotheparticularentity.Although

thischapter

highlightscertaincommonmeasurementandrecognitionissueswithrespecttothetax‐basisofaccounting,itis

notasubstituteforunderstandingthefederaltaxlawsapplicabletotheparticularentity.

Additionally,althoughtheIRSpermitsallentitiestousetheaccrualme thodofa ccountingfortaxpurposes,

manysmallerentitiescaninsteadelecttousethecashmethodofaccountingfortaxpurposes.Entitieswithin‐

ventoriesarerequiredtousetheaccrualmethodforsalesandpur chasesofinventory.

NontaxableRevenuesandNondeductibleExpenses

Underfederalincometaxlaws,certainrevenueisnottaxableandcertainexpensesarenotdeductible.Forex‐

ample,receiptssuchasinterestonobligationsofstateandlocalgovernmentsandproceedsfromlifeinsurance

policiesarenottaxable.Costssuchaspremiumspaidonofficers’lifeinsurancepolicies arenot

deductible.

Whenpresentingtax‐basisfinancialstatements,inordertobetransparent,preparersoftax‐basisfinancial

statementsmayrecognizenontaxablerevenuesandnondeductibleexpensesoutsideoftaxableincome. 

Nontaxablerevenuesshouldberecognizedwhenreceived(cash‐basis)orwhenearned(accrualbasis).Nonde‐

ductibleexpensesshouldbereportedand

chargedtoexpenseintheperiodpaid(cash‐basis)orwhenincurred

(accrualbasis).

AdditionalIncomeTaxesforPriorYears

AnIRSexammayresultinadditionalincometaxesbeingassessedforprioryears.Twoalternativemethodsmay

beusedtoaccountforadditionaltaxesforprioryears.

 Theamountmaybechargedtoexpenseinthecurrentperiodiftherearenocorrespondingadjustments

tothebalancesheetequivalent

forexpensescapitalizedorrevenuerecognized.

 Theamountmaybetreatedasapriorperiodadjustment and chargedtoretainedearningsinamanner

thatislogicalandconsistentwiththee quivalentofapresentationinaccordancewithGAAP.

TheIRSmaydisallowamountschargedtoexpenseinprior

yearsandrequirethoseamountstobecapitalized

andamortizedormayrequirerecognitionofpreviouslyunreportedrevenue.Sucha mounts,netofincometax

adjustments,shouldbetreatedaspriorperiodadjustments.Otherwise,eitheroftheprecedingmethodsiscon‐

sideredacceptable.Themethodusedandtheamountofadditionaltaxes

shouldbedisclosedinthenotestothe

financialstatements.

AccountingChangesforTaxPurposes

Fortaxpurposes,theeffectsofanaccountingchangemayberecognizedprospectivelyoveraspecifiednumber

ofyears.Accountingchangesshouldbetreatedinthesamemannerastheyaretreatedinthetaxreturn.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.17

SCorporations

IncomeofanScorporationistaxabletoitsshareholders.Consequently,suchacorporationmayberequiredto

maintaininformationondistinctclassesofretainedearnings.However,intax‐basisfinancialstatements,Scor‐

porationsusuallyreportretainedearningsasasingleamountandshouldreportdistributionstostockholders.

SignificantDifferencesBetweenGAAPandTax‐Basis

TherearemanydifferencesbetweenthewayitemsareaccountedforinaccordancewithGAAPandtheway

theyaretreatedunderthetaxrules.Someofthemorecommonincludethefollowing:

 Baddebtlossesonuncollectiblereceivables

 Inventorycapitalizationandvaluation

 Unrealizedgainsoninvestmentsecurities



 Depreciationandimpairmentofcapitalassets

 Fairvaluemeasurements

 Consolidation

18©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Chapter3

PresentationandDisclosureIssuesinFinancialStatementsPreparedWhenAp‐

plyingtheCash‐orTax‐BasisofAccounting

Thedeterminationoftheformandcontentofthefinancialstatementsorwhichfinancialstatementstopresent

andwhattoinclude(presentationanddisclosure)variesdependingonthefinancialreportingframeworkap‐

plied.

Financialstatementspreparedwhenapplyingthecash‐ortax‐basisofaccountingmayprovidelesscomplexand

understandablealternativestofinancialstatementspreparedinaccordancewithaccountingprinciples

generallyacceptedintheUnitedStatesofAmerica(GAAP).However,preparersmustbeknowledgeableofGAAP

disclosurerequirementsbecausecash‐andtax‐basisfinancial statementsshouldincludeinformativedisclosures

similartothoserequiredbyGAAPifthefinancialstatements

containitemsthatarethesameas,orsimilarto,

thoseinfinancialstatementspreparedinaccordancewithGAAP.

ObservationsandSuggestions

Often,preparersofcash‐andtax‐basisfinancialstatementselecttoomitsubstantiallyalldisclosuresrequiredby

thecash‐ortax‐basisofaccounting.Theomissionofdisclosuresisadeparturefromthecash‐ortax‐basisofac‐

countingand,ifsuchdisclosureswereincludedinthefinancialstatements,theymightinfluencetheuser’scon‐

clusionsabouttheentity’sfinancialposition,resultsofoperations,andcashflows.However,theomissionmay

notnecessarilyresultinmisleadingfinancialstatementsprovidedthattheintendedusersareinformedabout

suchmatters.

Ifcash‐ortax‐basisfinancialstatementscontainitemsforwhichGAAPwouldrequiredisclosure,thefinancial

statementsmayeitherprovidetherelevantdisclosurethatwouldberequiredforthoseitemsinaGAAPpresen‐

tationorprovideinformationthatcommunicatesthesubstanceofthatdisclosure.Thismayresultinsubstitut

‐

ingqualitativeinformationforsomeofthequantitativeinformationrequiredfo rGAAPpresentations.Forexam‐

ple,

 disclosureoftherepaymenttermsofsignificantlong‐termborrowingsmaysufficientlycommunicatein‐

formationaboutfutureprincipalreductionwithoutprovidingthesummaryofprincipalreductionduring

eachofthenextfiveyears.

 informationabouttheeffectsofaccountingchanges,discontinuedoperations, andextraordinaryitems

couldbedisclosedinanotetothefinancialstatementswithoutfollowingtheGAAPpresenta tionre‐

quirementsintheincomestatementequivalentordisclosingnet‐of‐taxeffects.

 insteadofshowingexpensesbytheirfunctionalclassificationswith

respecttothefinancialstatements

ofanot‐for‐profitorganization,astatementofactivitiescouldpresentexpensesaccordingtotheirnatu‐

ralclassifications,andanotetothefina ncialstatementscoulduseestimatedpercentagestocommuni‐

cateinformationaboutexpensesincurredbythemajorprogramandsupportingservices.



insteadofshowingtheamountsof,andchangesin,theunrestrictedandtemporarilyandpermanently

restrictedclassesofnetassetswithrespecttothefinancialstatementsofanot‐for‐profitorganization,a

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.19

statementofassets,liabilities,andnetassetscouldreporttotalnetassetsorfundbalances,arelated

statementofactivitiescouldreportchangesinthosetotals,andanotetothefinancialstatementscould

provideinformation,usingestimatedoractualamountsorpercentages,abouttherestrictionsonthose

amountsandon

anydeferredrestrictedamounts,describethemajorrestrictions,andprovideinfor‐

mationaboutsignificantchangesinrestrictedamounts.

Forfinancialstatementspreparedwhenapplyingthecash‐ortax‐basisofaccounting,GAAPdisclosurerequire‐

mentsthatarenotrelevanttothemeasurementoftheitemneednotbeconsidered.To

illustrate,

 fairvaluedisclosuresforinvestmentsindebtandequitysecuritieswouldnotberelevantwhenthebasis

ofpresentationdoesnotadjustthecostofsuchsecuritiestotheirfairvalue.

 disclosuresrelatedtoactuarialcalculationsforcontributionstodefinedbenefitplanswouldnotberele‐

vantin

financialstatementspreparedwhenapplyingthecash‐ortax‐basisofaccounting. 

 disclosuresrelatedtotheuseofestimateswouldnotberelevantinapresentationthathasnoesti‐

mates,suchasthecash‐ormodifiedcash‐basisofaccounting.

Financialstatementspreparedwhenapplyingthecash‐basis

ofaccountinggenerallydonotincludeastatement

ofcashflows.However,dependingontheuser’srequirements,financialstatementspreparedwhenapplyinga

modifiedcash‐orthetax‐basisofaccountingmayincludeastatementofcashflows.Forexample,itmaybe

challengingforuserstoobtainaccurateinformationon

operating,investing,andfinancingactivitiesinsingle‐

yearfinancialstatementspreparedwhenapplyingthetax‐basisofaccounting unlessastatementofcashflowsis

presented.

SimilartofinancialstatementspreparedinaccordancewithGAAP,inordertoachievefairpresentation,financial

statementspreparedwhenapplyingthecash‐ortax‐

basisofaccountingshouldincludeallinformativedisclo‐

suresthatareappropriatefortheapplicablefinancialreportingframework,includingallsignificantmattersthat

materiallyaffectthefinancialstatements’use,understanding,andinterpretation.

Additionally,becausefinancialstatementspreparedwhenapplyingthecash‐ortax‐basisofaccountinghave

certaininherentpresentationand

disclosurelimitations,inordertoenhancethevalueandusefulnessofsuchfi‐

nancialstatements,thepreparermaydiscloseadditionalinformationinthenotestothefinancialstatements.

Forexample,donatedcapitalassetswouldnotbeincluded inthebalancesheetequivalentinfinancialstate‐

mentspreparedwhenapplyinga

modifiedcash‐basisofaccounting—evenifthemodificationtothecash‐basis

ofaccountingistorecordcapitalexpendituresasassetsanddepreciatethemovertheirestimatedusefullives.

Thepreparermayelecttodisclosethevalueofsuchdonatedcapitalassetsinthenotestothefinancialstate‐

ments.

Pr esen t a tion— Cash‐BasisFinancialStat ements

Becauseabalancesheetequivalentwouldsimplyshowthecashbalance andacorrespondingequityaccount,

andastatementofcashflowswouldberepetitiveofthestatementofcashreceiptsanddisbursements,finan‐

cialstatementspreparedwhenapplyingthecash‐basisofaccountingmayconsistonlyofastatementof

cashre‐

ceiptsanddisbursements.Althoughasinglestatementmaybepresented,info rmativedisclosures arestillnec‐

essary.Additionally,restrictionsoncashbalancesshouldeitherbepresentedonthefaceofthestatementof

cashreceiptsanddisbursementsorshouldbedisclosedinthenotestothefinancialstatements.

20©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

BasisofAcc oun ting

Arequireddisclosureforallcash‐andtax‐basisfinancialstatementsisthedescriptionofthebasisofaccounting

(financialreportingframework),includinghowthatbasisofaccountingdiffersfromGAAP.Althoughthesedif‐

ferencesfromGAAPshouldbequalitativelydescribed,theyneednotbequantified.Thisdescription isimportant

financialstatementspreparedwhenapplyingamodifiedcash‐basisofaccountingbecausesuchfinancial

statementsmayvarydependingonthemodificationstothecash‐basisthatweremade.Thedescriptionthere‐

forebecomesessentialtotheuser’sunderstandingofthefinancialstatements. 

Thedescriptionofthebasisofaccountingis

usuallypresentedinthesummary ofsignifi cantaccountingpolicies

sectionofthenotestothefinancialstatementswithaheadingsuchas“BasisofAccounting.”Thefollowingex‐

amplesrepresenthowthebasisofaccountingmaybedisclosedinthenotestofinancialstatementsprepared

whenapplyingthecash‐,a

modifiedcash‐,andthetax‐basisofaccounting.

Example:BasisofAccountingNote—Cash‐BasisofAccounting

BasisofAccounting

ThefinancialstatementsofCompanyXhavebeenpreparedonthecash‐basisofaccounting,whichisacompre‐

hensivebasisofaccountingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica

(GAAP).Thecash‐basisofaccountingdiffersfromGAAPprimarilybecauserevenuesarerecognizedwhenre

‐

ceivedratherthanwhenearnedandexpensesarerecordedwhenpaidratherthanwhenincurred.Thefinancial

statementsthereforepresentonlycashandcashequivalentsandchangesthereinintheformofcashreceipts

anddisbursements.

Example:BasisofAccountingNote—ModifiedCash‐BasisofAccounting

BasisofAccounting

ThefinancialstatementsofCompanyXhavebeenpreparedonthecash‐basisofaccounting,modifiedtorecord

assetsorliabilitieswithrespecttocashtransactionsandeventsthatprovideabenefitorresultinanobligation

thatcoversaperiodgreaterthantheperiodinwhichthecashtransactionor

eventoccurred.Themodifications

resultintherecordingofinvestments,inventories,capitalassets,andrelatedshort‐termandlong‐termobliga‐

tionsonthestatementoffinancialposition.Thismethodofaccountingrepresentsacomprehensivebasisofac‐

countingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesof

America(GAAP).Thisbasis

ofaccountingdiffersfromGAAPprimarilybecausecertainrevenueandrelatedassets(suchasaccountsreceiva‐

bleandrevenueforbilledorprovidedservicesnotyetcollected,andotheraccruedrevenueandreceivables)

havebeenrecognizedwhenreceivedratherthanwhenearnedandcertainexpensesandrelated

liabilities(such

asaccountspayableandexpensesforgoodsorservicesreceivedbutnotyetpaid,andotheraccruedliabilities

andexpenses)havebeenrecognizedwhenpaidratherthanwhentheobligationswereincurred.

Example:BasisofAccountingNote—Tax‐BasisofAccounting

BasisofAccounting

ThefinancialstatementsofCompanyXhavebeenpreparedontheaccrualbasisofaccountingthattheCompany

usesforfilingitsfederalincometaxreturn,whichisacomprehensivebasisofaccountingotherthanaccounting

principlesgenerallyacceptedintheUnitedStatesofAmerica(GAAP).ThisbasisdiffersfromGAAP

primarilybe‐

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.21

causetheCompanyexpensesthecostofcertaintypesofassetsinaccordancewithIRCSection179.GAAPre‐

quiresthatsuchassetsbecapitalizedandexpensedovertheirestimatedusefullives.

SummaryofSignificantAcc ountingPolicies

FASBAccountingStandardsCodification(ASC)235,NotestoFinancialStatements,requiresthatfinancialstate‐

mentspreparedinaccordancewithGAAPincludeasummaryofsignificantaccountingpoliciesinthenotesto

thefinancialstatements.Accordingly,cash‐andtax‐basisfinancialstatementsshouldincludeasummaryofsig‐

nificantaccountingpolicies

inthenotestothefinancialstatements.

Inadditiontothebasisofaccountingdiscussedpreviously,thenoteshouldincludedisclosureofthesignificant

accountingpoliciesusedtopreparethefinancialstatements,includingpoliciesthatinvolvethefollowing:

 Aselectionfromexistingacceptablealternatives

 Industryspecificapplications

 Unusual

orinnovativeapplicationsofaccountingprinciples

Becausethecash‐basisofaccountingdoesnotincludetherecognitionofnoncashassets,liabilities,andnoncash

transactions,elaborateaccountingpolicydisclosuresareusuallyunnecessary.Infinancialstatementsprepared

whenapplyingamodifiedcash‐basisofaccounting,suchdisclosuresmayincludeinformationaboutthe

follow‐

ing:

 Investments

 Inventory

 Propertyandequipment

 Incometaxes

 Consolidation

 Relatedpartiesandrelatedpartytransactions

 Commitmentsandcontingencies 

 Uncertainties

 Subsequentevents

 Assetimpairments

Thesignificantaccountingpoliciesnotefortax‐basisfinancialstatementsshouldincludedisclosureofthefollow‐

ing:



 Whetherthebasicmethodofaccountingiscashoraccrual

22©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

 Thetaxfilingstatusoftheentity,ifotherthanataxablecorporation(thatis,aCcorporation)

 Thatrevenuesandrelatedassetsandexpensesandrelatedobligationsarerecognizedonlywhenthey

arereportedordeductedforfederalincometaxpurposes

 Thatnontaxableincomeandnondeductibleexpenses

areincludedinthedeterminationoftheequiva‐

lentofoperatingresultsor“netincome”

 Thenatureofanyoptionaltaxmethodsofaccountingfollowed

 Thenatureofanyimportantjudgmentsorpolicies necessaryforanunderstandingof themethodsof

recognizingrevenueandallocatingcoststocurrent

andfutureperiods

 Taxuncertaintiesincludingopentaxyears

Also,taxuncertaintiesshouldbeaddressedinfinancialstatementspreparedwhenapplyingthecash‐ortax‐

basisofaccounting.FASBASC740‐10‐50‐15requiresthatopentaxyearsbedis closed—evenifthereportingen‐

tityisapass‐through

entityoranot‐for‐profitorganization.

Inaddition,infinancialstatementspreparedwhenapplyingthetax‐basisofaccounting,disclosuresregarding

significantaccountingpoliciesmay includeinformationaboutreceivables.

Thefollowingrepresentsguidanceoncertainothercommonpresentationanddisclosureissueswithrespectto

cash‐andtax‐basisfinancial

statements.

SubsequentEvents

FASBASC855,SubsequentEvents,setsforthgeneralstandardsofaccountingforanddisclosureofeventsthat

occurafterthebalancesheetdatebutbeforethefinancialstatementsareissuedorareavailabletobeissued.

Thepreparershoulddisclosethedatethroughwhichsubsequentevents have beenevaluated,which

isthedate

thefinancialstatementsareavailabletobeissued.Whenfinancialstatementspreparedwhenapplyingthecash‐

ortax‐basisofaccountingcontainitemsthatarethesameas,orsimilarto,thoseinfinancialstatementspre‐

paredinaccordancewithGAAP,suchfinancialstatementsshouldcontainthedisclosures

requiredbyFASBASC

855.

RelatedPartyTransactions

Theexistenceofrelatedparty transactionsthatarematerialindividuallyorintheaggregateandthenatureand

amountsofthetransactionsandbalancesshouldbedisclosed.Notethatthetaxrules maydefine“relatedpar‐

ty”differentlythanhowitisdefinedinaccordancewithGAAP.Toavoidconfusionon

thepartofusersofthe

tax‐basisfinancialstatements,theGAAPdefinitionofrelatedpartyshouldbeconsideredforallfinancialreport‐

ingpurposes.

CommitmentsandContingencies

Theexistenceandnatureofmaterialcommitmentsandcontingenciesshouldbedisclosedinthenotestofinan‐

cialstatementspreparedwhenapplyingthecash‐ortax‐basisofaccounting.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.23

PensionPlans

Theexistenceandnatureofapensionplanshouldbedisclosedinthenotestofinancialstatements whenapply‐

ingthecash‐ortax‐basisofaccounting.

AssetsandLiabilities

Informationdisclosedforassetsandliabilitiescommonlyincludesthefollowingitems:

 Restrictedcash,segregatedfromcashavailableforcurrentoperations,withadescriptionofthenature

oftherestriction

 Theaggregatefairvalueofinvestmentsinmarketablesecurities

 Accountsandnotesreceiv ablefromofficers,employees,andaffiliates,presented

separatelywithdisclo‐

sureoftheeffectiveinterestrateonnotesreceivable,andinterestincomefortheperiod

 Themajorclassesofproperty,plant,andequipment;depreciationexpensefortheperiod;themeth‐

od(s)usedincomputingdepreciation;andtheaggregate,accumulateddepreciation

 Themethodofdetermininginventory

cost(forexample,lastin,firstoutandfirstin,firstout)

Owners’Equity

Thefinancialstatementsoftenincludedisclosuresregardinginformationonowners’equityasfollows:

 Foreachclassofstock,thenumberofsharesauthor ized,issued,andoutstanding;theparorstatedval‐

ue;and,insummaryform,thepertinentrightsandprivilegesofeachoutstandingclass(ifmorethanone

class

isoutstanding)

 Theexistenceofstockoptionandstockpurchaseplans

 Restrictionsonthepaymentofdividends

 Changesfortheperiodintheseparatecomponentsofowners’equity

Anotetothefinancialstatementsofavo luntary healthandwelfareorganizationthatpreparestax‐basisfinan‐

cial

statementscouldprovideinformation,usingestimatedoractualamountsorpercentages,aboutthere‐

strictionsontotalnetassetsorfundbalancesandonanydeferredrestrictedamounts,describethemajorre‐

strictions,andprovideinformationaboutsignificantchangesinrestrictedamounts.

RisksandUncertainties

FinancialstatementspreparedinaccordancewithGAAParerequiredtoincludeanumberofdisclosureswithre‐

specttorisksanduncertainties.

ThefollowingtablesummarizesthesedisclosuresandhowGAAPrequirementsfordisclosingrisksanduncer‐

taintiesshouldbeaddressedincash‐andtax‐basisfinancialstatements.Thetableis

notmeanttobeall‐

inclusive.

24©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.



ObservationsandSuggestions

Often,preparersofcash‐andtax‐basisfinancialstatementselecttoomitsubstantiallyalldisclosuresrequiredby

thecash‐ortax‐basisofaccounting.Theomissionofdisclosuresisadeparturefromthecash‐ortax‐basisofac‐

countingand,ifsuchdisclosureswereincludedinthefinancialstatements,theymightinfluencetheuser’scon‐

clusionsabouttheentity’sfinancialposition,resultsofoperations,andcashflows.However,theomissionmay

notnecessarilyresultinmisleadingfinancialstatementsprovidedthattheintendedusersareinformedabout

suchmatters.



GAAPRequirement SummaryofRequiredDisclosures

ApplicabilitytoCash‐orTax‐

BasisofAccounting

NatureofOperations Entitiesshoulddiscloseade‐

scriptionofthemajorproducts

orservicesthereportingentity

sellsorprovidesanditsprincipal

markets.Thisinformationisuse‐

fulbecauseithelpsfinancial

statementusersunderstandthe

natureoftheentity’sbusiness

andtheriskscommontothat

business.

This

disclosureisrelevanttoall

financialstatementspreparedin 

accordancewiththecash‐ortax‐

basisofaccountingandshould

bemade.

UseofEstimates Financialstatementsshouldin‐

cludeanexplanationthatthe

preparationoffinancialstate‐

mentsinaccordancewithGAAP

requirestheuseofmanage‐

ment’sestimates.

Thisdisclosuremaynotberele‐

vanttosomefinancialstate‐

mentspreparedinaccordance

withthecash‐ortax‐basisof

accounting;

forexample,finan‐

cialstatementspreparedonthe

cash‐basisthatdonotinclude

estimatedamounts.

CertainSignificantEstimates Ifcertaincriteriaaremet,the

entityisrequiredtodisclosethe

natureofanuncertaintyifitisat

leastreasonablypossiblethata

changeinanestimatewilloccur

inthenearterm.Thepurposeof

thedisclosureistocommunicate

tofinancialstatementusersthat



thereisareasonablepossibility

thatcertainestimatedamounts

inthecurrentyearfinancial

statementswillchangesignifi‐

cantlyandaffectthesubsequent

years’financialstatements.

IftheGAAPdisclosurecriteria

aremet,thefinancialstatements

shouldincludedisclosureofthe

informationrequiredbyGAAP.

VulnerabilityDuetoConcentra‐ Ifcertaincriteriaaremet,the IftheGAAPdisclosurecriteria

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.25

GAAPRequirement SummaryofRequiredDisclosures

ApplicabilitytoCash‐orTax‐

BasisofAccounting

tions financialstatementsarere‐

quiredtoincludedisclosurein‐

formationaboutitsvulnerability

duetoconcentrations;forex‐

ample,significantvolumeof

businessconductedwithone

customer.

aremet,thepreparershould

disclosetheinformationre‐

quiredbyGAAP.

GoingConcern Abasicpremiseunderlyingfi‐

nancialreportingisthatauserof

thefinancialstatementscanas‐

sumethattheentitywillcontin‐

ueasagoingconcernforarea‐

sonableperiodoftime.Ifthe

preparerconcludesthatmaterial

uncertaintiesexistsuchthatthe

entitymaynot

continueasago‐

ingconcernforareasonablepe‐

riodoftime,thefinancialstate‐

mentsshouldincludedisclosure

ofsuchuncertainty.

Ifthepreparerconcludesthat

thereissubstantialdoubtabout

theentity’sabilitytocontinueas

agoingconcernforareasonable

periodoftime(generallyone

yearfromthedateofthebal‐

ancesheetequivalent),thepre‐

parershoulddisclosethegoing

concernconsiderationsinanote

tothefinancialstatements.

TerminologyforCash‐andTax‐BasisFinancialSt a t emen ts 

Thereisnorequirementtomodifyfinancialstatementtitlesincash‐ortax‐basisfinancialstatements.However,

usersofsuchfinancialstatementsshouldbeable toreadilyidentifythebasisofaccountingusedtopreparethe

financialstatements.Acommonandconvenien tway ofidentifyingthebasisofaccountingisthrough

thefinan‐

cialstatementtitlesbyadding“cash‐basis,”“modifiedcash‐basis,”or“tax‐basis”afterthefinancialstatementti‐

tle.

Cash‐basisfinancialstatementsmightbetitled,forexample,

 StatementofAssetsandLiabilitiesArisingfromCashTransactions;

 StatementofRevenueCollecte dandExpensesPaid;

 Statement

ofRevenueandExpenses—Cash‐Basis;or

 StatementofCashReceiptsandDisbursemen ts.

Modifiedcash‐basisfinancialstatementsmightbetitled,forexample,

 StatementofAssetsandNetAssets—ModifiedCash‐Basis;or

 StatementofRevenue,ExpensesandChangesinNetAssets—ModifiedCash‐Basis.

Tax‐basisfinancialstatementsmightbe

titled,forexample,

26©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

 StatementofAssets,Liabilities,andCapital—Tax‐Basis;

 StatementofOperations—Tax‐Basis;or

 StatementofRevenueandExpenses—Tax‐Basis.

Theprecedingexamplesarenotmeanttobeall‐inclusiveandarenottheonlyacceptabletitles.

Withrespecttothecaptionstobeusedwiththecash‐,modified

cash‐,ortax‐basisfinancialstatements,thereis

norequirementtomodify thestandardGAAPfinancialstatementcaptions.Therefore,captionssuchas“netin‐

come,”“netloss,”and“retainedearnings”areacceptable.However,ifmodificationsaredesired(whichmany

preparerspreferasameansofadditionalemphasis thatthe

financialstatementsarenotpreparedinaccordance

withGAAP),commonexamplesforcash‐basisfinancialstatementsareexcessofrevenuecollectedover expenses

paidandexcessofexpensespaidoverrevenuecollected.Forfinancialstatementspreparedwhenapplyinga

modifiedcash‐basisofaccounting,commonmodificationsareexcessofrevenue

overexpensesandexcessofex‐

pensesoverrevenue.Withrespecttotax‐basisfinancialstatements,modificationswithrespecttofinancial 

statementcaptionsarerarelymade.However,modifications, ifmade,mayincluderetainedearnings—tax‐basis

andnetincome—tax‐basis.

Consolid ation Accoun ting

Professionaljudgmentshouldbeappliedtodeterminewhichpresentation—consolidated,unconsolidated,or

combined—providesthemostmeaningfulandrelevantinformation.Apreparershouldnotconsolidateentities

unlessallentitiestobeconsolidatedusethesamebasis ofaccounting.Forexample,itwould notbeappropriate

toconsolidateanentitythatpreparesitsfinancial

statementsusingamodifiedcash‐basisofaccountingwithits

parentwhomaintainsitsbooksandrecordsinaccordancewiththetax‐basisofaccounting.Ifthemodifie dcash‐

basisofaccountingisused,thenallconsolidatedentitiesshouldutilizethesamemodificationstothecash‐basis

ofaccounting.

With

respecttofinancialstatementspreparedwhenapplyingthetax‐basisofaccounting,consolidationisbased

ontheIRC.Therefore,theconsolidationrequirementsofFASBASC810,Consolidation,donotapply.However,if

theentityfilesaconsolidatedtaxreturn,itshouldreportconsolidatedresultsonitstax‐basisfinancialstate‐

ments.Inthecaseofbrother‐sistercorporations inwhicheachentitymaintainsitsbooksandrecordsonthe

tax‐basisofaccounting,butaconsolidatedtaxreturnisnotfiled,thepreparermaypreparecombinedfinancial

statementsbecausesuchfinancialstatementsmaybemoreusefultousersthanindividualuncombined

financial

statements.

Althoughthetaxconsolidationrulesarefollowed,additionaldisclosures maybenecessarytolessenthechance

thatthefinancialstatementsarenotmisleading.Consider,forexample,a60 percentownedsubsidiarythat

wouldbeconsolidatedinfinancialstatementsprepar edin accordancewithGAAPbutisnotconsolidatedin

fi‐

nancialstatementspreparedwhenapplyingthetax‐basisofaccountingbecausethethresholdforconsolidation

undertheIRCis80percentownership.Eventhoughthesubsidiaryisnotconsolidated,thepreparershouldcon‐

siderwhichdisclosuresareappropriaterelativetothe60percentownedsubsidiary.Examplesofmattersthat

might

requiredisclosurearetheownershipandrelationshipwiththesubsidiary,relatedpartytransactions,

guarantees,andcommitments.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.27

ChangeFr om GAAPtoCash‐orTax‐Basis

AchangefromGAAPtocash‐ortax‐basisstatements(orviceversa)doesnotrepresentachangeinaccounting

principlesasdescribedin FASBASC250,AccountingChangesandErrorCorrections.Therefore,nojustification

forthechangeisrequired,andacumulativeeffectadjustmentisunnecessary.Whenonlythe

currentyear’s

cash‐ortax‐basisstatementsarepresented,therearethreewaysofpresentingopeningequity:

 ShowopeningequityaspreviouslyreportedinaccordancewithGAAP,withanadjustmenttoconvertto

thecash‐ortax‐basis.

 Showopeningequityontheas‐adjustedcash‐ortax‐basis.



 Showtheeffectsoftheadjustmenttoconvertasacumulative‐effectadjustmentintheincomestate‐

mentequivalent.

Ifcomparativefinancialstatementsarepresented,thepriorperiodsshouldberestatedandpresentedonthe

basistowhichthecompanyhaschanged.Restatementisnecessarytoensurecomparabilitybetween

allperiods

presented.

Inallcases,thechangeinaccountingbasisshouldbedisclosedinthenotestothefinancial statements.Thefol‐

lowingisanexampleofhowsuchachangeinaccountingbasiscouldbedisclosedinthenotestothefinancial

statements:

In20X1,managementadoptedapolicy

ofpreparingitsfinancialstatementsonthebasisofaccounting

thatitusestofileitsfederalincometaxreturn.Priorto20X1,theCompany’sfinancialstatementswere

preparedinaccordancewithaccountingprinciplesge nerallyacceptedintheUnitedStatesofAmerica.

Managementbelievesthatthischangeresultsinmore

relevantfinancialreportingthatiseasierandless

costlytounderstand,apply,anduseintheCompany’scircumstancesandconsideringtheneedsofthe

usersofthefinancialstatements.The20X1financialstatementshavebeenrestatedtobeonthetax‐

basisofaccounting.

28©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Appendix

IllustrativeCash‐andTax‐BasisFinancialStatements

Thisappendixcontainsillustrativeexamplesoffinancialstatementspreparedwhenapplyingthecash‐,modified

cash‐,ortax‐basisofaccountingfordifferenttypesofentities.Thesefinancialstatementsareintendedtoillus‐

tratethesignificantdiscussionpointsinchapters1–3ofthispracti ceaid.Eachfinancialstatementhasbeen

an‐

notatedtohighlightthesekeypoints.



NameofEntity TypeofEntity BasisofPreparation

CeolainnClub Not‐for‐profit Cash

Mickey’sCenter Not‐for‐profit ModifiedCash

Donnelly&Oates LimitedLiabilityPartnership Tax(AccrualBasis)

CharltonContractors,Inc. ConstructionContractor Tax(AccrualBasis)

MargaretRose1964IrrevocableTrust Trust Tax(AccrualBasis)

CEOLAINNCLUB

FINANCIALSTATEMENTS

FORTHEYEARSENDED

JUNE30,20X2AND20X1

Circumstancesincludethefollowing:

 Thefinancialstatementsareforanot‐for‐profitmembershipclub.

 Thefinancialstatementsarepreparedonthecash‐basisofaccounting.

 ThefinancialstatementsarecomparativefortheyearsendedJune30,20X2,and20X1.

Thefinancialstatementsillustratethefollowing:

 The

financialstatementsincludeastatementoffunctionalexpenses,whichisrequiredbyaccounting

principlesgenerallyacceptedintheUnitedStatesofAmerica(GAAP).Financialstatementsprepared

whenapplyingthecash‐basisofaccountingarenotrequiredtoincludesuchastatement,butmayin‐

steadcommunicatethesubstanceofthat

requirement.

 GAAPrequiresnot‐for‐profitorganizationstoreporttheamountofunrestricted,temporarilyrestricted,

andpermanentlyrestrictednetassetsonthefaceofthestatementoffinancialposition.Becausea

statementoffinancialpositionequivalentisnotpresented,theillustrativefinancialstatementscom‐

municatethesubstanceoftheGAAP

requirementinthenotestothefinancialstatements.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.29

CeoliannClub

StatementsofCashReceiptsandDisbursements

FortheYearsEndedJune30,20X2and20X1



June30,

20X2

June30,

20X1

Cashreceivedfromsupportactivities:

Membershipdues $49,899 $46,759

Donations 996 1,125

Programs 7,495 10,645

Totalcashreceivedfromsupportactivities 58,390 58,529

Cashreceivedfromothersources:

Interestincome 19 30

Other 300 3,720

Totalcashreceivedfromothersources 319 3,750

TOTALCASHRECEIVED $58,709 $62,279

Cashdisbursed:

Programservices $29,110 $29,484

Supportingservices 19,783 19,113

Fundraising 6,288 8,803

TOTALCASHDISBURSED $55,181 $57,400

Excessofrevenuecollectedoverexpensespaid 3,528 4,879

Cashandcashequivalents,beginningofyear 39,046 34,167

Cashandcashequivalents,endofyear $42,574 $39,046

Seeaccompanyingnotestofinancialstatements.

30©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

TheCeoliannClub

StatementsofFunctionalExpensesCash‐Basis

FortheYearsEndedJune30,20X2and20X1



Program

Services

Supporting

Services Fundraising

Total

June30,

20X2

Program

Services

Supporting

Services Fundraising

Total

June30,

20X1

Salariesand

benefits

$23,333 $16,440 $4,241 $44,014 $23,633 $15,876 $5,937 $45,446

Events—special

1,795 1,795

2,513 2,513

Legalandac‐

counting

2,320

2,320

2,500

2,500

Insurance 313 51 45 409 317 49 63 429

Postage/printing 3,477

3,477 3,398

3,398

Licenses/fees

114

114

464

464

Officeexpense 612 232 207 1.051 620 224 290 1,134

Miscellaneous 1,375 626

2,001 1,516

1,516

$29,110 $19,783 $6,288 $55,181 $29,484 $19,113 $8,803 $57,400

53% 36% 11%

52% 33% 15%

Seeaccompanyingnotestofinancialstatements.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.31

CeolainnClub

NotestoFinancialStatements

Cash‐Basis

FortheYearsEndedJune30,20X2and20X1

Note1—SummaryofSignificantAccountingPolicies

NatureofActivities

TheCeolainnClub(theClub)isaNewYorknot‐for‐profitorganization.TheClub’smissionistopromotesafeso‐

cialprogramsforyoungadults.

BasisofAccounting

TheClub’sfinancialstatementshavebeenpreparedonthecash‐basisof

accounting,whichisacomprehensive

basisofaccountingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP).

Thecash‐basisofaccountingdiffersfromGAAPpri marilybecauserevenuesarerecognizedwhenreceivedrather

thanwhenearnedandexpensesarerecordedwhenpaidratherthanwhenincurred.The

financialstatements

thereforepresentonlycashandcashequivalentsandchangesthereinintheformofcashreceiptsanddis‐

bursements.

CashandCashEquivalents

TheClubconsidersallhighlyliquidinvestmentsavailableforcurrentusewithaninitialmaturityofthreemonths

orlesstobecashequivalents.As

ofJune30,20X2,and20X1,cashandcashequivalentsconsistedentirelyofthe

adjustedbookbalanceintheClub’scheckingaccount.

NetAssets

AsofJune30,20X2,and20X1,alloftheClub’snetassetswereunrestricted.

IncomeTaxes

TheClubisexemptfromfederalandstateincometaxes

underInternalRevenueCodeSection501(c)(7).Accord‐

ingly,noprovisionforincometaxeshasbeenmadeinthefinancialstatements. 

UncertainTaxPositions

Federalandstateincometaxreturnsfortheyears20X0todatearesubjecttoexaminationbytaxingauthorities.

SubsequentEvents

Managementhasevaluatedsubsequent eventsthrough

August28,20X2,whichisthedatethefinancialstate‐

mentswereavailabletobeissued.

32©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

MICKEY’SCENTER

FINANCIALSTATEMENTS

ASOFANDFORTHEYEARENDED

AUGUST31,20X2

Circumstancesincludethefollowing:

 Thefinancialstatementsareforanot‐for‐profitcharity.

 Thefinancialstatementsarepreparedonamodifiedcash‐basisofaccounting.Thecash‐basisofac‐

countingwasmodifiedtoaccruecashtransactionsandeventsthatprovideabenefitorresultinanobli

‐

gationthatcoversaperiodgreaterthantheperiodinwhichthecashtransactionsoreventsoccurred.

Suchaccrualsresultedintherecordingofpropertyandequipmentasassetsonthestatementofassets

andnetassetsandsubsequentdepreciationofthoseassetsovertheirestimateduseful live s .

 The

financialstatementsareasofAugust31,20X2,andfortheyearthenended.

Thefinancialstatementsillustratethefollowing:

 Thefinancialstatementsincludeastatementoffunctionalexpenses,whichisrequiredbyaccounting

principlesgenerallyacceptedintheUnitedStatesofAmerica(GAAP).Financialstatementsprepared

whenapplyinga

modifiedcash‐basisofaccountingarenotrequiredtoincludesuch astatement, but

mayinsteadcommunicatethesubstanceofthatre quirement.

 GAAPrequiresnot‐for‐profitorganizationstoreporttheamountofunrestricted,temporarilyrestricted,

andpermanentlyrestrictednetassetsonthefaceofthebalancesheet(in

thecaseoftheillustrativefi‐

nancialstatementspreparedonamodifiedcash‐basisofaccounting,suchpointintimestatementisre‐

ferredtoasthestatementofassetsandnetassets).Theillustrativefinancialstatementsdonotfollow

thosepresentationrequirementsbutinstead,communicatetheirsubstan cebyprovidingrelevant

in‐

formationinthenotestothefinancials tatements. 

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.33

Mickey’sCenter

StatementofAssetsandNetAssets

ModifiedCash‐Basis

August31,20X2



Assets

Cashandcashequivalents $316,258

Restrictedcash(Note2) 108,084

Propertyandequipment(netofaccumulatedde‐

preciationof$35,565)

9,018

$433,360

NetAssets

Unrestrictednetassets(Note5) 433,360

Netassets $433,360

Seeaccompanyingnotestofinancialstatements.

34©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Mickey’sCenter

StatementofRevenue,ExpensesandChangesinNetAssets

ModifiedCash‐Basis

FortheYearEndedAugust31,20X2



Revenue

Corporateandfoundationcontributions $536,134

Othercontributions 235,920

Exchangeclubprojects  105,302

Unsolicitedandotherdonations 69,754

Totalrevenue 947,110

Expenses

Programservices 769,426

Managementandgeneral 100,718

Fundraising 55,264

155,982

Totalexpenses 925,408

Increaseinnetassets 21,702

Netassets,beginningofyear 411,658

Netassets,endofyear $433,360

Seeaccompanyingnotestofinancialstatements.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.35

Mickey’sCenter

StatementofFunctionalExpenses

ModifiedCash‐Basis

FortheYearEndedAugust31,20X2



ProgramServices Managementand

General

Fundraising Total

Salariesandbene‐

fits

$451,675 $76,781 $38,041 $566,497

Grantexpense 41,291

41,291

Specialevents 77,790

13,233 91,023

Training 16,029

16,029

Professionalser‐

vices

16,810

Telephone 14,782 720 428 15,930

Postage/printing 6,176 301 178 6,655

Officesupplies 16,597 809 481 17,887

Programmaterials 16,279

16,279

Depreciation 8,917 435 259 9,611

Rent 58,084 2,831 1,683 62,598

Miscellaneous 61,806 2,031 961 64,798

$769,426 $100,718 $55,264 $925,408

83% 11% 6%

Seeaccompanyingnotestofinancialstatements.

36©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Mickey’sCenter

NotestoFinancialStatements

ModifiedCash‐Basis

August31,20X2

Note1—SummaryofSignificantAccountingPolicies

NatureofActivities

Mickey’sCenter(theCenter)isanonprofitcorporationincorporatedundertheTexasNon‐ProfitCorporation

Act.ThepurposeoftheCenteristouseitsfundsexclusivelyforcharitable,scientific,andeducationalpurposes, 

especiallythepreventionofchildabuse.

Basisof

Accounting

ThefinancialstatementsoftheCenterhavebeenpreparedonthecash‐basisofaccounting,modifiedtorecord

assetsorliabilitieswithrespecttocashtransactionsandeventsthatprovideabenefitorresultinanobligation

thatcoversaperiodgreaterthantheperiodinwhichthecashtransactions

oreventsoccurred.Themodifica‐

tionsresultintherecordingofcapitalassetsonthestatementofassetsandnetassets.Exceptfordepreciation,

alltransactionsarerecognizedaseitherrevenueorexpenseswhenreceivedorpaidincash.Exceptfordeprecia‐

tion,noncashtransactionsarenotrecognized.Thisbasis

ofaccountingrepresentsacomprehensivebasisofac‐

countingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP).Thisbasis

ofaccountingdiffersfromGAAPprimarilybecausecertainrevenueandrelatedassetshavebeenrecognized

whenreceivedratherthanwhenearnedandcertainexpensesandrelatedliabilities

havebeenrecognizedwhen

paidratherthanwhentheobligationswereincurred.

PropertyandEquipment

Propertyandequipmentarerecordedatcostandconsistoftheofficebuildingandequipment.Depreciationis

computedonthestraight‐linemethodbasedonestimatedusefullivesof30yearsand5yearsfor

theoffice

buildingandequipment,respectively.

CashEquivalents

TheCenterconsidersallhighlyliquiddebtinstrumentswithanoriginalmaturityofthreemonthsorlesstobe

cashequivalents.

Contributions

TheCenterrecordscontributionswhenreceivedincash.

ContributedServices

ManyindividualsvolunteertheirtimetohelptheCenterwithits

educationalactivities.Duringtheyearended

August31,20X2,theCenterreceivedapproximately200volunteerhoursthathavenotbeenrecordedinthe

statementofrevenue,expenses,andchangesinnetassets.

FunctionalExpenses

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.37

Thecostsofprovidingthevariousprograms,fundraising,andotheractivitieshavebeensummarizedonafunc‐

tionalbasisinthestatementoffunctionalexpenses.Accordingly,certaincostshavebeenallocatedamongthe

programsandfundraisingactivitiesbenefited.Functionalexpensesareallocatedtoprogramsandsupporting

servicesbasedonspecificidentification.

Expensesthatrelatetomorethanoneprogramorsupportactivityare

allocatedbasedonsalaryexpenditure.

IncomeTaxes

TheCenterisexemptfromfederalandstateincometaxesunderInternalRevenueCodeSection501(c)(3 ),ex‐

cepttotheextentthatithastaxableincomefrombusinessesthatarenot

relatedtoitstaxexemptpurpose.Un‐

relatedbusinessincome,iftherewasany,wouldbetaxedattheapplicablecorporateincometaxrate.TheCen‐

terdidnothaveanyunrelatedbusinessincomeduringtheyearendedAugust31,20X2,andaccordingly,nopro‐

visionforincometaxeshasbeen

madeinthefinancialstatements.

TheCenterisnotcurrentlyunderexaminationbyany taxingjurisdiction.Federalandstatetaxingauthoritiesno

longerhavetherighttoexaminetaxyearspriorto20Y9.FortheyearendedAugust31,20X2,therewerenoin‐

terestorpenaltiesassociatedwithtax

positionsrecordedintheaccompanyin gfinancialstatements.

UseofEstimates

Thepreparationoffinancialstatementsonamodifiedcash‐basisofaccountingrequiresmanagementtomake

estimatesandassumptionsthataffectfinancialstatementamountsanddisclosures.Actualresultscoulddiffer

fromthoseestimatesandassumptions.

SubsequentEvents

Inpreparingthesefinancial

statements,managementoftheCenterhasevaluatedeventsandtransactionsfor

potentialrecognitionordisclosurethroughJanuary20,20X3,thedatethefinancialstatementswereavailableto

beissued.

Note2—RestrictedCash

Thebalancerepresentsfundsrestrictedbytheboardofdirectorsinanamountequaltothebalancein

the

SchoolInitiativesFund.

Note3—CommitmentsandContingencies

ThelandonwhichtheCenter’sofficeislocatedisbeingleasedonanannualbasisatarateof$1,400perannum.

SeeNote4.

Note4—SubsequentEvents

InSeptember20X2,theCenterenteredintoa“purchaseandsaleagreement,”whichprovided

forthepurchase

ofabuildingintheamountof$230,000andtheassumptionofaleaseofthelandonwhichthebuildingislocat‐

ed.ThebuildingpurchasewasexecutedonSeptember28,20X2,andwasfinancedinpartbya$220,000note

payabletoabank.The

termsofthenoteprovideforquarterlyinterestpaymentsatthebank’sprimerate

throughthenotematuritydate.A$100,000principalpaymentwasdueandmadeinDecember20X2,andthe

remainingbalanceisdueSeptember20X8.Thenoteissecuredbyaleaseholddeedoftrustandsecurityagree

‐

mentandanassignmentofrentsandleases.

38©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Theassumedleasepreviouslyreferredtoisanoperatingleasethatrequiresannualpaymentsof$19,600

throughSeptember20X6.TheCenter hastheoptiontoterminatetheleaseinMarch20X9.Iftheleaseisnot

terminated,theannualpaymentwill berevisedtoreflect6percentofthevalueof

theland,whichwillbede‐

terminedassetforthintheleaseagreement.

InDecember20X2,theCenterenteredintoaconstructioncontractfor$138,000todesignandcons tructcertain 

buildingandleaseholdimprovements.

Note5—InternallyRestrictedNetAssets

NetassetsinternallyrestrictedfortheSchoolInitiativesFundconsist

ofamountsallocatedfromunrestrictednet

assetsasapprovedbytheboardofdirectors.Theinternallyrestrictedamountsaretobeusedforpurchas ing

equipmentandestablishingprogramsforeducationalprogramsinschoolsandarenotavailableforotherpur‐

poseswithoutapprovalbytheboardofdirectors.

Note6—Allocationof

JointCosts

DuringtheyearendedAugust31,20X2,theCenterconductedactivitiesthatincludedappealsforcontributions 

andincurredjointcostsofapproximately$46,000.Theseactivitiesincludeddirectmailcampaignsandspe cial

events.Approximately65percentofthesejointcostswereallocatedtofundra isingactivitiesand35percentto

programservices.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.39

DONNELLY&OATESLIMITEDLIABILITYPARTNERSHIP

FINANCIALSTATEMENTS

ASOFANDFORTHEYEARENDED

DECEMBER31,20X2

Circumstancesincludethefollowing:

 Thefinancialstatementsareforalimitedliabilitypartnership (LLP)thatownsandoperatesaracquet

andswimclub.

 ThefinancialstatementsarepreparedonbasisofaccountingthattheLLPusesforfederalincometax

purposes.

 Thefinancialstatementsareasofand

fortheyearendedDecember31,20X2.

Thefinancialstatementsillustratethefollowing:

 TheStatementofRevenuesandExpensesusesthecaption“Revenuesinexcessofexpenses”toportray

whatafinancialstatementpreparedinaccordancewithaccountingprinciplesgenerallyacceptedinthe

UnitedStatesofAmerica(GAAP)would

describeas“Netincome.”Thereisnoprohibitionontheuseof

“Netincome”orotherGAAPcaptionswithinthefinancialstatements.Inthissituation,theentityhas

chosenthetermbecausemanagem entbelievesittobemoredescriptive.

 ThefinancialstatementsincludeaStatementofCashFlows,whichis

notrequiredforfinancialstate‐

mentspreparedwhenapplyingthetax‐basisofaccounting.However,inthiscase,thefinancialstate‐

mentsincludeasingleyearonly,thusitwouldbedifficultforfinancialstatementuserstoobtainaccu‐

ratelytheinformationonoperating,investingandfinancingactivitiespresentedin

astatementofcash

flows.

40©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Donnelly&OatesLimitedLiabilityPartnership

StatementsofAssets,LiabilitiesandPartners’Capital

Tax‐Basis

December31,20X2



Assets

Cash 450,944

Accountsreceivable 451,194

Inventory 311,214

Prepaidexpensesandotherassets 24,046

Financingfees,lessaccumulatedamortizationof

$57,096

259,124

Syndicationcosts 312,166

Propertyandequipment,netofaccumulateddepreci‐

ationof$2,810,112

9,054,554

$10,863,242

LiabilitiesandPartners’Capital

Accountspayable $276,502

Accruedpayrollandrelatedcosts 117,792

Otheraccruedexpenses 23,998

Unearneddues 369,586

Mortgagepayable $7,566,966

Totalliabilities 8,354,844

Partners’capital 2,508,398

$10,863,242

Seeaccompanyingnotes.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.41

Donnelly&OatesLimitedLiabilityPartnership

StatementofRevenuesandExpenses

Tax‐Basis

FortheYearEndedDecember31,20X2



Revenues

Membershipdues $3,970,334

Initiationfees 389,638

Tenniscourtfeesandlessons  1,103,224

Otherincome 726,936

Sportsshopandcafé 1,219,740

Totalrevenues 7,409,872

Expenses

Managementfee 50,700

Maintenanceandoperating 504,448

Utilities 391,460

Advertisingandpromotions 191,088

Payrollandrelatedcosts 2,774,706

Insurance 136,984

Administrative 246,906

Realestatetaxes 351,246

Costofsales—sportsshopandcafé 701,800

Totalexpenses 5,349,338

Netoperatingincome 2,060,534

Partnershipexpenses (9,572)

Interestexpense (765,476)

Depreciationandamortization (610,094)

Lossonsaleofequipment (4,240)

Revenuesinexcessofexpenses $671,152

Seeaccompanyingnotes.

42©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.

Donnelly&OatesLimitedLiabilityPartnership

StatementofPartners’Capital

Tax‐Basis

FortheYearEndedDecember31,20X2



LimitedPart‐

ners

SpecialLimited

Partner

GeneralPart‐

ner

Partners’Capi‐

tal

Balance,December31,

20X1

$1,017,392 $1,256,710 $(69,276) $2,204,826

Cashdistributions (238,924) (55,138) (73,518) (367,580)

Revenuesinexcessofex‐

penses

436,254 100,674 134,224 671,152

Balance,December31,

20X2

$1,214,722 $1,302,246 $(8,570) $2,508,398

Seeaccompanyingnotes.

©2018AssociationofInternationalCertifiedProfessionalAccountants.Allrightsreserved.43

Donnelly&OatesLimitedLiabilityPartnership

StatementofCashFlows

Tax‐Basis

FortheYearEndedDecember31,20X2



Cashflowsfromoperatingactivities

Revenuesinexcessofexpenses $671,152

Adjustmentstoreconcilerevenuesinexcessofex‐

pensestocashflowsfromoperatingactivities

Depreciationandamortization 610,094

Lossonsaleofequipment 4,240

(Increase)decreasein:

Accountsreceivable (23,494)

Inventory (102,916)

Prepaidexpenses 1,472

Accountspayableandaccruedexpenses 74,992

Unearneddues 32,874

Netcashflowsprovidedbyoperatingactivities 1,268,414

Cashflowsfrominvestingactivities

Acquisitionofequipment (277,138)

Proceedsfromsaleofequipment 620

Netcashflowsusedbyinvestingactivities (276,518)

Cashflowsfromfinancingactivities

Repaymentofdebt (473,574)

Cashdistributionstopartners (367,580)

Netcashflowsusedbyfinancingactivities (841,154)

Increaseincash 150,742

Cashatbeginningofyear 300,202

Cashatendofyear $450,944

Supplementaldisclosures ofcashflowinformation:

Cashpaidduringtheyearforinterest $774,170

Seeaccompanyingnotes.

Donnelly&OatesLimitedLiabilityPartnership

NotestoFinancialStatements

Tax‐Basis

FortheYearEndedDecember31,20X2

Note1—SummaryofSignificantAccountingPolicies

NatureofOperations

ThePartnershipownsandoperatesaracquetandswimclub(theClub)locatedinMinnesota.

TheClubhasapproximately3,000membersatDecember31,20X2.TheClubextendscredittomembersforthe

paymentofduesandothercharges.

ThePartnership,formed

in19W5,isalimitedliabilitypartnershipinaccordancewiththeprovisionsoftheUni‐

formPartnershipActasineffectintheStateofMinnesota.

ThegeneralpartnerofthePartnershipisTonyDonnelly.

BasisofAccounting

ThePartnership’sfinancialstatementsarepreparedontheaccountingbasisthePartnership

usedforfederalin‐

cometaxpurposes,whichisacomprehensivebasisofaccountingotherthanaccountingprinciplesgenerallyac‐

ceptedintheUnitedStatesofAmerica(GAAP).ThePartnershipusestheAcceleratedCostRecoverySystem

(ACRS)andModifiedAcceleratedCostRecoverySystem(MACRS)indepreciatingitsproperty.UnderACRS

and

MACRS,depreciationisdeterminedoverperiodsoftimethatareshorterthanthoseusedinaccordancewith

GAAP.Additionally,theincometaxmethods usedtocapitalizeandamortizeam ortizableassetsdifferfrom

thoseusedunderGAAP.

SyndicationcostsarecarriedasanassetofthePartnershipandarenotamortized.

UnderGAAPthesecosts

wouldbedeductedfrompartners’capi tal.

CashEquivalents

ThePartnershipconsidersallhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlesstobe

cashequivalents.

ConcentrationofCreditRisk

ThePartnershipplacesitscashwithonebankinginstitution.Attimestheamounton

depositexceedsthein‐

suredlimitoftheinstitutionandexposesthePartners hiptoacollectionrisk.

Inventories

Inventories,whichconsistofmerchandiseforsaleinthesportsshop,food,andbeverages,arestatedatthe

lowerofcost(firstin,firstoutmethod)ormarket.

MembershipDuesandInitiationFees



Membershipduesarebilledinadvanceandrecordedinaccountsreceivableandunearneddues.Theduesare

recognizedasrevenueinthemonthearned.Initiationfeesarerecordedasrevenueintheperiodwhenthefeeis

collected.

PropertyandEquipment

Propertyandequipmentarecarriedatdepreciatedcost.Depreciationis

computedusingincometaxmethods.

Thecostofmaintenanceandrepairsischargedtoincomeasincurred;significantrenewalsorbettermentsare

capitalized.

FinancingFees

Financingfeesareamortizedoverthetermoftherelateddebtusingthestraight‐linemethod.During20XX,fi‐

nancingfeesrelatedtoretireddebt

werewrittenoff.Thefinancingfeesrelatedtonewdebtwerecapitalized.

Amortizationexpensewas$12,149during20X2.

Start‐UpCosts

Start‐upcostsareamortizedover60monthsusingthestraight‐linemethod.

IncomeTaxes

IncometaxesonPartnershipincomeareleviedonthepartnersatthepartnerlevel.Accordingly,

allprofitsand

lossesofthePartnershiparerecognizedbyeachpartneronhisrespectivetaxreturn.

ManagementbelievesthatthePartnershiphasadequatelyaddressedallrelevanttaxpositionsandthatthere

arenounrecordedtaxliabilities.Tax returnsfiledforthetaxyearsendingfromDecember31,20Y9,through

cur‐

rentarestillsubjecttoexaminationbyfederalandstatetaxauthorities.Anyinterestorpenaltiesassessedtothe

Partnershiparerecordedinoperatingexpenses.Nointerestorpenaltiesfromfederalorstatetaxauthorities

wererecordedintheaccompanyingfinancialstatements.

AdvertisingandPromotions

Advertisingcostsareexpensedas

incurred.FortheyearendedDecember31,20X2,thePartnershipincurred

$191,088inadvertisingcosts.

Estimates

Thepreparationoffinancialstatementsonthetax‐basis ofaccountingrequiresmanagementtomakeestimates

andassumptionsthataffecttheamountsreportedonthefinancialstatementsandaccompanyingnotes.Actual

resultscoulddiffer

fromthoseestimates.

SubsequentEvents

SubsequenteventshavebeenevaluatedthroughFebruary24,20X3,whichisthedatethefinancialstatements

wereavailabletobeissued,andtherearenosubsequenteventsrequiringdisclosure.

Note2—PartnershipOrganization

ProfitandLossAllocations

PriortoDecember1,20XX,profitsandlossesfromannualoperationswereallocated99percenttothelimited

partnersand1percenttothegeneralpartner. 

SubsequenttoNovember30,20XX,anduntiltheClassAlimitedpartnershavereceiveddistributionsofnetcash

flowequaltotheirpreferredreturn,profits

andlossesfromannualoperationsareallocated65percenttothe

ClassAlimitedpartners;15percenttothespeciallimitedpartner;and20percenttothegeneralpartner.

AftertheClassAlimitedpartnershavereceivedcumulativedistributionsofnetcashflowequaltotheirpre‐

ferredreturn,profits

andlossesfromannualoperationswillbeallocated45percenttotheClassAlimitedpart‐

ners;15percenttothespeciallimitedpartner;and40percenttothegeneralpartner.

NetCashFlowAllocationFromOperations

SubsequenttoNovember30,20XX,netcashflowisallocated65percenttothe

ClassAlimitedpartners;15per‐

centtothespecial limitedpartner;and20percenttothegeneralpartneruntilsuchtimeastheClassAlimited

partnershavereceivedcumulativedistributionsequaltotheirpreferredreturn.

Thebalanceofanynetcashflowwillbedistributed45percentto

theClassAlimitedpartners;15percenttothe

speciallimitedpartner;and40percenttothegeneralpartner.

PreferredReturn

Thepreferredreturnmeansa9percentperannumcumulativenoncompoundedreturnontheadjustedcapital

contributionoftheClassAlimitedpartners.Theadjustedcapitalcontributionmeanstheoriginal

capitalcontri‐

butionsarereducedonlybydistri butionfromthenetproceedsofsaleorrefinancing.

Note3—PropertyandEquipment

PropertyandequipmentatDecember31,20X2,consistedofthefollowing: 



RecoveryPeri‐

od—Years

Land $975,720 —

Building 9,320,050 7–40

Tenantimprovements 1,568,896 5–7

Totalcostofpropertyandequip‐

mentbeingdepreciated

$11,864,666

Less:Accumulateddepreciation 2,810,112

Totalpropertyandequipment,net $9,054,554

Depreciationexpensewas$597,945during20X2.

Note4—MortgagePayable



AtDecember31,20X2,debtconsistedofthefollowing:

Mortgageloanpayableinmonthlypaymentsof$73,124,includinginterestat

9.375%,throughJanuary20XYwhentheinterestratechangesto3.5%abovethe3‐

yearTreasurybaserate.BeginningFebruary1,20XY,monthlypaymentswillbead‐

justedtoreflectthenewinterestrate;thepaymentswillbebasedupon

a15‐year

term.TheremainingprincipalisdueJanuary1,20XZ .Themortgageissecuredby

property,equipment,andapersonalguaranty. $6,778,186

10%unsecurednotepayabletothespeciallimitedpartnersdueinmonthlyinstall‐

mentsof$16,546,includingprincipalandinterest,throughFebruary1,20XZ,when

the

unpaidbalanceisdue. 788,780

$7,566,966

Scheduledprincipalpaymentsundertheseloansareapproximately$380,000peryearuntilFebruary1,20 XY,

whenpaymenttermswillbeadjustedasdescribedpreviously.

Note5—AmendmentofthePartnershipAgreemen t

ThePartnershipagreementwasamendedeffectiveNovember30,20XX.Theprimarypurposeoftheamend‐

mentwastocreateanew

classoflimitedpartner(thespeciallimi tedpartner)andtochangetheallocationsof

profits,losses,andcashdistributions.

EffectiveNovember30,20XX,MichaelOatessurrenderedhis67limitedpartnershipunitsinexchangefor

$1,450,000anda15percentspeciallimitedpartnershipinterest.Additionally,aspartofthisexchange,$200,000

waspaiddownonthenotepayabletothespeciallimitedpartner,theinterestrateonthisnotewasreducedto

10percentfrom12percent,andthetermofthenotewasshortened.

Note6—TransactionsWithAffiliates

AtDecember31,20X2,thePartnershipowedpartnersoraffiliatedentities$788,780.

During

20X2amanagementfeeof$50,700waspaidtoapartner.

CHARLTONCONTRACTORS,INC.

FINANCIALSTATEMENTS

ASOFANDFORTHEYEARSENDED

DECEMBER31,20X2,AND20X1

Circumstancesincludethefollowing:

 Thefinancialstatementsareforageneralcontractor.Thege neralcontractorhaselectedtobetreated

asasmallbusinesscorporation(Scorporation)underInternalRevenueCodeSection1362.

 Thefinancialstatementsarepreparedontheaccrualmethodofaccountingusedforfederalincometax



purposes.

 ThefinancialstatementsarecomparativestatementsasofandfortheyearsendedDecember31,20X2,

and20X1.

Thefinancialstatementsillustratethefollowing:

 Thefinancialstatementsincludeastatementofcashflows,whichisnotrequiredforfinancialstate‐

mentspreparedwhenapplyingthetax‐basis

ofaccounting.

 Informationaboutcontractreceivables(Note2),billingsinexcessofcostsonuncompletedcontracts

(Note5),andbacklog(Note7)aredisclosurestypicallymadein thefinancialstatementsofconstruction

contractors.However,theagingsummaryofcontractreceivablesisnotusuallydisclosed.Inthissitua‐

tion,thepreparer

concludedthattheinformationisrelevanttothefinancialstatementusers.

 Theinformationonaccountspayableandaccrualsisnotrequiredbuthasbeenincludedbecausethe

preparerconcludedthatusersofthefinancialstatementsfinditmeaningful.

 AccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica

(GAAP)requiresasummaryof

futureminimumleasepayments,w hichusuallyis presentedinaschedule.Becausetheentity’slease

commitmentsarenotcomplex,thisinformationhasbeensummarizedinnarrativeform,whichisac‐

ceptableforfinancialstatementspreparedonthetax‐basisofaccounting.

CharltonContractors,Inc.

StatementsofAssets,LiabilitiesandEquity

Tax‐Basis

December31,20X2and20X1



20X2 20X1

Assets

CurrentAssets

Cashandcashequivalents $3,078,966 $3,608,930

Accountsreceivable—contract(Note2) 2,409,554 1,422,268

Advancestoofficers 7,812 —

Inventory 287,714 196,200

Totalcurrentassets 5,784,046 5,227,398

PropertyandEquipment

Machineryandequipment 1,694,980 1,710,828

Transportationequipment 384,790 395,042

Officefurnitureandequipment 162,454 163,034

Leaseholdimprovements 363,798 363,798

Totalcost 2,606,022 2,632,702

Accumulateddepreciationandamortization

(Note3)

(2,362,850) (2,343,812)

Netpropertyandequipment 243,172 288,890

OtherAssets

Cashsurrendervalueofofficers’lifeinsurance 24,454 23,610

Miscellaneous 1,460 20,766

Totalotherassets 25,914 44,376

Totalassets $6,053,132 $5,560,664

Seeaccompanyingnotestofinancialstatements.

CharltonContractors,Inc.

StatementsofAssets,LiabilitiesandEquity

Tax‐Basis

YearsEndedDecember31,20X2and20X1



20X2 20X1

LiabilitiesandStockholders’Equity

CurrentLiabilities

Accountspayableandaccruals(Note4) $548,646 $288,904

Billingsinexcessofcostsonuncompletedcon‐

tracts(Note5)

976,754 445,108

Totalcurrentliabilities 1,525,400 734,012

ContributedCapital

Commonstock,$1,000parvalue;100shares

authorized;60sharesissuedandoutstanding

60,000 60,000

RetainedEarnings 4,467,732 4,766,652

Totalstockholders’equity 4,527,732 4,826,652

Totalliabilitiesandstockholders’equity $6,053,132 $5,560,664

Seeaccompanyingnotestofinancialstatements.

CharltonContractors,Inc.

StatementsofOperationsandRetainedEarnings

Tax‐Basis

YearsEndedDecember31,20X2and20X1



20X2 20X1

Contractrevenue $7,009,498 $8,116,380

Costofcontractrevenue

Directcosts

Materialsandsupplies 1,710,330 1,729,310

Salariesandwages 1,184,132 1,264,664

Subcontracts 1,670,596 1,838,942

Other 99,486 92,560

4,664,544 4,925,476

Indirectcosts 813,520 967,278

5,478,064 5,892,754

Grossprofit 1,531,434 2,223,626

Generalandadministrativeexpenses

Salariesandwages 1,298,552 2,139,444

Profit‐sharingplancontribution — 6,138

Other 596,938 539,786

1,895,490 2,685,368

Operatingloss (364,056) (461,742)

Financingincome 88,148 132,590

Netloss (275,908) (329,152)

Retainedearnings,beginningofyear 4,766,652 5,255,804

Distributionstostockholders (23,012) (160,000)

Retainedearnings,endofyear $4,467,732 $4,766,652

Seeaccompanyingnotestofinancialstatements.

CharltonContractors,Inc.

StatementsofCashFlows

Tax‐Basis

YearsEndedDecember31,20X2and20X1



20X2 20X1

Cashflowsfromoperatingactivities

Netloss $(275,908) $(329,152)

Noncashitemsincludedinnetloss:

Depreciation 45,718 60,204

(Increase)decreasein:

Contractreceivables (987,286) 2,103,570

Inventory (91,514) (3,260)

Cashsurrenderofofficers’lifeinsurance (844) (1,200)

Otherassets — (408)

Increase(decrease)in:

Accountspayableandaccruals 259,742 (100,832)

Billingsinexcessofcostsonuncompleted

contracts

531,646 (895,508)

Netcash(used)providedbyoperat‐

ingactivities

(518,446) 833,414

Cashflowsfrominvestingactivities

Propertyandequipmentpurchases — (60,000)

Advancestoofficers (7,812) —

Redemptionofcertificatesofdeposit — 2,132,038

Decreaseinmiscellaneousassets 19,306 —

Netcashprovidedbyinvestingac‐

tivities

11,494 2,072,038

Cashflowsfromfinancingactivities

Distributionstostockholders (23,012) (160,000)

Net(decrease)increaseincashandcashequiva‐

lents

(529,964) 2,745,452

Cashandcashequivalents,beginningofyear 3,608,930 863,478

Cashandcashequivalents,endofyear $3,078,966 $3,608,930

Seeaccompanyingnotestofinancialstatements.

CharltonContractors,Inc.

NotestoFinancialStatements

Tax‐Basis

December31,20X2and20X1

Note1—SummaryofSignificantAccountingPolicies

NatureofOperations

CharltonContractorsisageneralcontractorprimarilyengagedintheconstructionofcommercialandmultifami‐

lyresidentialprojectsintheSanDiegometropolitanarea.

BasisofAccounting

Theaccompanyingfinancial statementshavebeenpreparedontheaccrualmethodofaccountingusedfor

fed‐

eralincometaxpurposes,whichisacomprehensivebasisofaccountingotherthanaccounting principlesgener‐

allyacceptedintheUnitedStatesofAmerica(GAAP).

IftheaccompanyingfinancialstatementswerepreparedinconformitywithGAAP,contractrevenueandcosts

wouldberecognizedunderthepercentage‐of‐completionmethod

ofaccounting,anallowanceforuncollectible

accountsreceivablewouldbeestablished,propertyandequipmentwouldbedepreciatedovertheirestimated

usefullives,andtherelatedpartyleasewouldbecapitalizedasanassetandliability.

TheCorporationhaselectedtobetreatedasasmallbusinesscorporation(Scorporation)underInternal

Reve‐

nueCodeSection1362.Thiselectionprovidesthat,inlieuofcorporateincometaxes,thetaxableitemsand

creditspassdirectlytothestockholders.Therefore,thesefinancialstatementsdonotincludefederalorstatein‐

cometaxesthatwouldotherwisebeapplicable.

TheCorporationusestheaccrualcompletedcontract

methodtorecognizeconstructionrevenue.Thatmethod

ofaccountingrecognizescontractrevenueandcostswhenacontractiscompletedorsubstantiallycompleted.A

contractisconsideredsubstantiallycompletedwhenallcostsexceptinsignificantitemshavebeenincurredand

theinstallationhasbeenacceptedbythecustomer.

Contractcostsincludealldirect

materialandlaborcostsandthoseindirectcostsrelatedtocontractperfor‐

mance,suchasrent,depreciation, maintenance,andinsurance.Indirectcostsareallocatedbasedoncontract

revenue.Generalandadministrativecostsarechargedtoexpensesasincurred.

Amountsbilledinexcessofcostsareclassifiedascurrentliabilitiesunder

billingsinexcessofcostonuncom‐

pletedcontracts.Contractretentionsareincludedincontractreceivables.

Thepreparationoffinancialstatementsrequiresmanagementtomakeestimatesandassumptionsthataffect

thereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthe

financialstatements

andthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actual

resultscoulddifferfromtheseestimates.

CashandCashEquivalents

Cashandcashequivalentsconsistofhighlyliquidinvestments withamaturityofthreemonthsorlesswhenpur‐

chased.

AtDecember31,20X2,and20X1,theCorporationhadondepositwithseveralbanksamountsinexcessofFed‐

eralDepositInsuranceCorporationinsurancelimits.TheCorporationhasnotexperiencedanylossesinsuchac‐

counts.TheCorporationbelievesitisnotexposedtoanysignificantcreditriskoncashand

cashequivalents.

ContractReceivables

Contractreceivables,includingretentions,arerecordedasprogressbillingsandrenderedinaccordan cewiththe

provisionsofthecontracts.TheCorporationusesthedirectwrite‐offmethodtorecorduncollectibleaccountsin

compliancewiththeInternalRevenueCode.

Inventory

Inventoryisvaluedatthelowerof

cost,basedonthefirstin,firstoutmethod,ormarket.

PropertyandEquipment

Propertyandequipmentarerecordedatcostanddepreciatedusingprincipallyacceleratedmethods. Leasehold

improvementsareamortizedoverthelifeoftherelatedleasesortheirestimatedusefullives,whicheveris

shorter.

Propertyandequipmentaredepreciated

overthefollowingrecoveryperiods:



Machineryandequipment 5years

Transportationequipment 5years

Officefurnitureandequipment 5–7years

Leaseholdimprovements 10–31.5years

Expendituresformainte nanceandrepairsthatdonotmateriallyextendthelivesoftheassetsarechargedto

earnings.Whenpropertyorequipmentissoldor

otherwisedisposedof,thecostandrelatedaccumulatedde‐

preciationareremovedfromtherespectiveaccounts,andtheresultinggainorlossisreflectedinearnings.

Profit‐SharingPlan

TheCorporationadoptedaprofit‐sharingplaneffectiveNovember22,19V4.Substantiallyallfull‐timeemploy‐

eesareeligibletoparticipate.

TheCorporation’scontributionsonbehalfofitsemployeesaredeterminedannu‐

allybytheboardofdirectors.TheCorporationdidnotmakeacontributionfor20X2.Profit‐sharingcontributions

were$6,138fortheyearendedDecember31,20X1.

StatementofCashFlows

Forpurposesofthestatementofcashflows,cash

andcashequivalentsincludemoneymarketaccountsandop‐

eratingbankaccounts.

TheCorporationdidnotpayanyinterestexpensefor20X2and20X1.

IncomeTaxes

TheCorporation,withtheconsentofitsshareholders,haselected,inaccordancewiththeInternalRevenue

Code,tobetreatedasanScorporation.Inlieuoffederalincometaxes,theshareholdersofanScorporationare

taxedontheirproportionateshareofthecorporation’staxableincome.Therefore,noprovisionfor

federalin‐

cometaxeshasbeenincludedinthesefinancialstatements.Californialawgenerallyconformstofederallawex‐

ceptfora1.5percenttaximposedonScorporation’searnings.TheCorporationissubjecttotaxinotherstates.

Deferredincometaxeshavenotbeenrecognizedinthesefinancialstatements

becausetheamountofdeferred

taxesisnotconsideredmaterial.

TheCorporationdoesnotrecognizealiabilityforuncertaintaxpositionsuntilagreementandsettlementis

reachedwiththetaxingauthority.TaxreturnsfiledforthetaxyearsendingfromDecember31,20Y9,through

currentarestillsubjecttoexaminationby

federalandstatetaxauthorities.

SubsequentEvents

TheCorporationhasevaluatedsubsequenteventsfromthedateofthestatementofassets,liabilities,andequi‐

ty—tax‐basisthroughMarch12,20X3,thedateonwhichthefinancialstatementswereavailabletobeissued,

anddeterminedthattherearenoitemsto

disclose.

Note2—ContractReceivables

AnagingsummaryofcontractreceivablesatDecember31,isasfollows:



20X2 20X1

Billed

Current $1,131,718 $364,284

30days 486,854 306,318

60days 189,138 79,914

90daysandover 129,326 133,272

1,937,036 883,788

Unbilledretentions 456,512 444,252

Unbilledamountsoncomplet‐

edcontracts

16,006 94,228

Totals $2,409,554 $1,422,268



CompletedanduncompletedcontractreceivablesatDecember31,areasfollows:



20X2 20X1

Completedcontracts

Billed,includingretentions $906,052 $581,760

Unbilledretentions 116,772 125,206

Unbilledamountsoncompletedcon‐

tracts

16,006 94,228

Uncompletedcontracts

Uncompletedcontractsbilled 1,030,984 302,028

Unbilledretentions 339,740 319,046

Totals $2,409,554 $1,422,268

Receivableswrittenoffasuncollectibletotaled$30,158fortheyearendedDecember31,20X2,and$2,000for

theyearendedDecember31,20X1.Recoveriesofreceivableswrittenoffanuncollectibletotaled$17,000for

theyearendedDecember31,20X1.

Note3—DepreciationandAmortization

TheaccumulateddepreciationandamortizationbalancesatDecember

31,areasfollows:



20X2 20X1

Machineryandequipment $1,689,162 $1,701,064

Transportationequipment 308,130 296,002

Officefurnitureandequipment 161,612 160,440

Leaseholdimprovements 203,946 186,306

Totals $2,362,850 $2,343,812



Note4—AccountsPayableandAccruals

AccountspayableandaccrualsconsistofthefollowingatDecember31:



20X2 20X1

Tradeaccountspayable $343,222 $ 157,726

Subcontractpayables 156,130 86,104

Accruedpayroll 40,626 39,814

Accruedandwithheldpayrolltaxes 3,124 860

Salestaxpayable 5,544 4,400

Totals $548,646 $ 288,904

Note5—BillingsinExcessofCostsonUncompletedContracts 

BillingsinexcessofcostsonuncompletedcontractsatDecember31areasfollows:



20X2 20X1

Billingsonuncompletedcontracts $4,320,008 $2,258,286

Costsincurredonuncompleted

contracts

(3,343,254) (1,813,178)

Billingsinexcessofcostsonun‐

completedcontracts

$976,754 $445,108

Note6—CommitmentUnderLeaseAgreement

OnDecember15,20V6,theCorporationsignedaleasewithitsstockholdersforanofficeandproductionfacility

locatedinMiraMesa,California.Thefacilityleaseisfor25years,terminatingDecember15,20YY.Thebasean‐

nualrentwas$343,000for20X2and20X1.Increases

inthebaseannualrentaretobebasedontheconsumer

priceindex,nottoexceed6percent.ThestockholderspaytherealestatetaxesandtheCorporationpaysall

maintenancechargesandoperatingcostsforthefacility.Therentalpaymentsincludeanescalationforincreas‐

esinreal

estatetaxes.

AtDecember31,20X2,theaggregateminimumleasepaymentsunderthisleasewereapproximately

$2,800,000.Futureminimumleasepaymentsarescheduledtobeapproximately$350,000foreachofthenext5

years.Rentexpenseforeachoftheyears endedDecember31,20X2,and20X1was$353,000.

Note7—Backlog



Theestimatedgrossrevenueonworktobeperformedonsignedcontractswas$3,467,894atDecember31,

20X2,and$4,183,624atDecember31,20X1.Inadditiontothebacklogofworktobeperformed,therewas

grossrevenuetobereportedinfutureperiodsundertheaccrualcomple tedcontractmethod

usedbythecom‐

panyof$1,548,173atDecember31,20X2,and$1,668,961atDecember31,20X1.

MARGARETROSE1964

IRREVOCABLETRUST

FINANCIALSTATEMENTS

ASOFANDFORTHEYEARSENDED

DECEMBER31,20X2AND20X1

Circumstancesincludethefollowing:

 Thefinancialstatementsareforanirrevocabletrust.

 Thefinancialstatementsarepreparedonthecashmethodofaccountingusedforfederalincometax

purposes.

 ThefinancialstatementsarecomparativeasofandfortheyearsendedDecember31,20X2,and20X1.

Thefinancial

statementsillustratethefollowing:

 Thefinancialstatementsdonotincludeastatementofcashflows,whichisacceptableforapresenta‐

tionwhenapplyingthetax‐basisofaccounting.Thepreparerconcludedthatastatementofcashflowsis

notnecessarybecause(1)theusersofthefinancialstatements

aremoreinterestedinassetbalancesra‐

therthancashflows,and(2)ifcashflowinformationis needed,itcouldeasilybederivedfromthein‐

formationpresented.

MargaretRose1964IrrevocableTrust

StatementsofAssets,LiabilitiesandCorpus

Tax‐Basis

December31,20X2and20X1



20X2 20X1

Assets

Marketablesecurities—atcost $1,830,087 $1,560,681

(marketvalue$2,746,922and$2,353,519in

20X2and20X1,respectively)

Purchasedinterest 340 —

Totalassets $1,830,427 $1,560,681

LiabilitiesandCorpus

Duetobeneficiary 157,946 75,302

Totalliabilities 157,946 75,302

Corpus 1,672,481 1,485,379

Totalliabilitiesandcorpus $1,830,427 $1,560,681

Seeaccompanyingnotes.

MargaretRose1964IrrevocableTrust

StatementsofRevenues,ExpensesandCorpus

Tax‐Basis

YearsEndedDecember31,20X2and20X1



20X2 20X1

Revenues

Dividends $76,139 $69,044

Interest 4,729 4,457

Gain(loss)onsaleofsecurities,net 201,370 46,094

Totalrevenues 282,238 119,595

Expenses

Accountingfee 7,500 7,000

Bankcustodianfee 3,018 2,588

Investmentcounselfee 9,474 7,588

Totalexpenses 19,992 17,176

Incomebeforeprovisionforincometaxes 262,246 102,419

Provisionforincometaxes 75,144 22,207

Netincome 187,102 80,212

Corpus,beginningofyear 1,485,379 1,405,167

Corpus,endofyear $1,672,481 $1,485,379

Seenotestofinancialstatements.

MargaretRose1964IrrevocableTrust

NotestoFinancialStatements

Tax‐Basis

FortheYearsEndedDecember31,20X2and20X1

Note1—NatureofTrustandSignificantAccountingPolicies

NatureofTrust

TheMargaretRose1964IrrevocableTrust(theTrust)wascreatedonMay5,1964,byMichaelThomas.Distribu‐

tionof25percentofprincipalistobemadeatage30,and331/3percentatage35.AfterJanuary

1,19X2,the

beneficiarymayrequestannuallyanoncumulativedistributionofthelargerof$5,000or5percentoftheprinci‐

palasoftheendoftheyear.Upondeathofthebeneficiary,theTrustistobedistributedaccordingtotheterms

ofherwill.Thetrusteehas

discretionarypowertodistributeprincipalorincome,orboth.

BasisofAccounting

Theaccompanyingfinancial statementshavebeenpreparedonthecashmethodofaccountingusedforfederal

incometaxpurposes,whichisacomprehensivebasisofaccountingotherthanaccoun tingprinciples generally

acceptedintheUnitedStatesofAmerica(GAAP).

Consequently,certainrevenuesandexpensesarerecognized

inthedeterminationofincomeindifferentreportingperiodsthantheywouldbeifthefinancialstatements

werepreparedinconformitywithGAAP .Althoughincometaxrulesareusedtodeterminethetimingofthere‐

portingofrevenuesandexpenses,nontaxablerevenues

andnondeductibleexpensesareincludedinthedeter‐

minationofnetincome.

UseofEstimates

Thepreparationoffinancialstatementsinconformitywiththecashmethodofaccountingusedforfederalin‐

cometaxpurposesrequiresmanageme nttomakeestimatesandassumptionsthataffecttheamountsreported

inthefinancialstatements

andaccompanyingnotes.Actualresultscoulddifferfromthoseestimates.

MarketableSecurities

Marketablesecuritiesarecarriedatcost.Thecostofmarketablesecuritiessoldisbasedoncostasdetermined

underthespecificidentificationmethod.

IncomeTaxes

TheTrustdoesnotrecognizealiabilityforuncertaintaxpositions.Taxreturns

filedforthetaxyearsendingfrom

December31,20Y9,throughcurrentarestillsubjecttoexaminationbyfederalandstatetaxauthorities.

SubsequentEvents

Inpreparingthesefinancialstatements,theTrusthasevaluatedeventsandtransactionsforpotentialrecogni‐

tionordisclosurethroughApril1,20X3,thedatethefinancial

statementswereavailabletobeissued,andde‐

terminedthattherearenoitemstodis close.

Note2—MarketableSecurities

AtDecember31,20X2,and20X1,grossunrealizedgainsandlossespertainingtomarketablesecuritiesinthe

portfoliowereasfollows:



Cost

MarketVal‐

ue

Unrealized

Gains Losses

20X2

Equities $948,766 $1,790,955 $854,565 $12,376

Fixedincomeandmoney

market

881,321 955,967 119,362 44,716

Total $1,830,087 $2,746,922 $973,927 $57,092

Market Unrealized

Cost Value Gains Losses

20X1

Equities $891,685 $1,611,732 $757,910 $37,863

Fixedincomeandmoney

market

668,996 741,787 72,791 —

Total $1,560,681 $2,353,519 $830,701 $37,863

Note3—IncomeTaxes

Theincometaxexpenseshownintheaccompanyingfinancialstatementsdiffersfromtheexpensethatwould

resultfromapplyingstatutorytaxratestoincomebeforeincome taxesprimarilybecauseofcapitalgains.Distri‐

butionstobeneficiariesareallowedasadeductionfromtaxableincomeforthetrustin

theyearinwhichsuch

distributionsaremade.

TheprovisionforincometaxesfortheyearsendedDecember31consistsof:



20X2 20X1

Federal $63,200 $ 17,874

State 11,944 4,333

Provisionforincome

taxes

$75,144 $ 22,207

