Special Purpose Frameworks (OCBOA) Explained

Last updated: October 23, 2026

Special purpose frameworks are non-GAAP bases of accounting recognized by the AICPA in AU-C 800: the cash basis (including modified cash), the income tax basis, a regulatory basis, a contractual basis, and any other definite basis. Older standards called them OCBOA, short for other comprehensive basis of accounting. The CPA exam tests them in FAR Area I, Financial Reporting.

In plain terms, the framework you pick decides three things: what the business records, how it titles and presents its financial statements, and what it must disclose. GAAP, or generally accepted accounting principles, is the default set of rules. If you need a refresher, start with our explainer on what GAAP is.

This lesson explains those differences with examples of customer collections, equipment purchases, loan payments, inventory, and tax-exempt income. Watch the video lesson below, then use the comparison table and worked examples to review.

Key takeaways

• Special purpose frameworks are non-GAAP bases: cash (including modified cash), income tax, regulatory, contractual, and other.
• OCBOA, short for other comprehensive basis of accounting, is the older name for the same frameworks.
• Statement titles must identify the basis. An unmodified title like “Balance Sheet” implies GAAP.
• Non-GAAP statements still need notes that describe the basis and how it differs from GAAP. The differences do not have to be quantified.
• A statement of cash flows is not required for cash or tax basis statements.
• On the CPA exam, identify the framework first, classify each transaction second, and calculate third.

Watch: Special Purpose Frameworks (OCBOA)

Professor Farhat compares cash basis, modified cash basis, and income tax basis accounting, with examples of equipment, debt, inventory, and financial statement disclosures. Watch the lesson, then use the written examples below to review each framework.

Jump to a topic in the video

These links open the corresponding section on YouTube.

• 0:00 — Special purpose frameworks and OCBOA overview
• 6:47 — Financial statement titles, equity, and disclosures
• 10:11 — Pure cash basis and accrual timing
• 13:52 — Modified cash basis and worked examples
• 18:11 — Income tax basis financial statements
• 23:04 — Common CPA exam mistakes

Build on this lesson with the cash-to-accrual exercises and financial reporting lessons in the Farhat Lectures Intermediate Accounting course.

What Are Special Purpose Frameworks and OCBOA?

A special purpose framework is an identified, non-GAAP set of accounting rules for preparing financial statements. The AICPA’s auditing standard AU-C 800 and its preparation, compilation, and review standards (AR-C 70, 80, and 90 under SSARS) both use this term. OCBOA is the older name for the same idea. The framework tells you when to record transactions and how to measure and present the resulting balances.

The three approaches emphasized in this lecture are:

• Cash basis: records cash receipts and cash disbursements when cash moves.
• Modified cash basis: starts with cash accounting and incorporates supported modifications, such as capitalizing equipment and recording depreciation.
• Income tax basis: uses the accounting basis the entity uses, or expects to use, for its income tax return, with appropriate financial statement presentation and disclosures.

Regulatory, contractual, and other bases are also special purpose frameworks. A contractual basis follows the financial reporting provisions of an agreement between the entity and a third party, such as a lender. A regulatory basis follows the requirements of a regulatory agency that has jurisdiction over the entity. An other basis is any definite set of logical, reasonable criteria applied to all material items. The AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) is the best-known example of an other basis. Deloitte’s overview of special purpose financial statements discusses these alternatives. The AICPA publishes the governing standard, AU-C 800, with its other currently effective Statements on Auditing Standards.

Non-GAAP does not automatically mean incorrect. The framework must be appropriate for the circumstances and intended users, and the statements must follow it consistently. Calling a presentation “OCBOA” does not excuse an accounting error or override a requirement to provide GAAP statements.

Where does the term OCBOA come from?

OCBOA dates back to the AICPA’s Statement on Auditing Standards No. 62, Special Reports, issued in 1989. When the AICPA clarified its auditing standards, SAS No. 122 replaced SAS 62 with AU-C 800, Special Considerations: Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, effective for periods ending on or after December 15, 2012. SSARS No. 21, issued in 2014, adopted the same “special purpose framework” wording for preparation, compilation, and review engagements. Exam questions, textbooks, and many practitioners still say OCBOA, so know both names.

Who uses special purpose frameworks, and why?

Closely held companies, partnerships, trusts, and small not-for-profit organizations are the typical users. The appeal is practical. Cash and tax basis statements cost less to prepare, keep the books aligned with the tax return, and avoid complex GAAP areas such as deferred taxes and lease accounting. They work when the people reading the statements, usually owners, lenders, and tax authorities, understand and accept the basis. They do not work when a user requires GAAP, for example a bank covenant that calls for GAAP statements or a regulator that mandates GAAP.

Special Purpose Frameworks vs. GAAP: Comparison Table

When comparing OCBOA vs. GAAP, separate the timing of cash flows from the recognition of assets, liabilities, revenue, and expenses.

The modified cash column describes possible policies, not a universal checklist that every entity must adopt.

Three Presentation Principles: Titles, Equity, and Disclosures

1. Identify the accounting basis clearly

A financial statement title should help readers understand the basis used. Avoid an unqualified title that could imply GAAP when the statements follow a special purpose framework.

Clear examples include Statement of Assets and Liabilities—Modified Cash Basis and Statement of Revenues and Expenses—Income Tax Basis. Familiar statement names can also be appropriately qualified, such as Balance Sheet—Tax Basis. The objective is clear communication of the framework, rather than a blanket prohibition on familiar words.

The title communicates the basis; the actual accounting policies and transaction treatment determine it. Read both.

2. Explain changes in equity

Users need to understand how the owners’ interest changed during the period. For a sole proprietorship, a basic reconciliation is:

Ending owner’s equity = Beginning equity + Owner contributions + Income under the selected basis − Owner withdrawals.

For a corporation, retained earnings generally increase by income under the selected basis and decrease by dividends, assuming no other adjustments. Stock contributions affect contributed capital rather than retained earnings.

3. Include informative disclosures

Non-GAAP financial statements still need explanatory information. The notes should identify the basis, explain significant accounting policies and material differences from GAAP, and address relevant matters such as significant obligations, related-party transactions, and uncertainties.

For example, an unpaid obligation may be absent from the face of strict cash-basis statements but still matter to users. A material pending lawsuit cannot simply be dismissed because no cash has been paid. Disclosures should fit the basis and circumstances; not every GAAP disclosure is automatically relevant.

A practical disclosure checklist for non-GAAP statements:

• A note that names the basis of accounting and summarizes the significant accounting policies.
• A description of how the basis differs from GAAP. Under AU-C 800 the effects of those differences do not have to be quantified.
• For items that look like GAAP items, such as depreciation or long-term debt, disclosures similar to what GAAP would require, for example depreciation methods and debt maturities.
• Any additional information needed so the statements are not misleading, such as commitments, contingencies, and related-party transactions.

Compiled statements may omit substantially all disclosures if the compilation report says so. Reviewed and audited statements cannot.

A separate statement of cash flows is generally not required for the cash- and tax-basis presentations discussed here. That does not eliminate the need to distinguish operating activity from financing transactions.

Cash Basis vs. Accrual Basis: Follow the Timing

Under pure cash basis accounting, the first question is whether cash moved. A credit sale does not create a recognized receivable in this strict model, and an unpaid operating bill does not create a recognized payable. Prepaid operating costs are recorded when paid rather than carried as prepaid assets; depreciation is not recorded.

Example: Services performed in December, collected in January

A business completes $8,000 of services in December and collects the customer’s payment in January. Assume the services meet the accrual revenue recognition requirements in December.

• Accrual basis: recognize $8,000 of revenue and a receivable in December. January’s collection reduces the receivable.
• Cash basis: recognize the receipt in January. There is no December revenue from this transaction under the cash method.

The same timing distinction applies to a December utility expense paid in January: accrue the expense in December under accrual accounting, but record the cash-basis payment in January.

New to the accrual method? Our short lesson on cash basis vs. accrual basis accounting covers the basics.

Cash receipts are not all revenue

Customer collections, bank borrowings, and owner contributions all increase cash, but they represent different activities. Borrowed money and owner contributions are financing receipts, not operating revenue. Likewise, loan principal repayments and owner withdrawals are cash outflows that should not be mistaken for operating expenses.

A statement of cash receipts and disbursements explains cash movement. Its excess of receipts over disbursements should not automatically be described as operating profit. Classify the transactions before interpreting the total.

Modified Cash Basis Accounting: Worked Examples

Modified cash basis accounting keeps cash accounting as its starting point and adds selected modifications that have substantial support. A modification has substantial support when it matches how GAAP would treat the item and does not create a lopsided result. Depending on the stated policies, those modifications can include equipment and depreciation, outstanding borrowings, inventory, or accrued income taxes. Trade receivables and payables are normally left out, because recording receivables without also recording payables is a one-sided accrual that lacks substantial support.

Modified cash basis is different from modified accrual accounting used for governmental funds. Do not treat the terms as interchangeable. If you want the governmental side, see our lesson on modified accrual accounting.

Equipment: capitalize $30,000 and depreciate it

Assume a business pays $30,000 for equipment, uses straight-line depreciation over five years, has no residual value, and records a full year of depreciation.

• Annual depreciation: $30,000 ÷ 5 = $6,000.
• Carrying amount after one year: $30,000 − $6,000 = $24,000.

Under the equipment modification, the purchase creates an asset and the annual depreciation reduces income. Under the strict cash model, the $30,000 payment is a disbursement in the purchase period.

Debt: separate principal from interest

Assume a business borrows $20,000 and later pays $5,200, consisting of $4,000 of principal and $1,200 of interest. Under a modified cash framework that recognizes debt:

• The principal payment reduces the loan balance to $16,000.
• The $1,200 interest payment is an expense.
• The entire $5,200 reduces cash, but only the interest portion reduces income.

Inventory: expense the merchandise sold

Assume no beginning inventory, $40,000 of merchandise purchases, and $12,000 of ending inventory. If the framework capitalizes inventory, and there are no other inventory adjustments:

Cost of goods sold = $0 + $40,000 − $12,000 = $28,000.

The remaining $12,000 stays in inventory instead of becoming an expense immediately.

Which modifications have substantial support?

Modifications that pass the test, because they mirror GAAP and keep the statements logical:

• Capitalizing equipment and recording depreciation.
• Recording inventory and cost of goods sold.
• Recording loans payable and the related interest.
• Accruing income taxes.

Modifications that fail the test:

• Recording accounts receivable but not accounts payable. This is a one-sided accrual.
• Recording revenue when earned and expenses when incurred for everything. At that point the statements are accrual statements, and they should be evaluated against GAAP.

The exam trick is to read the accounting policy note first. It tells you which modifications the entity adopted, and that controls the answer.

Complete example: cash, income, and equity are different totals

For a separate example, assume a new business begins with no balances. The owner contributes $40,000, the business borrows $20,000, and customers pay $90,000 for services. It pays $55,000 of operating expenses, buys equipment for $30,000, repays $5,000 of loan principal, and distributes $4,000 to the owner. The equipment has the same $6,000 annual depreciation described above. Assume no other transactions, interest, or taxes.

The statement balances: $56,000 cash + $24,000 equipment = $15,000 debt + $65,000 equity. Notice why the $56,000 cash balance is not the $29,000 income figure.

Income Tax Basis Financial Statements

Income tax basis financial statements follow the entity’s tax accounting rules for recognition and measurement. The underlying tax method may be cash or accrual, so “tax basis” does not automatically mean “cash basis.”

These financial statements also serve a different purpose from simply handing someone a tax return. Users need to understand the business’s financial activity, including items that do not enter the calculation of taxable income.

Example: tax-exempt income and a nondeductible expense

Assume $100,000 of taxable operating revenue, $70,000 of deductible operating expenses, $3,000 of tax-exempt interest, and a $2,000 nondeductible penalty. Ignore other tax adjustments and income tax expense.

• Taxable income in this simplified example: $100,000 − $70,000 = $30,000.
• Income including the tax-exempt and nondeductible items: $30,000 + $3,000 − $2,000 = $31,000.

The $3,000 interest and $2,000 penalty still affect the business. A clear presentation can show them separately from taxable income, with a reconciliation or notes explaining the difference. Recognize the items consistently with the entity’s underlying accounting method.

Being excluded from taxable income does not mean an item never appears anywhere on a tax return. It may appear on informational schedules or reconciliation schedules.

Tax depreciation can produce a different carrying amount

Suppose equipment costs $50,000. For illustration, assume $10,000 of GAAP depreciation and $18,000 of depreciation under the applicable tax rules for the first year. These are assumed amounts, not a prescribed tax depreciation rate.

• GAAP carrying amount: $50,000 − $10,000 = $40,000.
• Tax-basis carrying amount: $50,000 − $18,000 = $32,000.

The $8,000 difference comes from the measurement rules applied to the same equipment. Explain the relevant basis differences; do not assume every special purpose presentation requires a complete numerical reconciliation to GAAP.

How do CPAs report on special purpose framework statements?

This part shows up on the AUD section of the CPA exam, in the area on forming conclusions and reporting.

When a CPA audits special purpose framework statements, AU-C 800 requires the auditor’s report to include an emphasis-of-matter paragraph. That paragraph points the reader to the note that describes the basis of accounting and states that the basis is a basis other than GAAP. The opinion itself says whether the statements are presented fairly in accordance with the special purpose framework, not GAAP.

If the statements use a contractual basis, or a regulatory basis that is not intended for general use, the report also includes an other-matter paragraph restricting its use to the parties named in the agreement or the regulator. Cash and tax basis statements do not carry that restriction.

For preparation, compilation, and review engagements, AR-C 70, 80, and 90 under SSARS apply. Compilation and review reports include a similar paragraph that identifies the framework, refers to the basis note, and states that the basis is other than GAAP. A preparation engagement requires the basis to be described on the statements or in a note.

One more point that trips up candidates: a statement of cash flows is not required under the cash or tax basis. Its absence is not a departure, and the accountant’s report does not need to mention it.

Special Purpose Frameworks: CPA Exam Mistakes to Avoid

1. Assuming non-GAAP means wrong. Evaluate the statements against the appropriate, identified framework.
2. Treating every receipt as revenue. Separate customer activity from borrowing and owner contributions.
3. Treating every payment as an expense. Distinguish expenses from loan principal, owner withdrawals, and capitalized purchases.
4. Assuming depreciation proves GAAP. Modified cash and tax bases can include depreciation.
5. Assuming tax basis always means cash basis. Determine the entity’s actual tax method.
6. Ignoring tax-exempt income or nondeductible expenses. Their financial effects still need appropriate treatment.
7. Judging the framework from the title alone. Read the policies, the transaction details, and the notes.

When solving a question, identify the framework first, classify each transaction second, and calculate the requested amount third. This approach helps prevent confusion between cash, income, and equity.

Practice questions: special purpose frameworks

Try these before you check the answers.

Question 1. A company prepares its year-end position statement on the pure cash basis. Which title is most appropriate?

A. Balance Sheet
B. Statement of Financial Position
C. Statement of Assets and Liabilities Arising From Cash Transactions
D. Statement of Cash Flows

Question 2. A company uses the modified cash basis and capitalizes equipment. During the year it collected $120,000 from customers, paid $80,000 of operating expenses, paid $25,000 for equipment (five-year life, straight-line, no residual value, full year of depreciation), and repaid $10,000 of loan principal. What is modified cash-basis net income?

A. $5,000
B. $15,000
C. $35,000
D. $40,000

Question 3. Under AU-C 800, which item is NOT required in income tax basis financial statements?

A. A description of the basis of accounting
B. A summary of significant accounting policies
C. A quantified reconciliation of the differences between the tax basis and GAAP
D. Disclosures similar to GAAP for items that are similar to GAAP items

Question 4. A company prepares income tax basis financial statements and earned $5,000 of tax-exempt municipal bond interest. How should the interest be treated?

A. Excluded from the financial statements because it is not taxable
B. Included in revenue, shown separately or disclosed, because it is still income of the business
C. Recorded as a liability until it becomes taxable
D. Reported only on the tax return, never in the financial statements

Answers

1. C. Unmodified titles such as Balance Sheet or Statement of Financial Position imply GAAP. A cash-basis title must identify the basis. Statement of Cash Flows is a GAAP statement and is not required under the cash basis.
2. C. $120,000 − $80,000 − $5,000 depreciation ($25,000 ÷ 5) = $35,000. The $25,000 equipment payment is capitalized, not expensed, and the $10,000 loan repayment reduces debt, not income. Answer A is the change in cash ($120,000 − $80,000 − $25,000 − $10,000), a classic trap.
3. C. AU-C 800 requires a description of the basis, the significant accounting policies, how the basis differs from GAAP, and GAAP-like disclosures for similar items. The effects of the differences do not need to be quantified.
4. B. Tax-basis statements report the entity’s full financial activity. Nontaxable revenue and nondeductible expenses are included, either on the face of the statements as separate lines or with disclosure that reconciles to taxable income.

Frequently Asked Questions About OCBOA

What does OCBOA stand for?

OCBOA stands for other comprehensive basis of accounting. It is traditional terminology for alternatives to GAAP, including cash, modified cash, and tax bases. Modern discussions commonly use “special purpose frameworks.”

Does modified cash basis recognize accounts receivable?

In the model discussed in this lesson, ordinary customer receivables remain unrecognized even though equipment, depreciation, inventory, or debt may be recorded. Always check the modifications described in the accounting policies or exam question.

Do OCBOA financial statements need notes?

Yes. A simpler accounting basis does not eliminate the need for informative disclosures about the framework, significant policies, and matters relevant to users’ understanding.

Why learn special purpose frameworks before cash-to-accrual conversion?

Conversion requires you to identify what cash accounting leaves out. Understanding receivables, unpaid expenses, prepaid costs, and the treatment of assets gives you the foundation for making the appropriate accrual adjustments.

Is OCBOA still an official term?

No. The AICPA replaced “other comprehensive basis of accounting” with “special purpose framework” when AU-C 800 took effect for periods ending on or after December 15, 2012, and SSARS 21 adopted the same term for preparation, compilation, and review engagements. Exam questions, textbooks, and many practitioners still say OCBOA, so know both names.

What is the difference between cash basis and modified cash basis?

Pure cash basis records only cash receipts and cash payments. Modified cash basis starts there and adds a few accrual-style modifications that have substantial support, most often capitalizing and depreciating equipment, recording inventory, recording loans, and accruing income taxes. Trade receivables and payables are normally still left out.

Are income tax basis financial statements GAAP?

No. Tax basis statements follow the recognition and measurement rules the entity uses on its income tax return. Timing can differ from GAAP, for example tax depreciation versus book depreciation, and the statements must be titled and disclosed so readers do not mistake them for GAAP statements.

Do special purpose framework statements need a statement of cash flows?

No. A statement of cash flows is not required for cash basis or tax basis financial statements. Many preparers present a statement of cash receipts and disbursements instead, and an entity may add a cash flow statement if its users want one.

Can a CPA audit, review, or compile OCBOA statements?

Yes. Audits follow AU-C 800, and preparation, compilation, and review engagements follow AR-C 70, 80, and 90 under SSARS. The auditor’s report includes an emphasis-of-matter paragraph that refers to the note describing the basis and states that it is a basis other than GAAP. For contractual basis statements, and regulatory basis statements not intended for general use, the report also restricts who may use it.

Is FRF for SMEs a special purpose framework?

Yes. The AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities is a non-GAAP framework that falls under the “other basis” category in AU-C 800, because it is a definite set of logical, reasonable criteria applied to all material items.

Continue Studying with Farhat Lectures

Practice the calculations until you can explain why each transaction changes cash, income, or equity. Then continue to the cash-to-accrual conversion lesson in the Intermediate Accounting course, which includes related lessons, exercises, and multiple-choice questions. For the reporting side covered in AUD, see the Auditing course. Additional course content requires subscription access unless marked as a free sample.

You can also browse Farhat Lectures CPA exam and accounting courses to find study resources aligned with your current course.

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About the author

Mansour Farhat, CPA, CIA, DBA, creates the video lessons, interactive exercises, and practice questions on Farhat Lectures. He teaches financial, intermediate, advanced, governmental, and managerial accounting along with CPA and CMA exam topics, and his lessons are used as a supplement alongside every major CPA review course. Read more on the About Me page.