Modified cash basis accounting is the cash basis of accounting carrying specific departures from it, where each departure is kept because it has substantial support. The auditing standards give it no separate name and no separate framework: the modifications are written into the definition of the cash basis itself, so a set of modified cash basis statements is a set of cash basis statements. The definition’s exact wording, and where the cash basis sits relative to GAAP, are set out in cash accounting.
Substantial Support Is the Whole Test
The phrase doing the work is substantial support, and the standard offers exactly one example of a modification that has it: recording depreciation on fixed assets (AICPA, AU-C section 800, paragraph .07).
One example is not a list, and treating it as one is the first mistake made here. The test is not whether a departure appears on somebody’s list of common modifications. It is whether that particular departure can be supported.
The consequence is worth stating plainly. A set of books that departs from the cash basis wherever it seemed convenient, without support for each departure, has not produced modified cash basis statements. It has produced statements on no framework at all, which is a worse problem than being outside GAAP, and it is the line cash accounting draws between a modification and an improvisation.
It Is One of Five Special Purpose Frameworks
A special purpose framework is a financial reporting framework other than GAAP, and the standard names five bases of accounting that qualify: cash basis, tax basis, regulatory basis, contractual basis, and other basis (AU-C section 800, paragraph .07).
Two placements inside that list matter for this term. The cash basis is commonly referred to as an other comprehensive basis of accounting, the older label that still turns up in engagement letters. And in the context of that section, the cash basis of accounting is not a regulatory basis of accounting (AICPA, AU-C Glossary of Terms). A regulator accepting cash basis statements does not turn them into regulatory basis statements, and the two categories carry different reporting requirements.
The Modifications Bring GAAP Disclosure With Them
This is the part that surprises firms, and it is where the framework stops being a shortcut.
Where special purpose financial statements contain items that are the same as, or similar to, those in GAAP financial statements, informative disclosures similar to those required by GAAP are necessary to achieve fair presentation. Statements prepared on a tax basis or on a modified cash basis of accounting usually reflect depreciation, long-term debt, and owners’ equity, so the informative disclosures for those three in such statements would be comparable to those in GAAP statements (AU-C section 800, paragraph .A26).
Read what that does to the trade. A modification made toward accrual generally imports the GAAP disclosure obligation for the item modified, because the item now sitting in the statements is the same as or similar to the GAAP one. Put depreciation in and the disclosure for depreciation comes with it. The framework is lighter than GAAP only in the places it has not been modified, so the saving shrinks with each departure added.
That paragraph is also the standard’s own confirmation of what the typical modifications are, which is the closest thing to a supported list that exists.
Modified Cash Is Not Modified Accrual
The two names look like variants of one idea and they belong to different worlds. Modified accrual is a governmental basis, not a special purpose framework for a private business.
Under it, modified accrual is a combination of cash basis and full accrual basis, with revenues recognized when they are both measurable and available, measurable meaning the cash flow can be reasonably estimated and available meaning the revenue can finance current expenditures to be paid within 60 days, while expenditures are recorded on a full accrual basis because they are always measurable when incurred (Texas Comptroller of Public Accounts, Reporting Requirements for Annual Financial Reports, Modified Accrual Basis of Accounting).
The sharpest way to tell them apart is depreciation, because the two move in opposite directions on it. Recording depreciation is the standard’s own example of a supported modification to the cash basis. Under modified accrual, depreciation expense is not recorded for governmental funds, and assets are instead expensed in the operating fund when purchased because they are a current use of funds (the same source).
What It Is Not
- GAAP. A special purpose framework is defined as a framework other than GAAP, so the two are exclusive by construction.
- The tax basis. Tax basis is a separate one of the five, defined as the basis the entity uses to file its return. A modified cash basis often resembles it and is not it, and the accounting method rules that govern the return sit in accounting methods.
- A bookkeeping style. It is a reporting framework, which is why an auditor can report on statements prepared under it at all.
Common Questions
None, as the standards define them. The modifications are inside the definition of the cash basis, so the difference is how far a given set of statements has been modified, not which framework it sits on.
Any that have substantial support. The standard names recording depreciation on fixed assets, and its application material indicates that depreciation, long-term debt and owners’ equity are what such statements usually reflect.
Yes. The standards set out how an auditor accepts, plans, performs and reports on an engagement over statements prepared under a special purpose framework, which is why the framework has a definition in the auditing literature in the first place.
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