A small dental practice books $480,000 of cash receipts and asks its CPA for "an income statement." Under GAAP that filing would need accruals, depreciation, and deferred taxes the practice does not track. A special purpose framework lets the same numbers tell an honest story, but only if the financial statements wear different titles and disclose the basis used.
Most small businesses, individuals, and partnerships do not need GAAP. Lenders, owners, and tax authorities do not demand it. GAAP is expensive: accruals, deferred taxes, fair value, lease capitalization. AU-C Section 800 sanctions five non-GAAP frameworks for audit and requires the auditor's report to describe the basis so a reader does not mistake SPF statements for GAAP.
KEY: SPF is the umbrella term for cash, modified cash, tax, regulatory, and contractual bases.
Cash basis recognizes revenue only when cash is received and expenses only when cash is paid. The balance sheet has cash and equity, nothing else. No A/R, no A/P, no accrued payroll, no depreciation, no deferred revenue.
Common mistakes
- Using GAAP titles on SPF statements. A statement headed "Balance Sheet - Cash Basis" violates AU-C 800. The trap answer keeps the GAAP noun and only adds a qualifier. Correct: "Statement of Assets and Liabilities Arising from Cash Transactions" or "Statement of Assets and Liabilities - Cash Basis."
- Forgetting depreciation under modified cash basis. Pure cash basis expenses the truck immediately; modified cash capitalizes it and depreciates over its life. A question that gives you a $48,000 vehicle purchase and asks for modified-cash net income includes a trap answer that subtracts the full $48,000.
- Reversing the prepaid adjustment. A/R growth adds to revenue; prepaid growth subtracts from expense (the cash went out but benefits next year). Treating the prepaid like A/R inflates expense by twice the change. Trap: $722,000 + $3,000 = $725,000 instead of $722,000.
Bottom line
- A special purpose framework (SPF) is any non-GAAP, non-IFRS basis used to prepare financial statements (cash, modified cash, tax, regulatory, or contractual), defined in AU-C 800
- SPF statements cannot use GAAP titles (Balance Sheet, Income Statement, Statement of Cash Flows); titles must signal the basis, e.g. Statement of Assets and Liabilities Arising from Cash Transactions
- Cash basis recognizes revenue when received and expense when paid; no A/R, no A/P, no accruals, no depreciation
- Modified cash basis is cash basis plus select accrual modifications, almost always PP&E with depreciation, often inventory and AR/AP
Exam shortcut
When a question shows financial statement titles, the fastest elimination is the noun: any choice with "Balance Sheet" or "Income Statement" is GAAP, not SPF. For cash-to-accrual conversions, write the formula on the scratch pad first (Cash + ΔA/R − ΔUnearned for revenue, Cash + ΔA/P − ΔPrepaids for expense), then plug in. Trap answers usually drop one bucket.
The full lesson (about 2,799 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.E1
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