Special Purpose Financial Frameworks

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## 📘 Special Purpose Frameworks (SPFs) and Related Audit Requirements ### 🧾 What is a Special Purpose Framework (SPF)? A **Special Purpose Framework** is a financial reporting framework other than GAAP, used primarily by **nonissuers** (private companies). Unlike general-purpose frameworks like U.S. GAAP or IFRS, SPFs serve specific reporting needs. --- ### 📚 Types of Special Purpose Frameworks 1. **Cash Basis**: Records cash receipts and disbursements, with possible modifications like depreciation. 2. **Tax Basis**: Used for preparing financial statements aligned with income tax filings. 3. **Regulatory Basis**: Meets requirements of regulatory bodies (e.g., utility commissions). 4. **Contractual Basis**: Used to fulfill terms of a contract with specific third parties. 5. **Other Basis**: Any logical and reasonable framework applied consistently. 👉 Cash, Tax, and Regulatory bases are often called **OCBOA** (Other Comprehensive Bases of Accounting). --- ### 🔍 Additional Auditor Responsibilities When auditing SPF-based financial statements, auditors must: - Understand the **purpose** of the financial statements and the **intended users**. - Obtain management's acknowledgment of responsibility for appropriate disclosures, including: - A description of the SPF and key accounting policies. - Explanation of how it differs from GAAP. - Disclosure of significant interpretations (especially under contractual basis). - Any additional disclosures needed for fair presentation. - Evaluate if management's interpretation of contractual terms is reasonable. - Assess the entity’s ability to continue as a going concern—even if SPF does not require it. --- ### 📝 Special Purpose Financial Statement Audit Report The audit report for SPF financial statements includes unique elements: #### 🧩 Key Differences from GAAP Reports: - **Purpose Statement**: If necessary, state the financial statement’s intended use. - **Non-GAAP Titles**: Use appropriate headings like: - “Statement of Assets and Liabilities – Cash Basis” - “Statement of Revenues and Expenses – Tax Basis” - **Management’s Responsibility**: Must include their responsibility for selecting an appropriate SPF. - **Emphasis-of-Matter Paragraph**: - References the SPF used and where it is described. - States that the framework is non-GAAP. - May warn that statements may not suit other purposes. - **Other-Matter Paragraph** (if needed): - Restricts the report’s use to specific parties. - Example: “For use only by ABC Company’s Board, management, and [regulator name].” #### 🔔 Exception for Regulatory Basis Used for General Purpose: If regulatory-basis statements are intended for general use: - No **Emphasis** or **Other-Matter** paragraph. - Auditor gives an opinion on: - Fair presentation under the regulatory basis. - Material departure from GAAP (usually a **qualified or adverse opinion**). --- ### ✅ Minimum Required Elements of the Report The audit report for SPFs must include: - Title indicating it's an independent auditor’s report. - Addressee. - Description and opinion on the SPF financial statements. - Explanation of financial statement purpose (if needed). - Statement of auditor’s independence and ethics compliance. - Responsibilities of management and the auditor. - Reference to any laws or regulations involved. - Emphasis or Other-Matter paragraphs (if applicable). - Auditor’s signature. - City and state where the report is issued. - Date of the report. --- ### 📄 Sample Reports 1. **Cash Basis (Nonissuer)**: - Includes Emphasis-of-Matter on cash basis (non-GAAP). 2. **Regulatory Basis (General Use, Nonissuer)**: - Provides unmodified opinion on regulatory basis. - Expresses an adverse opinion on GAAP due to significant differences. - No Emphasis or Other-Matter paragraph. --- ### 🔚 Conclusion SPFs offer flexibility for nonissuers with specific reporting needs. However, auditors must meet additional requirements beyond a GAAP audit. Reports must clearly describe the framework used and often restrict the report's usage to ensure appropriate understanding by users.