What does regulatory basis mean on the CPA exam?
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Regulatory basis. A special-purpose framework required by a regulator, such as an insurance department's rules. Not GAAP, and the report has to say who may use it.
Defined against AU-C 800.07.
Worked example
A state insurance department requires every insurer it licenses to file annual statements prepared under its own accounting rules, which differ from GAAP. Insurer A files them only with the department. Insurer B also posts the same statements on its website for policyholders and investors, so they are intended for general use.
How does the auditor's report differ for the two insurers?
- Both sets of statements follow a regulatory basis, a special purpose framework set by the regulator rather than by a standard setter.
- Insurer A: the report expresses one opinion, judged against the regulatory basis alone, adds an emphasis-of-matter paragraph on that basis, and restricts use to the insurer and the department.
- Insurer B: because the statements are for general use, use cannot be restricted, and the report gives two opinions, one on the regulatory basis and one under GAAP, which is ordinarily adverse because the basis departs from GAAP.
Answer: Insurer A gets one opinion, on the regulatory basis, and a restriction on use. Insurer B receives two opinions, the GAAP one ordinarily adverse, and no restriction on use.
The trap: Giving both insurers the same restricted report. What decides the reporting is the intended use: a regulatory-basis report can be restricted only when the statements are not meant for general use.
Based on AU-C 800.07; AU-C 800.16.
Which CPA exam sections use regulatory basis?
Regulatory basis appears in the FAR section of the CPA exam.
Other terms defined against AU-C 800
- cash basis: Recognizing revenue when cash is received and expense when cash is paid.
- contractual basis: A special-purpose framework built from the terms of a contract, used when two parties agree how the numbers will be prepared for their own purposes.
Related terms
- applicable financial reporting framework: The framework management adopts for the statements, such as GAAP or a special purpose framework.
- adjusted basis: What the taxpayer has invested in property for tax purposes: cost, plus improvements, less depreciation taken.
- basis of accounting: The rule for WHEN something is recorded: cash when money moves, accrual when it is earned or incurred, modified accrual somewhere between.
- carryover basis: Basis that follows the property from the previous owner instead of resetting to what was paid.
- debt basis: An S corporation shareholder's basis in loans they personally made to the corporation.
- inside basis: The partnership's own tax basis in the assets it holds.