For the complete Conceptual Framework project chronology, please go to our Conceptual Framework Project Overview page.

Timetable

• Click for IASB Project Timetable

Background

Neither the IASB's current Framework nor FASB's Conceptual Framework includes a reporting entity concept. Yet such a concept is fundamental to financial reporting – because all financial reports provide information about an entity.

At their joint meeting in October 2004, the IASB and the US FASB decided to add to their respective agendas a joint project to develop a common conceptual framework, based on and built on both the existing IASB Framework and the FASB Conceptual Framework, that both Boards would use as a basis for their accounting standards.

The two boards reached the following tentative decisions about the approach to the project:

• The project should initially focus on concepts applicable to business entities in the private sector. Later, the boards should consider the applicability of those concepts to other sectors, beginning with not-for-profit organizations in the private sector.
• The project should be divided into phases, with the initial focus being on achieving the convergence of the frameworks and improving particular aspects of the frameworks dealing with objectives, qualitative characteristics, elements, recognition, and measurement. Furthermore, as the frameworks converge and are improved, priority should be given to addressing issues that are likely to yield benefits to the boards in the short term, that is, cross-cutting issues that affect a number of their projects for new or revised standards.
• The converged framework should be in the form of a single document. It should include a summary and a basis for conclusions.

Project Is Being Conducted in Eight Phases

The Conceptual Framework project is being conducted in eight phases. We have organised our project notes on IAS Plus with a separate web page for each phase plus a page on the overall approach to the project (click below to go to the relevant page):

• Overall Approach to the Project
• Phase A: Objectives and Qualitative Characteristics
• Phase B: Elements and Recognition
• Phase C: Measurement
• Phase D: Reporting Entity – This Page
• Phase E: Presentation and Disclosure
• Phase F: Purpose and Status
• Phase G: Application to Not-for-profit Entities
• Phase H: Remaining Issues

Discussion at the December 2005 IASB Meeting - Reporting Entity

Reporting Entity

The IASB Framework defines the reporting entity in one sentence with no further explanation. The FASB framework does not contain a definition. Thus there is a gap in both frameworks, even though the concept exists. This paper considers what a reporting entity is - i.e. when is a legal entity or economic unit a reporting entity, aggregation versus disaggregation, the purpose of consolidated financial statements and whether control is the right basis for consolidation.

The Board questioned how concepts such as joint control or significant influence fit into this project. Staff noted that this would be during a later stage of the project. The purpose of this meeting was to establish the direction of the project and the key areas of focus.

The paper provoked a lot of discussion. Some Board members felt that the definition of a reporting entity should not depend on whether that entity produces financial statements and that the paper was often circular. Others felt that certain aspects of the paper were helpful, such as the distinction between direct and indirect control.

Generally, the Board felt that the project should remain broad, and consider only what a reporting entity is.

Discussion at the March 2006 IASB Meeting - Reporting Entity

Reporting entity

The staff proposed that an entity for financial reporting purposes should not be limited to legal entities. The staff proposed that an entity be defined as follows (amended for Board comments at the meeting):

An entity is an economic unit that has the capacity to engage in transactions with other entities.

The exact wording will be refined as necessary during the course of the project. However, what these words are intended to convey is that an entity for financial reporting purposes:

• (a) Is broader than legal entities, hence the use of the word economic;
• (b) Has a cohesive or unified organisational structure, such that it has observable boundaries and therefore can be distinguished from other parties that have an interest in it, such as investors and creditors.

The Board agreed with the staff proposals as well as the fact that what constitutes an entity for financial reporting purposes includes; a natural person, sole proprietorship and a branch or segment of a legal entity. However, a mere collection of assets and liabilities would not constitute an entity. In this regard, the staff were asked to consider more closely, the definition in IFRS 3 of a business.

Parent-only entity

Sometimes a parent entity might prepare parent-only (separate) financial statements, in addition to (or instead of) consolidated financial statements. The Board agreed that the parent should be considered an entity according to the proposed definition. However there was some discussion about whether parent-only financial statements faithfully present decision-useful information as they do not display the actual underlying assets and liabilities of subsidiaries that are effectively under the parent's control (instead, only the investment in subsidiaries is displayed, at cost or in accordance with IAS 39). The consequence of this view is that parent-only financial statements would not be viewed as general purpose financial statements as they are 'incomplete'.

Other Board members pointed out that the parent-only financial statements contain information that is useful to shareholders, for example the dividend flows that are paid out of the parent entity alone (not necessarily the group).

Discussion at the April 2006 IASB Meeting - Reporting Entity

Meaning of Control of Another Entity

This discussion focussed on the meaning of control of another entity, including whether it should be defined at a standard or concepts level. Staff proposed that control be defined as follows:

Control of an entity is the ability to direct the strategic financial and operating policies of an entity so as to access benefits flowing from the entity and increase, maintain or protect the amount of those benefits.

The Board agreed with the staff proposals that:

• control, in the context of control of another entity, should be defined at the concepts level;
• the definition of control should contain both a power element and a benefits element, together with a link between the two, along the lines set out in the working definition (given above); and
• the conceptual framework should explain that determining whether one entity has control over another entity involves an assessment of all the facts and circumstances.

There was a general discussion about common control transactions and entities. Staff clarified that this would be discussed at a later stage. The purpose of this discussion was to consider the very simplified question of whether entity A controls entity B.

With regard to power element of control, staff asked the Board whether:

• power relates to the entity's financing and operating policies;
• power is non-shared;
• the ability to direct the financing and operating policies of the other entity is sufficient; hence, in concept, control is broader than legal control, in particular, it includes de facto or effective control; and
• one entity has control over another should be based upon an assessment of the present facts and circumstances, and therefore the control concept should not exclude situations in which control might be temporary.

There was general agreement by the Board with the above, with certain caveats. In particular, the Board were concerned with how latent control fits into this model.

There was general agreement by the Board that with regard to the benefits element of control:

• the control definition should refer broadly to benefits or economic benefits, rather than specific types of benefits; and
• leaving aside the issue of SPEs, the control definition should not specify a minimum level of benefits.

Discussion at the September 2006 IASB Meeting - Reporting Entity

Reporting Entity

The Board has identified eight cross-cutting issues in the Reporting Entity phase of its project on the Conceptual Framework. The Board discussed a paper that (a) summarised all previous Board decisions about the reporting entity and (b) identified remaining issues. The session was split into three major sections.

• Individual reporting entity
• Group reporting entity
• Control issues

The staff noted that the Board had decided that the conceptual framework related to general purpose external financial reports (GPEFR) and that the analysis presented considered only issues related to this. It was also noted that the analysis only considered issues from a conceptual level as different considerations might apply when considering the issues at a standard-setting level.

Individual Reporting Entity

The Board considered the following issues regarding the individual reporting entity:

• whether further research is necessary about what constitutes an 'individual entity' for financial reporting purposes, and
• whether the conceptual framework should describe what constitutes an individual entity, but not define it.

The Board agreed that further research about what constitutes an individual entity is unnecessary. It also decided that the conceptual framework should discuss what constitutes an individual entity but should not develop a definition.

Group Reporting Entity

Most of the session on the conceptual framework was devoted to discussing cross-cutting issues related to the Group reporting entity. In the discussion, Board members tried to understand what would distinguish the models presented (described in materials not available to observers).

The Board discussed the following issues:

• What is the purpose of consolidated financial statements? Why do some jurisdictions require parent-only financial statements, others require consolidated financial statements, and others combined financial statements?
• Is 'control' the right basis for consolidation?
• What does 'control over an entity' mean? Should this be defined at the concepts level or at the standards level?

Parent entity versus group entity

The Board noted that different views about the reporting entity concept, including different views about whether a parent-only entity can prepare 'general purpose financial statements' and, if so, whether different accounting requirements are appropriate. The Board had previously asked the staff to research whether a parent-only entity could be a reporting entity for the purposes of general purpose financial statements instead of or in addition to a group's consolidated financial statements. Previously, the Board agreed that a parent-only entity could be a reporting entity, but individual Board members reached that conclusion using different approaches. The staff therefore developed three approaches for the Board to consider:

• One entity-Two displays: Under this approach, the consolidated financial statements are regarded as being an alternative way of presenting information about the same set of assets, liabilities, and activities that appear in the parent-only financial statements. The entity can choose which to present. The Parent-only financial statement would be regarded as general purpose financial statements.

• One entity-One display: The consolidated financial statements are regarded as presenting information about a different set of assets and liabilities than the set of assets and liabilities that appear in the parent-only financial statements. The parent-only financial statements are not regarded as being general purpose external financial statements.

• Multiple entities: Under this approach, the parent-only financial statements relate to the parent entity. The consolidated financial statements relate to the group entity. Hence, both sets of financial statements are regarded as general purpose financial statements.

After a long debate that focused on trying to understand what distinguished the different approaches, the Board voted (9 members in favour) for the multiple entity approach (that is, both consolidated and parent-only entity could be a reporting entity).

Group reporting entities – approaches

The Board discussed the issue of when two or more entities should be combined and regarded as one entity for the purpose of providing financial information that is useful to both present and potential investors. The staff developed three models:

• Controlling entity model: A group entity comprises the controlling entity (the parent) and other entities under its control (its subsidiaries). Hence, the group is united by the parent entity's control over other entities. This approach requires that there be a parent entity.

• Common control model: In December 2005, the Board agreed that the staff should conduct further research into whether the boundaries of a group reporting entity should be based on a broader concept of control, for example, a concept that encompasses entities under common control.

• Risks and/or rewards model: Entities should be combined into a group entity when the activities of the second entity affect the wealth of the residual shareholders (or claimants) of the first entity.

The discussion around which model to apply was conducted in parallel with the debate on the parent entity versus the group entity debate above. As such, it was difficult to summarise the Board's discussion, as it was focused on trying to understand what the different models presented represented.

The Board seemed to agree that the group entity should be based on a 'modified controlling entity' model. This model will include 'sister-entities' as well as subsidiaries as part of the group. The Board voted 12-1 in favour of this model.

Control issues

For the issues set out below, the Board was asked to agree (a) whether the issue should be dealt with in the conceptual framework project and (b) whether they agree with the conclusion on that issue.

• Temporary control: Control over another is based upon an assessment of the present facts and circumstances. Therefore, the concept of control does not exclude situations in which control exists but it might be temporary.

  The Board agreed.

• De facto or effective control: The control concept should not be limited to circumstances in which the entity has sufficient voting rights or other legal rights to direct the financing and operating policies of another entity, but should be a broad concept that encompasses economically similar circumstances.

  The Board agreed.

• Power is non-shared: An entity does not have power over another entity if the first entity must obtain the agreement of others to direct the financing and operating policies of the second entity.

  The Board agreed.

• Treatment of options: In concept, when options are considered in isolation, the fact that an entity holds enough options that, if and when exercised, would place it in control over another entity is not sufficient, in itself, to establish that the entity has present control of that other entity. However, there could be other facts and circumstances that, taken together, indicate that the entity has present control over the other entity.

  The Board agreed.

• Control, joint control and significant influence: Control involves one entity (not multiple entities) having control over another entity. Hence, the relationship between an individual venturer and the joint venture should not be described as a control relationship. Similarly, the relationship referred to as 'significant influence' should not be described as a control relationship.

  This will be addressed at a subsequent meeting.

Discussion at the December 2006 IASB Meeting - Reporting Entity

Status, Outstanding issues and next steps

The IASB was joined by the project staff from New Zealand and the FASB via video links.

The staff told the Board that the FASB is not yet in a position to move forward on Phase D because they are concerned that they did not fully understand the IASB's views and how they had reached those views. An IASB member noted that the IASB was not in agreement on the issues in Phase D. Consequently, it would be very useful to discuss with the FASB the areas of disagreement. The staff countered that they wanted to speak with both Boards in smaller groups first.

Parent entity approach

The staff asked the Board for guidance about whether a discussion of the parent entity approach should be included in the Discussion Paper for Phase D, and if so, how extensive that discussion should be.

Some Board members thought that although it is important to discuss the parent entity approach somewhere in the Conceptual Framework package, Phase D was not the place to do so. Others saw the parent entity issue as a consolidation project issue and preferred it be discussed in the forthcoming Discussion Paper on that topic. Several Board members noted that the parent entity approach had nothing to do with the boundaries of the reporting entity, which was the topic of Phase D of the Conceptual Framework.

The Board agreed to prepare a separate Discussion Paper on the parent entity approach. How best to do this was left in the hands of the staff, who will return with suggestions at a later meeting.

Consistency with the Consolidation Project

The Board decided to defer detailed discussion of this issue pending developments in the Consolidation project. Board members expressed the view that conclusions in the two Discussion Papers should be consistent.

Initial draft of the Discussion Paper

Although the staff did not ask the Board to discuss the initial draft of the Discussion Paper (not available to Observers), some discussion took place.

Much of the discussion surrounded whether parent-only financial statements could be 'general purpose external financial reports.' Several Board members thought that there can be only one set of general purpose external financial reports – the consolidated financial statements; all other financial statements are special purpose financial reports. However, other Board members thought that parent-only financial statements can be general purpose financial reports.

The Chairman asked for an indicative vote on this issue. Nine Board members thought that the parent and its subsidiaries should always be regarded as a single entity for the purpose of general purpose external financial reports, and that this principle could be elaborated either at the Concepts level or at a Standards level. The remaining Board members thought that there could be multiple entities within a group (for example, parent-only and group) that could prepare general purpose external financial reports.

Discussion at the May 2007 IASB Meeting - Reporting Entity

The IASB was joined by the project staff from New Zealand via video link.

Determining the composition of a group reporting entity for financial reporting purposes

The Board discussed the following approaches:

• Controlling entity model

Under this model, the area of economic interest is circumscribed by the extent of one entity's control over other entities. A group entity comprises the controlling entity (i.e. the parent) and other entities under its control (i.e. its subsidiaries). Accordingly, the model is broadly similar to the control model currently used today, but with control defined to include both a power element and a benefits element.

• Common control model

Under this model the area of economic interest comprises those entities that are under the common control of the same controlling entity or controlling body. The key difference between the common control model and the controlling entity model is that, under the controlling entity model, the parent entity is always included in the group reporting entity, whereas the inclusion of the parent entity or controlling body is not essential under the common control model. This allows for the possibility of preparing 'group' general purpose external financial reports (GPEFR), prepared by combining the assets, liabilities and activities of the entities under common control, even though the parent entity or controlling body might not be required to (or might not choose to) prepare GPEFR.

• Synergistically managed assets approach

This approach was discussed by the Board for the first time. The area of economic interest, both for an individual entity and group entity, is circumscribed by the group of net assets that are managed synergistically together to generate returns to investors, creditors and others. Accordingly, the boundary of the reporting entity would not necessarily correspond to the boundary of a legal entity.

The staff pointed out that last week the FASB has reaffirmed that they prefer the controlling entity model but that the common control model should not be ruled out. The FASB did not pursue the synergistically managed assets approach. The Board expressed mixed views and was nearly equally split between controlling entity model or the common control model as preferred model but it appeared that no one wanted to rule out the respective other model. One Board member noted that the controlling entity model is a particular case of the common control model.

The synergistically managed assets approach was not pursued but some Board members pointed out that this approach might be useful in determining the reporting entity under the common control model.

Finally, there appeared to be a consensus that on a conceptual level the composition of the group reporting entity should be based on 'control' with the controlling entity model as 'main driver'. The decision whether the controlling entity model or the common control model should be required in certain circumstances should be made at the standards level.

Parent-only financial statements and consolidated financial statements

The Board continued its deliberations regarding the following issues:

Entity issue:

This issue addresses the question whether both sets of financial statements relate to the same entity, or two different entities. In previous discussions the following views were expressed:

View 1: Parent is the Group View

This view comprises the views formerly labelled 'One Entity - Two Alternative Displays' and 'One Entity - One Display'. The parent entity and the group entity are regarded as one and the same entity. The subsidiary entity is regarded of being part of the parent entity, for the purposes of the parent entity's financial reporting, akin to an unincorporated branch.

View 2: Parent not the same as Group View

This view represents the 'Multiple Entities' view. Under this approach, the subsidiary entity and the parent entity represent two separate entities (two separate 'circumscribed areas of economic interest'), while the group entity is a third entity (that is, a third 'circumscribed area of economic interest[) that encompasses within its boundary both the parent entity and the subsidiary entity.

The Board decided to no longer focus on this issue but to address exclusively the presentation issue. According to staff the FASB decided in the same way.

Presentation issue:

This issue determines which set of financial statements (or both) meets the objective of general purpose external financial reporting, by providing decision-useful information to present and potential investors, creditors and other external users with a financial interest in the parent entity.

The following views were discussed:

View A:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users. The parent entity can have only one set of general purpose external financial statements (GPEFS), but it can include other financial information within its single set of GPEFR. In particular, the parent's GPEFR could include both consolidated and parent-only financial statements. For example, there could be 'parent' and 'group' columns in each of its primary financial statements, or one set of financial statements presented as its GPEFS with another set of financial statements provided as supplementary information, all within a single set of GPEFR.

View B:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users. However, the parent entity can have only one set of GPEFS and it would be a standards-level issue to determine how the parent should present information about the subsidiary's assets, liabilities and activities. That standards-level issue is to determine, in a given set of circumstances, whether users' information needs would best be served by presenting, in the parent's GPEFS, information about its net investment in the subsidiary (as is done now in parent-only financial statements) or information about the underlying assets and liabilities of the subsidiary (as is done now in consolidated financial statements).

View C:

The parent entity can have only one set of GPEFS, which are its consolidated financial statements, because consolidated financial statements present information about all the parent's assets, liabilities and other activities, whereas parent-only financial statements do not. Parent-only financial statements present information about the parent's investment in its subsidiaries, not the underlying assets, liabilities and activities. Therefore, assets, liabilities, revenues and expenses are omitted (or offset), which is not a relevant or faithful representation of the parent entity's assets, liabilities, revenues and expenses. This should be explained at the concepts level. Parent-only financial statements should be treated as special purpose financial statements, and should be precluded from being described as GAAP-compliant, that is, should not be described as prepared in accordance with IFRS or US GAAP.

The staff informed the Board that the FASB was somewhere in between views B and C, that is, that an entity should only have one set of (consolidated) financial statements. The FASB acknowledged that there might be circumstances when parent-only financial statements should be permitted but that such exceptions should be addressed on standards-level only.

The Board was nearly equally split between view A and view C while view B was unanimously turned down. Those in favour of view C noted that there might be circumstances where parent-only financial statements could provide decision-useful information but they disagreed to require parent-only financial statements in all circumstances. One Board member in favour of view A noted that this approach would resolve the issue with investment companies, that is, to have the value of the investments in one line and to provide dividend information.

The Board did not come to a conclusion. For purposes of the Discussion Paper the Board decided to include a preliminary view that consolidated financial statement are considered to be the more important set of financial statements and to ask the constituents whether parent-only financial statements should be required in all circumstances or only occasionally.

The Board directed the staff to proceed drafting the Discussion Paper.

Discussion at the July 2007 IASB Meeting - Phase D Reporting Entity

Comment period

The Board agreed that the forthcoming Discussion Paper on Phase D of the Conceptual Frameworks project (Reporting Entity), which is now in pre-ballot and is expected later in the third quarter 2007, should have a comment period of 120 days.

Discussion at the September 2007 IASB Meeting – Reporting Entity

Comments on pre-ballot draft

The Board members and five external reviewers received in July a pre-ballot draft on the reporting entity discussion paper with request for comments.

At this meeting, comments received and proposed amendments where discussed with the Board members in order to determine whether the Board is satisfied with the changes made and would allow the staff to proceed with preparing a ballot draft of the discussion paper.

General issues in the context of an individual reporting entity

The comments received on this section raised a lack of clarity about the objectives this section was trying to achieve as well as the difficulty to understand its link with the section dealing with group reporting entity. The revised section clarifies why:

• the Board considered whether to develop a definition of a reporting entity
• the legal existence is sufficient to establish that a reporting entity exists
• a component of a legal entity, such as a branch, can be a reporting entity.

In addition, the revised section is more clearly linked with the objective of financial reporting. The description of a reporting entity has also been slightly modified to become 'a circumscribed area of business activity of interest to present and potential investors and creditors'.

One Board member stressed that it would be relevant to link what we mean by 'business' to the available definition in IFRS. Another member question whether subsidiary individual financial statements can be considered as general purpose financial statements as the completeness assertion cannot be met. Please refer to further discussion in the below section. In the end, the Board agreed with this revised section provided that minor amendments are made.

Other comments received

In the section on parent-only and consolidated financial statements, the pre-ballot draft states that 'the majority of the FASB members concluded that, in concept, parent-only financial statements should not be a required part of a parent entity's general purpose external financial report'. This statement raised significant debate among the Board on whether parent-only financial statements were required in all cases, in certain circumstances or if addition information would be sufficient. At some point, the Board considered to vote on whether parent only financial statements where required as part of general purpose consolidated financial statements of a parent. However, the Board could not figure out the exact question to vote on and therefore decided to postpone the vote to the next Board meeting.

Finally, the Board agreed to leave it up to the Project Manager to decide what would be the most efficient: to prepare the pre-ballot draft based on all comments received without submitting it one last time to the Board or whether the paper should go one more time to the Board. Some Board members express some concerns due to the number of comments to be incorporated.

Discussion at the February 2008 IASB Meeting

Entity perspective vs. Proprietary/Parent Company perspective

The Board discussed whether to issue a document (for example an invitation to comment) to describe the entity perspective and the proprietary perspective in the context of general purpose financial reporting. The staff was concerned that the Board was firmly in favour of the entity perspective but had never explained why nor given its constituents an opportunity to comment on that position.

The staff argued for a stand-alone document. They had considered and dismissed the idea of including the discussion in the basis for conclusions on the forthcoming Exposure Draft of Phase A of the Framework project, because they thought the issue deserved a more prominent discussion than a section in the Basis of a project of which it was not really a part. They had also considered and rejected the possibility of including the topic in the forthcoming Discussion Paper on the Reporting Entity chapter of the Framework, because the topic had nothing to do with the boundaries of the reporting entity for general purpose financial reporting. The staff represented to the Board that a separate invitation to comment could be prepared in short order and included with the above-mentioned Exposure Draft and Discussion Paper.

The Board agreed to allow the staff to prepare the invitation to comment.

Discussion at the April 2008 Joint IASB-FASB Meeting

Phase D: Comments on second pre-ballot draft of the discussion paper

The Boards discussed the three views developed regarding to the usefulness of parent-only financial statements.

View A:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users and parent-only financial statements should generally be provided in addition to consolidated financial statements.

View B:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users and parent-only financial statements should 'sometimes' be provided in addition to consolidated financial statements.

View C:

The parent entity can have only one set of general purpose external financial statements (GPFS), which are its consolidated financial statements. Accordingly, parent-only financial statements should not be included in the general purpose financial report of a parent entity, although some parent-only information might be included, for example, in the notes to the consolidated financial statements.

The staff noted that a majority of FASB supports View C whereas the IASB has not yet reached a majority view. The Boards had a thorough debate and apparently a significant number of IASB members acknowledged that parent-only financial statements can be GPFS. However, no majority view on one of the three views was expressed by the IASB. One FASB member expressed frustration with regard to the progress made in the conceptual framework project. Finally there seemed to be a consensus to adopt the staff recommendation, that is, to express the following preliminary view in the Phase D discussion paper:

• A parent entity should always present consolidated financial statements.
• The presentation of parent-only financial statements should not be precluded at the conceptual level, provided they are included in the same financial report as the consolidated financial statements.
• It would be a standards-level issue to determine whether parent-only financial statements should be required (either always or in particular circumstances) or merely permitted, or whether similar types of information should be presented in another format.
• It would also be a standards-level issue to determine the manner in which information should be presented in the consolidated financial statements.

May 2008: IASB and FASB issue Discussion Paper on Reporting Entity

On 29 May 2008, the IASB and the US FASB published similar consultative documents on two of the eight phases of their joint project to develop an improved conceptual framework. The framework will provide a foundation for developing future accounting standards. The two consultative documents are:

• Exposure Draft: Chapters 1 and 2 of the Conceptual Framework (Objective and Qualitative Characteristics)
• Discussion Paper: Preliminary Views – the Reporting Entity