Conceptual Framework Phase D — 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.
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).