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Conceptual Framework ED on reporting entity

11 Mar 2010

The IASB and the US Financial Accounting Standards Board (FASB) have published for public comment an exposure draft (ED) on the reporting entity concept.

The proposals form part of a Joint Project to develop a common and improved conceptual framework that provides the basis for developing future accounting standards. The boards published a discussion paper on the Reporting Entity Concept in May 2008. Respondents broadly supported the boards' preliminary views. In response to those comments the ED proposes what a reporting entity is and when an entity controls another entity. A summary is below:

What is a reporting entity?

A reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided.

When does one entity control another entity (resulting in a combined reporting entity)?

An entity controls another entity when it has the power to direct the activities of that other entity to generate benefits for (or limit losses to) itself. If an entity that controls one or more entities prepares financial reports, it should present consolidated financial statements.

Can a portion of an entity be a reporting entity?

A portion of an entity could qualify as a reporting entity if the economic activities of that portion can be distinguished objectively from the rest of the entity and financial information about that portion of the entity has the potential to be useful in making decisions about providing resources to that portion of the entity.

Comments on the ED are invited by 16 July 2010.