Conceptual framework — Sweep issue: boundary of a reporting entity

Date recorded:


At its September 2016 meeting, the Board tentatively decided to confirm the concepts on the boundary of the reporting entity proposed in the Conceptual Framework ED. The Board also directed the staff to clarify in drafting how the proposed concepts place appropriate limitations on what may constitute a reporting entity in situations when the reporting entity is not a legal entity. This is in light of many commentators’ concern that the proposed concept might lead to the preparation of financial statements for an incomplete set of economic activities for such entities.

Staff analysis and recommendation

The Staff concluded that spelling out the implications of applying the qualitative characteristics of relevance and faithful representation would help to allay concerns about providing incomplete and misleading information about a reporting entity that is not a legal entity, without providing excessive details in this regard.


The Board generally agreed with using relevance and faithful representation to set the boundary of a reporting entity. However, some Board members were concerned that the Staff proposals would still not ensure completeness of the financial information.

Relevance, faithful representation and the boundaries of a complete set of financial information are all relative concepts. These boundaries move depending on who the users are, what their financial information needs are, for what purpose they are using the information, what economic decisions they are making based on the information, and what their risk exposures are. Entities can always argue that a particular set of financial information provides relevant information and faithfully represents the economic activities that it purports to represent, i.e. the information could meet the criteria suggested by the Staff; yet it may still not give the users a full picture of their potential risk exposure. For example, financial information on just the profitable operations of an entity could arguably provide relevant information to a potential lender, but if the lender is exposed to both the profitable and loss-making operations of an entity, then information that incorporates both these operations would provide more relevant information to the potential lender and would more faithfully represent the full risk exposures of the lender.

The Board suggested setting the boundary of a reporting entity by first identifying who the users of the financial statements are and what their financial information needs are. Management should then assess what information is relevant to these users that would, at the same time, give them a holistic view and thus be a faithful representation of their potential financial risk exposure.

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