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Thursday 30 October 2014

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Conceptual Framework

Discussion paper: The reporting entity [Phase D][May 2008]


 Frequently Asked Questions


Why do we need a reporting entity concept?

 

General purpose financial reports provide information about a particular reporting entity. Therefore, the reporting entity phase (phase D) of the boards� joint project to develop a common conceptual framework deals with what a reporting entity is and other relevant issues such as how to determine the composition of a group reporting entity.

What is a reporting entity?

 

The discussion paper proposes: A reporting entity is a circumscribed area of business activity of interest to present and potential equity investors, lenders and other capital providers. It includes, but is not limited to, business activities that are structured as legal entities. Examples include a sole proprietorship, corporation, trust, partnership, association and a group of entities.

Does the discussion paper discuss how to determine the composition of a group reporting entity? Should the composition be based on control or on risks and rewards?


The discussion paper discusses three different models for how to determine the composition of a group reporting entity: the controlling entity model, the common control model and the risks and rewards model.

The boards� preliminary view is that the composition of a group reporting entity should be based on control, using the controlling entity model as the primary basis. The common control model may also provide useful information, but the boards would determine in one or more specific standards when to apply that model, rather than in the framework.

Although the boards� preliminary view is that the risks and rewards model should not be used to determine the composition of a group reporting entity, there is a link between control and risks and rewards. The control concept includes both power over another entity and the ability to obtain benefits (or to reduce the incidence of losses). Considering the benefits element of control typically involves considering who bears risks and/or who receives the rewards.

Does the discussion paper discuss how to assess whether an entity has control over another?

 

Yes, the boards� preliminary views on how to assess whether an entity has control over another include the following points:

  • All the existing facts and circumstances should be considered when assessing whether an entity has control over another entity.
  • Control includes situations in which control currently exists but might be temporary.
  • The control concept should not be limited to circumstances in which the entity has majority voting rights or other legal rights (sometimes referred to as de facto or effective control).
  • In some cases, an entity holds enough options over voting rights that exercise of those options would give the entity control over a second entity. That fact is not sufficient, in itself, to establish that the first entity currently controls the second entity.
  • Power must be held by one entity only.

In phase A of the conceptual framework project, the boards propose to adopt the entity perspective - what does this mean for the parent company approach to consolidated financial statements?


The boards� preliminary view is that consolidated financial statements should be presented from the perspective of the group reporting entity�not from the perspective of the parent company�s shareholders.

However, that does not mean that the information needs of the parent company�s shareholders are ignored under the entity perspective. The boards may later require extra information that is primarily directed to this group of capital providers in projects on individual standards.