FASB Proposal Addresses the Financial Reporting Entity

The Financial Accounting Standards Board (FASB) has issued a proposed new chapter of its Conceptual Framework that describes a reporting entity, Proposed Statement of Financial Accounting Concepts—Concepts Statement 8—Conceptual Framework for Financial Reporting—Chapter 2: The Reporting Entity.

The proposed Concepts Statement (CS) would become Chapter 2 of CS 8, which addresses matters relating to the reporting entity. Unlike the FASB Accounting Standards Codification, Concepts Statements are not authoritative but they establish a framework that board members use to develop standards of financial accounting and reporting. 

Currently, the term “reporting entity” is not defined within FASB’s conceptual framework. In the CS, the proposed definition of a reporting entity is “a circumscribed area of economic activities that can be represented by general purpose financial reports that are useful to existing and potential investors, lenders, and other resource providers in making decisions about providing resources to the entity.”

As proposed in the CS, three features are present in a reporting entity:

1. Economic activities of the entity have been conducted.
2. Those economic activities can be distinguished from those of other entities.
3. The financial information in general purpose financial reporting faithfully represents the economic activities of the entity in the circumscribed area and is useful in making decisions about providing resources to the entity.

Finally, the CS stipulates that parent-only financial statements are not sufficient to meet the objectives of general-purpose financial reporting. However, general-purpose financial reports for a portion of an entity can meet financial reporting objectives, if they represent a circumscribed area of economic activities and can faithfully represent those activities.