A reporting entity (or reporting unit) is an entity that voluntary chooses, or is required by law, to prepare general purpose financial statements.
The Conceptual Framework provides the following entity meaning [Conceptual Framework 3.10 – 3.14]:
A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting unit is not necessarily a legal entity.
Sometimes one entity (parent) has control over another entity (subsidiary). If a reporting entity comprises both the parent and its subsidiaries, the entity’s financial statements are referred to as ‘consolidated financial statements’. If a entity or report is the parent alone, the reporting unit’s financial statements are referred to as ‘unconsolidated financial statements’.
If a reporting-entity comprises two or more entities that are not all linked by a parent-subsidiary relationship, the reporting entity’s financial statements are referred to as ‘combined financial statements’.
Determining the appropriate boundary of a reporting entity can be difficult if the reporting-entity:
- is not a legal entity; and
- does not comprise only legal entities linked by a parent-subsidiary relationship.
In such cases, determining the boundary of the reporting unit is driven by the information needs of the primary users of the reporting unit’s financial statements. Those users need relevant information that faithfully represents what it purports to represent. Faithful representation requires that:
- the boundary of the reporting-entity does not contain an arbitrary or incomplete set of economic activities;
- including that set of economic activities within the boundary of the reporting entity results in neutral information; and
- a description is provided of how the boundary of the reporting entity was determined and of what constitutes the reporting entity.
The definition (or IFRS entity meaning) of a reporting unit is an entity where it is reasonable to expect that there are users dependent on a general purpose financial report (GPFR) to gain an understanding of the financial position and performance of the entity, and to make decisions based on this financial information and other information contained in the financial report. These users could be shareholders, members, employees, creditors, lenders or potential investors.
A non-reporting entity is where those charged with governance have determined that there are no users dependent on a GPFR. In this situation, a non-reporting entity is permitted to prepare a special purpose financial report and not a general purpose financial report.
Accordingly, it is very important for those charged with governance to document whether an entity has users dependent on general purpose financial reports to enable them to define the entity as either reporting or non-reporting. This will then determine the financial reporting framework to be used.
Examples of reporting entities include listed public companies, large private companies with external shareholders who have no access to financial information other than the annual financial report and public interest entities such as educational institutions. Examples of a non-reporting entity include private companies with a small number of shareholders all of whom are employed in the management of the business, not-for-profit associations and very small private companies.
If a particular entity is defined as a reporting entity it is required to prepare a general purpose financial report. This means that all domestic Accounting Standards or International Financial Reporting Standards must be applied in the preparation of the financial report. However, if an entity is defined as a non-reporting entity it only needs to prepare a special purpose financial report, which does not need to apply all of the domestic Accounting Standards or International Financial Reporting Standards. A special purpose financial report only needs to apply the measurement and recognition domestic Accounting Standards or International Financial Reporting Standards with limited disclosure.
Those charged with governance should also explore the benefits of producing a general purpose financial report even though the entity is non-reporting in nature. There may be opportunities for potential new users to learn more about the entity and its activities and operations. Or there may be stakeholders that value the additional information provided in a general purpose financial report. The downside to this is the cost of preparing a general purpose financial report which would be significantly more than a special purpose financial report.
Some listed companies use a general purpose financial report as a marketing document to promote their activities and demonstrate their social responsibility and standing within the community. Non-reporting activities could also produce a general purpose financial report to promote themselves in a similar way.
Another risk that needs to be explored by those charged with governance is the level of disclosure in a general purpose financial report which may inadvertently provide information to a competitor. It is essential to ensure that if the reader possibly includes a competitor looking for a competitive advantage, then careful attention needs to be made in the preparation of the general purpose financial report to ensure its disclosure is minimised to that required by statutory rules and guidelines.
The concept of a Reporting and Non-Reporting Entity and the significance of the definition is important to the financial report prepared by an entity and the associated benefits and risks. It is necessary that those charged with governance understand the concept and seek outside advice where needed to ensure that their decision is appropriate and correct.
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