The two most common reporting entities are a single legal entity preparing unconsolidated or company accounts or a group of legal entities preparing consolidated financial statements. Consolidation can be done at different levels, the most common being at the ultimate parent legal company level (the highest legal entity that controls any number of other legal entities) or at a sub-holding level by a reporting entity obliged to consolidate all legal entities it controls at this level.
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’.
Boundaries of other reporting entities
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 entity is driven by the information needs of the primary users of the reporting entity’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.