Definition of the Reporting Entity Concept
The reporting entity concept has been initiated in Australia by publishing the “Statement of Accounting Concept (SAC) 1 Definition of the Reporting Entity”. This report would initially focus on defining the reporting entity concept for underpinning the Australian financial reporting requirements. The second portion would be on the discussion of the factors that indicate an organisation is a reporting entity. Moreover, emphasis would be laid on discussing the various requirements in the context of both reporting entity and non-reporting entity organisations. Furthermore, the paper would lay stress on explaining the advantages of the stated concept along with reasons for taking into account the replacement of this particular concept by AASB. Finally, the paper would shed light on the reporting entity concept could outweigh its drawbacks with the help of its advantages.
According to Carey, Potter and Tanewski (2014), reporting entity denotes that an organisation is a distinct legal entity having separate business functions and operations. The financial statements could be developed distinctively for the organisation. Each organisation has a distinct legal entity, which is different from the shareholders. One of the ways is financial accounting, which could be utilised to report the organisational activities regardless of the entity size. There are few organisations having subsidiaries and each of them have a distinct legal entity. The reporting organisation would take into combination these distinct financial statements along with preparing a single consolidated statement in order to analyse the overall performance (Horngren and Harrison 2015).
There are certain factors that indicate an organisation is a reporting entity and they are enumerated briefly as follows:
- Each business entity is taxed distinctively.
- It is necessary to compute the financial position as well financial performance of an organisation.
- It is crucial for ascertaining the payable amounts to the different owners at the time of liquidation of an organisation (Flower 2015).
- The assets present in the event of a legal judgement in comparison to a business entity are to be ascertained from the perspective of liability.
- The records of a business organisation could not be audited, if they are combined with those of other organisations and/or individuals.
For a reporting entity organisation, it is expected that there are certain users relying on “general purpose financial reports (GPFR)” so that they could have an overview of the financial condition of the organisation in order to undertake decisions based on the provided financial information. These users mainly include shareholders, investors, employees, community, suppliers, creditors and the government (Henderson et al. 2015). For a non-reporting entity organisation, those having charged with governance have ascertained that their users are reliant on GPFR. Under such situation, it is needed to formulate a “special purpose financial report” in place of GPFR.
Therefore, it is crucial for those having governance charges in documenting whether an organisation consists of users reliant on GPFR so that they could distinguish it as either reporting or non-reporting entity (Pkf.com.au 2018). As a result, it would assist in ascertaining the framework for financial reporting to be used. For instance, the reporting entities mainly include public firms, big private organisations having outside shareholders with no access to financial information except annual reports and educational institutions, On the other hand, a non-reporting entity constitutes of private organisations having restricted number of shareholders and they are all employed in business management functions, non-profit organisations and small-sized private organisations (Hoyle, Schaefer and Doupnik 2015).
Indicators of Reporting Entity Status
As already evaluated above, if any organisation is classified as a reporting entity, it needs to prepare GPFR, which should comply with AASB, IFRS, IASB and Corporations Act 2001 while preparing the same. However, for a non-reporting entity, only special purpose financial report is to be prepared and it is not mandatory to follow all the above-stated standards. The only compulsion of this type of entity is to conform to the Australian accounting standards for recognition and measurement purposes having very few disclosures.
An organisation could have a range of benefits by following the reporting entity concept, which is discussed briefly as follows:
- It is possible to distinguish management from economic interest in order to demonstrate higher spread of membership or ownership.
- The reporting entities are probable to have a higher influence on the welfare of the external parties. Such entities include those firms having dominant positions in their marketplaces, employee-employer associations and public sector organisations enjoying regulatory power (Simkin, Norman and Rose 2014).
- The organisations following this concept disclose the values of assets, sales, employees and customers and their indebtedness level to the external parties for assisting them in undertaking significant decisions.
The primary reason that AASB is taking into consideration for replacing the reporting entity concept is the published of a revised conceptual framework by IASB. According to AASB, a reporting entity has a group of users dependent on GPFR for making useful decisions regarding scarce resource allocation. However, according to the revised definition of IASB, reporting entity is an organisation, which is needed or selects to prepare financial statements (Pitcher.com.au 2018). Since it is necessary for the Australian organisations to disclose financial information in line with IFRS, AASB needs to adopt the revised conceptual framework in the nation. For conducting the same, the reporting entity definition proposed by IASB would substitute the definition, as mentioned in the accounting standards of Australia. Another reason that AASB considers to replace the concept is that it does not believe that it has the right to ascertain who could, should or must develop financial statements. By combining these two reasons, AASB believes that the current concept of reporting entity would not be appropriate to continue within the accounting standards of the nation (Stent and Dowler 2015).
It has already been evaluated that the reporting entity concept mandates the Australian organisations to prepare a general purpose financial report for assisting the users including the users in undertaking significant investment decisions (Tello, Hazelton and Cummings 2016). Moreover, it assists the users in obtaining necessary information about the asset and liability values, equity, revenues and expenses. However, the revised definition of the reporting entity concept by IASB has removed the compulsion of the entities to publish general purpose financial reports. Even though such action would help in minimising time and cost, there is greater chance of the accounting manipulations on the part of the business organisations. For instance, the users could not be able to identify whether the organisation is suffering from poor financial conditions or it is on the verge of liquidation. Therefore, issues might be encountered severely at the time of undertaking decisions. Along with this, there might be severe distortions in the accounting figures, which would lead to inaccurate representation of the actual financial conditions of the business organisations. Therefore, it could be inferred that the current reporting entity concept in Australia has useful benefits capable enough to outweigh its drawbacks.
References:
Carey, P., Potter, B. and Tanewski, G., 2014. Application of the Reporting Entity Concept in Australia. Abacus, 50(4), pp.460-489.
Flower, J., 2015. The international integrated reporting council: a story of failure. Critical Perspectives on Accounting, 27, pp.1-17.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Horngren, C. and Harrison, W., 2015. ACCOUNTING: BSB110. Pearson Higher Education AU.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Pitcher.com.au., 2018. Proposed removal of the ‘reporting entity concept’ from Australian Accounting Standards | Pitcher Partners.. [online] Available at: https://www.pitcher.com.au/news/proposed-removal-%E2%80%98reporting-entity-concept%E2%80%99-australian-accounting-standards [Accessed 18 Aug. 2018].
Pkf.com.au., 2018. The Concept of a Reporting and Non-Reporting Entity . [online] Available at: https://www.pkf.com.au/blog/2017/the-concept-of-a-reporting-and-non-reporting-entity/ [Accessed 18 Aug. 2018].
Simkin, M.G., Norman, C.S. and Rose, J.M., 2014. Core concepts of accounting information systems. John Wiley & Sons.
Stent, W. and Dowler, T., 2015. Early assessments of the gap between integrated reporting and current corporate reporting. Meditari Accountancy Research, 23(1), pp.92-117.
Tello, E., Hazelton, J. and Cummings, L., 2016. Potential users’ perceptions of general purpose water accounting reports. Accounting, Auditing & Accountability Journal, 29(1), pp.80-110.
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