The Financial Accounting Standards Board (FASB) has issued a new chapter of its Conceptual Framework that describes a reporting entity.
The Conceptual Framework is a body of interrelated objectives and fundamentals that provides the FASB with a useful tool as it sets standards. A Statement of Financial Accounting Concepts is nonauthoritative and does not establish or change generally accepted accounting principles. The new chapter becomes Chapter 2 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. The new chapter is similar to the rest of the framework in that it establishes concepts that the Board would use in developing standards of financial accounting and reporting.
It provides the Board with a framework for developing standards that meet the objective of financial reporting and enhance the understandability of information for existing and potential investors, lenders, donors, and other resource providers of a reporting entity. The new chapter describes a reporting entity as “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.”
It also describes the three features of a reporting entity:
1. Economic activities 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 conducted within the circumscribed area and is useful in making decisions about providing resources to the reporting entity.
The Accountant has previously covered the FASB’s proposal to clarify accounting guidance related to profits interest awards. This can be found here.