Description of a Reporting Entity (B6.3)

IASB’s Proposed Description of an Entity for Financial Reporting

1. Reporting Entity Definition 

A **reporting entity** is defined as an entity that prepares general-purpose financial statements intended to meet the needs of a wide range of users. These users typically include investors, creditors, regulators, and others who rely on financial statements for decision-making. The reporting entity can be a single entity (e.g., a corporation) or a group of entities (e.g., a consolidated group). The definition emphasizes that financial statements are prepared for external stakeholders and not for internal management purposes.  

2. Going Concern Assumption

Going concern assumption underpins the preparation of financial statements. This assumption states that the entity is expected to continue its operations in the foreseeable future without any intention or necessity of liquidation or ceasing its business activities.  

Financial statements must disclose this uncertainty if evidence arises that challenges the going concern assumption, such as financial difficulties or legal issues.  

- In cases where the going concern assumption is deemed inappropriate, financial statements must be prepared on a different basis (e.g., liquidation basis), reflecting the entity’s anticipated cessation of operations.  

3. Basis of Accounting 

The **basis of accounting** applied in financial statements depends on the going concern assumption. When the going concern assumption holds, financial statements are prepared under the accrual basis, aligning revenues and expenses with the periods in which they occur.  

- If the going concern assumption does not apply, financial statements must be prepared differently, with adjustments to reflect the entity’s liquidation value or other appropriate measures.  

4. Entity Perspective

The IASB emphasizes that financial statements are prepared from the **entity’s perspective**, rather than the perspective of specific stakeholders or user groups.  

This approach views the entity as distinct from its owners, shareholders, or other stakeholders.  

- It ensures that financial statements reflect the economic activities of the entity as a whole, providing a neutral and comprehensive view of its financial position, performance, and cash flows.  

5. Clarification for Users

By defining the entity perspective, the IASB provides clarity for users regarding the standpoint taken in developing and interpreting accounting standards. This ensures that:  

- Financial statements are prepared impartially, without favoring any particular stakeholder group.  

- Users can confidently rely on the information to evaluate the entity’s performance and make informed decisions.  

This detailed framework ensures that financial reporting remains consistent, relevant, and reliable, catering to the diverse needs of users while adhering to fundamental principles of accounting.