Reporting entity ED: Page 206-207 Discussion Paper
Conceptual Framework - July 2013
a)
Describe a reporting entity as:
…a circumscribed area of economic
activities whose financial information has the potential to be useful to
existing and potential equity investors, lenders and other creditors who cannot
directly obtain the information they need in making decision about providing
resources to the entity and in assessing whether management and the government
board of that entity make efficient and effective use of resources provided.
b)
Explained that most, if not all, single legal
entities have the potential to be reporting entities. However, a legal entity
may not qualify as a reporting entity if, for example, there is no basis for
objectively distinguishing its economic activities from whose of another
entity.
c)
Stated that a portion of an entity could qualify
as a reporting entity:
i.
If the economic activities of that portion can
be distinguished objectively form the rest of the entity, and
j.
Financial information about the portion of the
entity has the potential to be useful in making decision about providing
resources to that portion of the entity.
Page 5 of Conceptual framework 2010
The board believes that financial statements prepared for this purpose meet the common needs of most
users. This is because nearly all users are making economic decision, for
example:
(a)
To decide when to buy, hold or sell and equity
investment.
(b)
To assess the stewardship or accountability of
management.
(c)
To assess the ability of the entity to pay and
provide other benefits to its employees.
(d)
To assess the security for amounts lent to the
entity.
(e)
To determine taxation policies.
(f)
To determine distributable profits and
dividends.
(g)
To regulate the activities of entities
Exploring these key needs of users of financial statement is
helpful in distinguishing a reporting entity. These needs focus no how a
proprietary perspective (sole trader and partnership) is differentiated from
those organizations with entity perspective (Ltd and PLC).
(a)
Shareholders/lenders as the users of financial
statements use the information provided to decide whether to buy, hold or sell
any portion of investment in shares and securities (i.e. the reporting entity
should be listed company) or a limited company where members can hold, buy or
sell their shareholding to other members.
(b)
In a proprietary entity managers are owners.
This is not the case for limited liability company, where there is separation
of ownership and control and manager act as agent of shareholders.
(c)
In proprietary entity owner is liable to pay his
employees the promised benefit even if the company suffers loss. Whereas for a
limited liability company the ability of the entity to pay and provide other
benefits of its employees rest on the performance of the company and if company
suffers loss owners need not pull money out of their pocket to pay for
employees.
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