The Financial Accounting Standards Board released a new chapter Thursday of its Conceptual Framework describing a reporting entity.
The new chapter will become Chapter 2 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. It’s similar to the rest of the framework, establishing concepts that FASB would use in developing standards of financial accounting and reporting.
It provides the members of the board with a framework for developing standards that meet FASB’s 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. A Statement of Financial Accounting Concepts is nonauthoritative and doesn’t establish or change GAAP, though.
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 discusses the three features of a reporting entity:
- Economic activities have been conducted;
- Those economic activities can be distinguished from those of other entities; and
- 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.
FASB chair Richard Jones discussed the board’s standard-setting work during the SEC and Financial Reporting Institute Conference last week at the University of Southern California.
“At the end of the day, for our standards to work, they have to be able to be applied by accountants, they have to be able to be audited by auditors, and they have to provide relevant information to investors to make capital allocation decisions,” he said. “And all three of those have to work. We do outreach with all three of those groups. Both preparers and practitioners are more apt to insert themselves into our process versus investors. To the extent that preparers have a perspective, whether it’s on a standard that we have on our agenda, whether it’s through formal comment letters, or if they want to share their views informally, we’re open. We’re there. We’re in person in Norwalk, Connecticut, but our phones and electronic communications work, and we’re happy to hear their perspectives because at the end of the day, they have a very important perspective into our process. I know I’ve heard from some preparers that talking to the FASB about accounting could be intimidating. It’s not designed to be that way. We’re here to hear your perspectives, any stakeholder from any background, and it’s our job to talk about it in terms that are relevant to that stakeholder, and in a way that we can get the best information from that stakeholder.”