Discussion Paper: Preliminary Views of an improved Conceptual Framework for
Financial Reporting: The Reporting Entity
Section 1: The reporting entity concept
Question 1
Do you agree that what constitutes a reporting entity should not be limited to
business activities that are structured as legal entities? If not, why?
Question 2
Do you agree that the conceptual framework should broadly describe (rather than
precisely define) a reporting entity as a circumscribed area of business activity of
interest to present and potential equity investors, lenders and other capital providers?
If not, why? For example, do you believe that the conceptual framework should
establish a precise definition of a reporting entity? If so, how would you define the
term? Do you disagree with including reference to equity investors, lenders and other
capital providers in the description (or definition) of a reporting entity? If so, why?
1) We agree that a reporting entity should not be limited to business activities
that are structured as legal entities on the grounds that not all businesses are
structured as legal entities for example branches of entities or sole proprietors.
In particular we agree with the use of substance over form as noted in
paragraph 21 (c). Practical difficulties establishing the boundaries of a
particular area of business activity could be dealt with through guidance in
standards. The discussion paper correctly notes that the requirement to
produce financial statements and/or reports should be driven by local
jurisdictional requirements and not by the IASB. However, in practice this
distinction is not always so clear cut and IFRS can potentially apply to
financial statements where there is no benefit commensurate with the cost
involved. Some aspects of this are referred to in the remainder of this
response.
2) We agree that the conceptual framework should broadly, rather than
specifically, define a reporting entity as a circumscribed area of business
activity to present and potential equity investors, lenders and other capital
providers. This is on the basis that it would be difficult to succinctly describe
all possible business activities that might lead to a business activity being
classified as a reporting entity. To attempt a precise definition would require
an exhaustive list of possible current and future business activities which
would be impracticable.
Section 2: Group reporting entity
Question 3
Do you agree that the risks and rewards model does not provide a conceptually
robust basis for determining the composition of a group reporting entity and
that, except to the extent that it overlaps with the controlling entity model (as
discussed in paragraphs 102 and 103), the risks and rewards model should not
be considered further in the reporting entity phase of the conceptual framework
project? If not, why?
Question 4
Assuming that control is used as the basis for determining the composition of a
group reporting entity, do you agree that:
(a) control should be defined at the conceptual level?
(b) the definition of control should refer to both power and benefits? If not, why? For
example, do you have an alternative proposed definition of control?
Question 5
Do you agree that the composition of a group reporting entity should be based
on control? If not, why? For example, if you consider that another basis should
be used, which basis do you propose and why?
Question 6
Assuming that control is used as the basis for determining the composition of a
group reporting entity, do you agree that the controlling entity model should
be used as the primary basis for determining the composition of a group entity?
If not, why?
Question 7
Do you agree that the common control model should be used in some circumstances
only? If not, why? For example, would you limit the composition of a group reporting
entity to the controlling entity model only? Or would you widen the use of the
common control model? If you support the use of the common control model, at least
in some circumstances, do you regard it as an exception to (or substitute for) the
controlling entity model in those circumstances, or is it a distinct approach in its own
right? Please provide reasons for your responses.
3) It is not clear from the Discussion paper as currently drafted whether the risks
and rewards model does or does not provide a better basis for determining the
composition of a group reporting entity. Having said that, the concept of
control in terms of consolidated accounts is a well understood and widely used
term. We are unclear at this stage what merits there would be in changing this
approach, particularly in light of the fact that the risks and rewards concept is
currently seen as supporting evidence for control. As pointed out in paragraph
102 in the Discussion paper, SIC 12 states that one of the indicators of control
is whether an entity has the ability to access the risks and rewards of
ownership. Thus, control is deemed to be the over-riding factor which is
supported by the risks and rewards assessment. There could, therefore, be
potential for combining the risks and rewards and control concepts together –
but further consideration would need to be given as to the possible outcomes
of this before a conclusion could be reached.
4) We agree that control should be defined at the concepts level. The notion of
control is a pervasive concept within IFRS and drives a number of key
decisions which can have a material impact on the financial statements i.e.
determining when entities are consolidated or not for example. As a result,
control needs to be defined at the concepts level to support its importance in
the context outlined above.
We agree that the concept of control should refer to both ‘power’ and
‘benefits’ for the reasons set out in the Discussion paper in paragraphs 44-48.
However, we do not see why the words “and increase….those losses” have
been included in the definition in paragraph 49 as they seem unnecessary. If
they are intended to have a specific aim this should be made clear, as there
have been a number of cases where “loose” wording in IFRS has caused
significant work for preparers and auditors.
5) We agree that the composition of a group reporting entity should be based on
control. As indicated in our answer to question 3, however, we believe that
risks and rewards play a part in this concept of control i.e. SIC 12.
6) We agree that the controlling entity model should be used as the primary basis
for determining the composition of a Group on the basis that the ultimate
controlling entity should also be included within consolidated financial
statements.
7) If the controlling entity were not to be included in the consolidated financial
statements of the entities that it controls, as proposed under the common
control model if applied in full, it could lead to a very odd set of consolidated
results which could be materially misleading. For Groups with a parent entity
of substance, this would result in the non-consolidation of that entity. We
therefore agree that the controlling entity model should be the approach.
However, while we can see that examples can be created where relevance to
some users is apparent, we are concerned by the wording on common control
in paragraph 95. This would be a subjective area and, if dealt with at an
international level, could result in many sub-consolidations in a Group where
any perceived benefit was far outweighed by the cost. Any requirements for
such consolidations should be left to a national level and IFRS should only
deal with the controlling entity model.
Section 3: Parent entity financial reporting
Question 8
Do you agree that consolidated financial statements should be presented from
the perspective of the group reporting entity, not from the perspective of the
parent company’s shareholders? If not, why?
Question 9
Do you agree that consolidated financial statements provide useful information
to equity investors, lenders and other capital providers? If not, why?
Question 10
Do you agree that the conceptual framework should not preclude the
presentation of parent-only financial statements, provided that they are included
in the same financial report as consolidated financial statements? If not, why?
8) We do not agree that the consolidated financial statements should be presented
from the perspective of the group reporting entity and that if prepared from a
parent company shareholder perspective they do not meet the needs of users,
until further work is performed on the implications of adopting such an
approach. The reasons for this are set out in our response to the Exposure
Draft on Chapters 1 and 2 of the Conceptual Framework. We would just note
here that the IASB’s continued progress along this line, both in this project
and some standards, when the implications have not been fully evaluated and
many commentators either disagree or are not yet convinced, is an indication
of why there is concern over the direction and due process of IFRS.
9) Yes, we believe that consolidated financial statements provide useful
information to equity investors, lenders and other capital providers.
10) The requirement to produce parent only or consolidated financial statements is
quite often driven by jurisdictional requirements as well as accounting
standards. This is noted in the discussion paper in paragraph 123. In our
opinion, the conceptual framework should not preclude the presentation of
parent-only financial statements regardless of whether they are presented with
the consolidated financial statements or not. Moreover, parent only financial
statements are often not general purpose financial statements like consolidated
financial statements and may have very limited users. Whilst the IASB has to
operate across jurisdictions we do not believe it is appropriate to make
recommendations that may cause legal, and/or taxation, issues in certain
territories. We therefore disagree with the board’s preliminary views set out in
paragraph 137, especially as not all intermediate parent entities are required to
prepare consolidated financial statements at present and this proposal may
result in the need to do so.
Section 4: Control issues
Question 11
With regard to the concept of control, in the context of one entity having
control over another, do you agree that:
(a) establishing whether control exists involves assessing all the existing facts and
circumstances and, therefore, that there are no single facts or circumstances that
evidence that one entity has control over another entity in all cases, nor should any
particular fact or circumstances—such as ownership of a majority voting interest—be
a necessary condition for control to exist? If not, why?
(b) the concept of control should include situations in which control exists but might
be temporary? If not, why?
(c) the control concept should not be limited to circumstances in which the entity has
sufficient voting rights or other legal rights to direct the financing and operating
policies of another entity, but rather should be a broad concept that encompasses
economically similar circumstances? If not, why?
(d) in the absence of other facts and circumstances, the fact that an entity holds
enough options over voting rights that, if and when exercised, would place it in
control over another entity is not sufficient, in itself, to establish that the entity
currently controls that other entity? If not, why?
(e) to satisfy the power element of the definition of control, power must be held by
one entity only? In other words, do you agree that the power element is not satisfied if
an entity must obtain the agreement of others to direct the financing and operating
policies of another entity? If not, why?
(f) having ‘significant influence’ over another entity’s financing and operating policy
decisions is not sufficient to establish the existence of control of that other entity? If
not, why?
Question 12
Should any of the above control issues be addressed at the standards-level rather than
at the concepts level? If so, which issues and why?
Question 13
Are there any other conceptual issues, relating either to the control concept or
to some other aspect of the reporting entity concept, that are not addressed in
this discussion paper and should be addressed at the concepts level? If so,
which issues and why?
11) Looking at each statement in turn:
a) We agree that the concept of control should be evidenced based on an
assessment of all of the facts and circumstances as opposed to relying
on any one particular fact or circumstance. If individual facts or
circumstances were relied upon then a detailed set of rules would be
required which would move away from the principles-based approach
which is not desirable.
b) Our concern with principles such as this is that when translated into
standards will the result always give a benefit commensurate with the
cost, or even any benefit. For example, if control is always equated
with consolidated financial statements, then would all of an acquisition
of another Group need to be fully consolidated even if parts were
acquired with the intention and ability to resell in a short time span
after acquisition – what would be appropriate in terms of useful
disclosure relative to the costs involved?
c) As per b) above.
d) As per b) above.
e) We agree that power to control can only exist when one entity alone
has that power. If the power is shared then that entity cannot act in its
own right to direct the operating and financing policies of the entity
and unilaterally access the benefits that the power to control should
bring.
f) We agree with the above statement.
12) The concept of control, being fundamental to Group situations, should be dealt
with at the concepts level. However, the sub-sets of that concept of control
could potentially be dealt with in more detail at the standards level.
13) We do not have any further conceptual issues to raise at this discussion paper
stage.