I Report, Therefore I Am?

FASB and IASB join forces to seek public comment on the most basic elements of accounting — like what it means to be a "reporting entity."

The Financial Accounting Standards Board and the International Accounting Standards Board are going back to basics: seeking public comment about what is meant by “faithful representation,” and what a “reporting entity” is.

FASB and IASB described what they are doing as part of an effort at devising “an improved conceptual framework that provides a sound foundation for developing future accounting standards.” The documents that they published today are designed to elicit views on two of the eight phases of their joint project, which will be chapters one and two of the framework.

Comments and the two areas are due by Sept. 29.

The so-called exposure draft that is being released includes updated proposals that reflect comments received on an initial consultation document published in July 2006.

The latest draft “proposes that the objective of financial reporting is to provide financial information that is useful” to current and potential investors, lenders, and others. It also improves the description of faithful representation, which the press release describes as “one of the qualitative characteristics that financial information should posses if it is to provide a useful basis for economic decisions.”

After the discussion of what faithful representation is, the second part of the draft “sets out the boards’ preliminary views on the reporting entity concept and related issues.” That concept “determines some important aspects of financial reporting,” the two groups said in their press release, but existing frameworks do not address specifically what a reporting entity is.

The preliminary views on the nature of an entity describe it as “a circumscribed area of business activity of interest to present and potential equity investors, lenders, and other capital providers.” Those views say that “control is the basis for determining the composition of a group reporting entity,” and they add that “consolidated financial statements should be prepared from the perspective of the group reporting entity.”

IASB and FASB said in the release that they had first added the “conceptual framework project” to their joint agenda in October 2004. In addition to the two phases dealing with “objectives and qualitative characteristics” and “reporting entity concept,” other areas include “definitions of elements, recognition, and derecognition;” measurement; boundaries of financial reporting, purpose and status of the framework; and application of the framework to not-for-profit entities

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