Evaluation Of Establishing An Accountancy Reporting Entity Accounting Essay

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It is inevitable that the business world has grown complexity in recent years, thus higher accounting standards were called to accommodate the recent change in the world of business. The need for changes in accounting conceptual framework was identified by IASB and FASB in order to improve the current accounting standards.

One of the issues being identified by the accounting standard body was regarding the reporting entity concept. The concept of reporting entity was defined by AASB as general purpose financial reports were being prepared in order to provide useful information to all entities, including economic entities to evaluate and make decision (Ngiam & Shying, 2009). Despite such concept were outlined implicitly by AASB, IASB and FASB does not include such concept in the conceptual framework, thus the needs of having a common conceptual framework in regards of such concept were called.

Difference & Implication of reporting entity concept

In order to comply with IASB, there would be a significant distinction between what has been outlined by many accounting standards and the new conceptual framework. One of the differences would be the change of definition of "reporting entity". As according to definition defined by AASB, the entities were mean to include user who make and evaluate decision in regards of allocation of scarce resources only (Ngiam & Shying, 2009), such definition were said to be too precise as it basically only cover group of user who will make and evaluate decision about allocation of resources are depending on general purpose financial reports (US FASB and IASB Seek Views on Two Consultative Documents on the Conceptual Framework, 2008). The "user" in this context was further defined in paragraph 9 of current IASB framework, which includes investors, employees, lenders, suppliers, trade creditors, customers, governments and their agencies (International Accounting Standards Board, 2007).

Thus IASB has proposed changes on such reporting entity concept, a new list of user group has outlined, which is equity investor, lenders as well as other creditor. Along with the new list, the equity investor will take both present and potential equity investor into account. (Financial Accounting Standards Board, 2008). As compared to what has been outlined by AASB, the proposed new list of user group by IASB carries a broader perspective in terms of the user who will rely on the general purpose financial reports, instead of just limit to user who make and evaluate the decision to allocate their scarce resources.

Judging from the positive point of view, such amendments would result a limit being imposed on the items being included in financial reporting. Because of such a broad category of user, user who are responsible for preparing the financial statements could no longer manipulate the way of their financial statements being published, for instance trying to attract more investor by hiding the loss making figure etc (Financial Accounting Standards Board, 2008). On the other hand, some has criticized that such changes would introduce many tenuous relationship parties to the entity, who might not have managerial and financial shares in organizations. Moreover, the wide application of such concept required organization to analyze who will be the reporting entity, which is a time and cost consuming task (Leo, Hoggett, Sweeting, & Radford, 2009).

In addition, IASB has also proposed that the application of reporting entity should not only limited to organizations which are structured as legal entities, but also includes other type of organization structure, such as sole trader, partnership, association and so on (Crook, 2008), the reasons were due to there are many organizations does not being regarded as reporting entities, but they were established for the common view of profit and raise their funds through external sources (Boymal, 2008). By default, AASB has outlined for private business sector, only organizations where there is a significant separation of ownership in the business or its financial characteristics meets the outlined requirements would be regarded as reporting entities. This implies that organization without separation of ownership, such as sole trader and partnership would not recognize as reporting entities, except there is reasonably ground to justify that there are external user relied on their financial reporting to make decision and allocate their scarce resources (Ngiam & Shying, 2009). Thus, the proposed changes by IASB reflects that the existence of legal structure in a business will no longer being use to determine whether they are being regarded as reporting entity, but it was use to establish the boundaries of reporting entity .

As the IASB conceptual framework were served as a guide to major legislative bodies and accounting standard boards, the most significance implication of such changes would be regulators and legislative bodies may set a new regulation to specify the types of business which are bound to prepare financial reports according to outlined accounting standards (Australian Accounting Standards Board, 2008), it is expected includes majority of the existing non-reporting entities, such as partnership and sole proprietorship. However, some difficulties will arise if such change were applied, for instance, practical difficulties for partnership business, as it is difficult to distinguish between the resources of business and partners due to the nature of partnership business does not have a separated entities (Financial Accounting Standards Board, 2008).

Conclusion

The establishment of reporting entity concept has bring a significant changes to the way that accounting standards defines the reporting entity due to its distinct difference from what has been outlined by existing accounting standards. The implication of such changes would bring both negative and positive results from different prospective, thus it would be an issue to majority of the accounting standards boards on outlining a new accounting standards for their jurisdiction to comply with such changes, as the conceptual framework were merely served as a guide to boards.

(Total words count: 926 words)

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