The FASB issued a proposed second chapter of its Concepts Statement No. 8, Conceptual Framework for Financial Reporting, entitled “The Reporting Entity”. This chapter seeks to describe a reporting entity and to provide a framework for matters relating to the identification of a reporting entity.

The proposed Concepts Statement defines 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.” Under the proposed Concepts Statement the reporting entity has three features:

1. Economic activities of the entity have been conducted.
2. Those economic activities have been distinguished from those of other entities.
3. The financial information in general purpose financial reporting faithfully represents the economic activities of the entity in the circumscribed area and is useful in making decisions about providing resources to the entity.

The proposed Concepts Statement clarifies that the existence of a legal entity is not necessary to identify a reporting entity, and a reporting entity can include more than one entity, or it can be a portion of an entity. The proposed Concepts Statement also indicates that in most cases consolidated financial statements for parent-subsidiary relationships most faithfully represents the operating results of an economic unit and parent-only financial statements would not meet the objective of general purpose financial reporting; however, parent-only financial statements may be included as supplemental information to a full set of consolidated statements. The proposed Concepts Statement notes that there could be circumstances in which presentation of a portion of a larger entity or presentation of combined financial statements when the facts and circumstances would indicate that this presentation would allow for the faithful representation of economic activities.

The FASB Concepts Statements are not authoritative and the FASB acknowledges that the proposed Concepts Statement is not meant to override authoritative standards. However, if a transaction is not specified in authoritative GAAP, an entity must first consider accounting principles for similar transactions or events within authoritative GAAP and then consider nonauthoritative guidance from other sources such as the Concepts Statements.

The FASB is seeking responses from individuals and organizations regarding this proposed Concepts Statement as well as seeking responses to five questions specifically identified in the text of the proposed new chapter to Concepts Statement No. 8. Any comments or responses are due by January 16, 2023.

The full text of proposed chapter to Concepts Statement No. 8 can be found here.

^{Readers should not act upon information presented without individual professional consultation.}