Submission to the IASB - The Reporting Entity

23 September 2008

Sir David Tweedie
Chairman
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
UNITED KINGDOM

Dear Sir David

The Reporting Entity

The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with a purpose of advancing Australia’s financial competitiveness. The G100 is pleased to provide comments on the Discussion Paper “Preliminary Views on Improved Conceptual Framework for Financial Reporting: The Reporting Entity”.

The reporting entity concept

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?

The reporting entity concept should not be restricted to legal entities. The concept should be sufficiently flexible to embrace a wide variety of business relationships and structures, for example, business activities and ventures undertaken by contractual agreement.

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?

The reporting entity concept which determines the boundaries for the preparation of the financial statements should be broadly described but with sufficient clarity so that it is operational. A precise definition may be too inflexible to adapt to changing business circumstances and arrangements.

Group reporting entity

Q3	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 paras 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? The G100 considers that the concept of control is more specific and less ambiguous than relying on risks and rewards. What is included in the scope and application of risks and rewards would lead to significant uncertainty in practice.
Q4	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? The G100 agrees that control should be defined at the conceptual level and refer to both power and benefits in order to establish the boundaries of the group.
Q5	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? Yes.
Q6	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? Yes.
Q7	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. The G100 considers that control is the basis on which the development of concepts and the boundaries of the group are determined. However, exceptions to this approach should be acknowledged in the case of stapled security arrangements and dual listed entities.

Parent entity financial report

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?

Yes. This is consistent with the application of the entity perspective and the identification of a user group wider than current owners.

Do you agree that consolidated financial statements provide useful information to equity investors, lenders and other capital providers? If not, why?

Yes. However, the G100 considers that clarification of the term ‘capital providers’ is desirable.

Q10

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?

The presentation of parent-only financial statements should not be precluded. While we would normally expect these statements to be included with the consolidated statements in a financial report there may well be circumstances where they are provided separately.

Q11

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 factor circumstances – such as ownership of a majority voting interest – be a necessary condition for control to exist? If not, why? We consider that ownership of a majority ownership interest is indicative that the entity has control. However, the existence of control would be determined on the basis of a range of factors and not solely ownership of voting rights.
b.	the concept of control should include situations in which control exists but might be temporary? If not, why? The G100 considers that control either exists or it doesn’t exist. The assessment of what is temporary is a practical matter.
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? Agree. However, this feature would need to be considered in the context of a range of factors.
e.	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? We consider that this would normally be the case. However, we presume that separate entities within a group reporting are included in the use of the term ‘one entity’.
f.	f. that 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? Yes.

Q12

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?

The G100 considers that the presentation of information relating to circumstances where temporary control exists should be addressed in an accounting standard as a practical issue and not at a conceptual level.

Q13

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?

No.

Yours sincerely

Tony Reeves
National President