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Parent entity concept or the entity concept

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Group Financial Reporting

Theoretically, the notion of the group, and the resulting accounting, may be centered on one of two polarized ideas: the parent entity concept or the entity concept.

Currently, there are proposals from the IASB which, if implemented, will change the basis of preparing consolidated statements. In the UK, the ASB has recently consulted on the plans and is considering feedback. (300 WORDS)

TASKS

1. Define and explain the two concepts and, with the aid of your own numerical examples, compare and contrast the content of the financial statements resulting from their application.

2. Consider whether the concepts are consistent with the ASB's Statement of Principles for Financial Reporting and the IASB's Framework for the Preparation and Presentation of Financial Statements.

3. Examine and assess the IASB's proposals for change and evaluate the possible impact of the proposals on current UK group accounting.
(300 words)

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This answer provides you an excellent discussion on the entity concept

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1. Define and explain the two concepts and, with the aid of your own numerical examples, compare and contrast the content of the financial statements resulting from their application.
The entity concept treats the financial transactions of any one individual, a group of individuals or company separate from unrelated financial transactions of that individual, group or individual. For instance, if there is a company and it is giving dividend to its shareholder that are its owners. Even though the company is owned by shareholders there are two aspects of the transaction, the company that is giving dividends and the shareholders that are receiving the money.

The Parent entity concept regards the group's financial statements as being mainly for the information of the shareholders of the holding company and so only the parent's percentage interest in the assets and liabilities of the subsidiary are consolidated.

Please consider the following example:
Say holding company pays $120 for the acquisition of 75% of the subsidiary company. The value of the net assets of subsidiary company is $100. In the balance sheet of holding company's consolidated balance sheet under the parent entity concept the transactions will be Assets of subsidiary company, 75, goodwill 45 giving a total of 120, holding company's interest 120, minority interest 25 given a total of 145. In case of entity concept the valuation of the net assets of subsidiary company will be 100, goodwill 60 giving a total of 160, holding company's interest 120, minority interest 40 given a total of 160.

This is what the website http://www.duncanwil.co.uk says: "As I said above, the ASB has reworked the entity concept to the extent that they now define single entities and consolidated entities:

Single entity financial statements ... report on the activities and resources under the entity's control ... the company is the reporting entity.

Consolidated financial statements report on the activities and resources under the entity's direct and indirect control ... the group comprising the parent and its subsidiaries is the reporting entity.

Source: An Introduction to the Statement of Principles for Financial Reporting.

To be frank, I ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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