2. Conceptual Framework

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2. Conceptual Framework

• The Reporting Entity

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• The big print giveth
• and the fine print taketh away.
• J. Fulton Sheen

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Statement of principles

• The Conceptual framework

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The magic of double entry

• Used for 500 years - Luca Pacioli
• Copied by other systems
• Time to go home?

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The magic of double entry

• Requires
• The fiction of separate accounting entities
• Double classifications of each transaction
• 
  Classification

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Reporting perspectives

• Proprietary Theory
• Owner --- Firm
• Entity Theory
• Owner --- Firm
• Fund Theory Resources
• available

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Reporting perspectives

• Commander Theory
• Enterprise Theory
• Shareholders
• Suppliers Managers Customers
• Banks Regulators
• Debtholders Tax Office
• Local Council Workers
• Unions

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REPORTING ENTITY

• What is it?
• Identity (Cohesive economic unit)
• Accounting fiction - the Firm is separate from
  the owner
• Essential for double entry accounting method
• Entity theory
• Limits to the identity (its boundaries)?
• Individual companies - Where there is direct
  control of assets
• Group accounts - when there is direct and
  indirect control of assets
• Individual departments of government
• Whole of government

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REPORTING ENTITY

• When to report?
• When there exists a legitimate demand -
• reasonable to assume there are users who need
  GPFS to make their economic decisions.
• information is useful
• benefits exceed costs

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Reporting Entity

• Boundary limits defined by
• Single reporting entity - direct control
• Consolidated report - direct and indirect control
• Direct Control
• Ability to use economic resources
• Able to benefit

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Control

• Group - indirect control if able to direct the
• operating / financial policies of other entity
  to gain benefit
• Variety of evidence
• Exposure to risk
• Can restrict or deny access to economic benefits
• Not the same as managing - no risk from
  operations

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Reporting Entity . . .
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Reporting Entity . . .

• Group
• direct Control
• Controls in own right the future economic
  benefits
• In a group
• Controlling entity F1 F2
• Controlled entity
• indirect
• Has control of another entity P S
• In a group
• Controlling and controlled entities as one group

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Group Accounts - Consolidations

• Group - Financial Report as if one entity
• (no accounting or legal entity equivalent)
• All intercompany transactions are eliminated
• A B

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Consolidation accounts

• To prevent some frauds
• To enable users to make assessments
• the alternative would be to . . . .

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The end

• If you have found the lecture useful, interesting
  or educational then do come again next week.

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• Everywhere I go I'm asked if I think the
  university stifles writers. My opinion is that
  they don't stifle enough of them.
• - Flannery O'Connor (1925-1964)

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• A committee is a cul-de-sac down which ideas are
  lured and then quietly strangled. Barnett
  Cocks