Discuss the Concept of the Reporting Entity and the Rationale

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The Answer is SAC1 deﬁnes a reporting entity as an entity for which 'it is reasonable to expect the existence of users dependent on general purpose ﬁnancial statements for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources' (para.40).In other words,a reporting entity has ﬁnancial statement users who cannot force the entity to prepare information to meet their speciﬁc needs,even though they have a right to be kept informed. SAC1 identiﬁes three factors that may be employed to determine whether dependent users exist and therefore whether an entity is a reporting entity.These factors,discussed in paragraphs 19-22 of SAC1,are as follows:• the separation of management from economic interest - that is,the greater the spread of ownership,the more likely it is that there is a large number of users,such as shareholders,who rely on general purpose ﬁnancial statements for decision-making purposes; • the ability of the entity to inﬂuence the welfare of others through economic or political importance or inﬂuence; and • the ﬁnancial characteristics of the entity,such as size and indebtedness.

Discuss the Concept of the Reporting Entity and the Rationale

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