Changes in Reporting Entity
The financial accounting term changes in reporting entity refers to a switch from one type of reporting entity to another. Changes in reporting entity can fall into several categories, including a change in subsidiaries, the number of companies combined into a consolidated report, as well as the mix of companies appearing in a consolidated report.
While the accounting profession is provided guidance by the Financial Accounting Standards Board when it develops Generally Accepted Accounting Principles, oftentimes these professionals have several options from which to choose. When deviating from past practices, or modifying information appearing in financial reports, these “accounting changes” fall into three categories: estimates, methods, and reporting entities.
When this type of change occurs, the profession is required to disclose this information in the company’s financial statements. In the case of reporting entities, accounting standards also require the restatement of prior financial statements. At a minimum, this includes sales revenue, income before extraordinary items, net income, and earnings per share. This allows the analyst-investor to accurately assess current versus past performance.
A change in reporting entity covers several scenarios; the three most common of which include:
- Preparing a consolidated financial statement instead of preparing separate statements for individual companies within an enterprise.
- Changing the mix of companies or subsidiaries previously reported in a combined or consolidated financial statement.
- Changing the number of companies or subsidiaries previously combined into a consolidated financial statement.