Explain why it is important that financial statements should reflect the substance of the underlying transactions and describe the features that may indicate that the substance of a transaction may be different from its legal form.Explain why it is important that financial statements should reflect the substance of the underlying transactions and describe the features that may indicate that the substance of a transaction may be different from its legal form.Explain why it is important that financial statements should reflect the substance of the underlying transactions and describe the features that may indicate that the substance of a transaction may be different from its legal form.Explain why it is important that financial statements should reflect the substance of the underlying transactions and describe the features that may indicate that the substance of a transaction may be different from its legal form.Explain why it is important that financial statements should reflect the substance of the underlying transactions and describe the features that may indicate that the substance of a transaction may be different from its legal form.
Answer :
Explanation :
Substance over form is an accounting concept which means that the economic substance of transactions and events must be recorded in the financial statements rather than just their legal form in order to present a true and fair view of the affairs of the entity.
Substance over form concept entails the use of judgment on the part of the preparers of the financial statements in order for them to derive the business sense from the transactions and events and to present them in a manner that best reflects their true essence. Whereas legal aspects of transactions and events are of great importance, they may have to be disregarded at times in order to provide more useful and relevant information to the users of financial statements.
Importance :
The principle of Substance over legal form is central to the
faithful representation and reliability of information contained in
the financial statements. By placing the responsibility on the
preparers of the financial statements to actively consider the
economic reality of transactions and events to be reflected in the
financial statements, it will be more difficult for the preparers
to justify the accounting of transactions in a manner that does
fairly reflect the substance of the situation. However, the
principle of substance over form has so far not been recognized by
IASB or FASB as a distinct principle in their respective frameworks
due to the difficulty of defining it separately from other
accounting principles particularly reliability and faithful
representation.
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