Characteristic of substance over form

Characteristic of Substance Over Form

In this article we would explain some important characteristics of substance over form principle. In substance over form the economic reality is preferred over legal form during the financial reporting of preparation of financial statements.

Important Characteristics of Substance over form

Some important characteristics of substance over form have been explained in term of economic reality, portray real nature of transaction etc. These characteristics have been briefly explained below

1.   Economic Reality is more Important:

In substance over form principle the economic reality of transaction is more important than legal form of the transaction. Thus the transaction are not recorded merely on the bases of legal reality and economic reality is more relevant for accounting for the transaction.This is an important characteristic of this principle.

2.   Portray Real Nature of Transaction:

Another important characteristic of Substance over form principle is portraying the real picture of the transactions. This approach discourages the hiding the actual nature of transaction. This concept has been explained with few examples.

3.   Achieve Faith full presentation:

Application of prudence concept helps in achieving the faith full presentation of financial statements. Faith full presentation of Financial statements is an important accounting principle. Characteristics of faithful presentation have been explained in my other article.

4.   Substance over form examples:

Finance lease recognition as asset is a typical example of substance over form. The assets held under finance lease are classified as asset despite the fact that title of the leased asset has not yet transferred to the entity.

Similarly the sale the asset and buy back at higher price is basically a loan arrangement and should be reflected as loan. Thus in this case, company will not record the sales and purchase; rather the difference between sales price and repurchase price will be recorded as the loan.

5.   List of Characteristics of Substance over form:

Some important characteristics of substance over form principle are listed below

a.    Economic reality is more focused.

b.    Reflect the real nature of transaction.

c.    Finance lease is famous example of substance over form.

d.    Prudence concept achieves faithful presentation of FS.

In this article we have discussed some important characteristics of substance over form principle.