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Dear Sir,
Which of the following treatments applies the principle of faithful representation? Could you please clarify each statement? Thank you for your help!
– Recording the whole of the net proceeds from the issue of a loan note which is
potentially convertible to equity shares as a liability.
– Allocating part of the sales proceeds of a motor vehicle to interest received even
though it was sold with interest?free finance.Hi,
Faithful representation links back to the concept of substance, i.e. the economic reality and not the legal element.
The first one is not applying substance if we show in full as a liability. There is an equity element that must be shown as part of split accounting for a convertible debt instrument.
The second one is showing the substance of the transaction as by showing an interest component it reflect the substance of the transaction in that there is interest on the sale. Saying that it is interest free is just sales jargon when the item is sold at above its true value. The difference between the two is the interest component.
Thanks
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