substance of transaction

When considering the substance of a transaction, we are ignoring the apparent legal position and getting to look behind the transaction to see the real reason for the transaction

So when a distillery sells millions of gallons of whisky to a bank, but has the right to buy that whiskey back after, say, 8 years, then that’s a sale Dr Receivables / Cash Cr Revenue. Well, that’s the legal side of it.

But if we look behind the transaction and the reason for it, it isn’t really a sale. Ask yourself, what is a bank going to do with millions of gallons of whisky?

So, if it’s not a sale, what is it? Well, realistically, it’s a loan from the bank to the distillery secured by the title to the whisky

OK?

Do you know, Syed, I thought that I had made that clear!

If you read the first paragraph of my answer and then the last paragraph, what conclusion do you come to?

Answer that for me and then I’ll tell you if you’re correct. 🙂

NOOOOOO !!!!!

We ignore the legal position because although it looks like a sale, it isn’t really! We look at the commercial reality of the transaction. And the commercial reality is that the transaction is, in substance, a loan secured on the asset of the immature whisky.

What’s a bank going to do with all that whisky? It’s clearly a loan, not a sale.

The substance of the transaction is considered in preference to the legal form of the transaction – hence the expression “substance over form”