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Substance over form tends to come up mostly in two areas… Hire Purchase and fraud cases.
The principle is that when preparing accounts, you need to look at the ‘substance’ of the transaction rather than the strict legal ‘form’.
With Hire Purchase agreements we pay a hire fee for an agreed period, then there is the option at the end of the lease to purchase the asset and take ownership. Yet when we prepare the accounts, we record the asset from the start of the agreement and treat the hire fees as a liability and not an expense. This is the classic example of substance over form.
Another example is goods bought on credit. You will notice that many invoices carry the legal disclaimer ‘title of these goods shall not pass until payment has been received in full’. Yet in the accounts, the goods are ours as soon as we receive them and NOT when we pay for them. The ‘substance’ of the transaction is that the goods are ours, even though the legal ‘form’ differs.
I hope this makes sense, I won’t discuss Substance over Form with regards to fraud as I think it’s beyond the scope of F7.The tutor will correct me if I’m wrong 🙂
You’re correct – the classic example is in finance leases. There are other areas identified in the course notes – goods sold on a sale or return basis, debt factoring, sale and lease-back transactions. We look at the commercial reality rather than the strict legal form
what is ‘substance over form’ and why is applying the
principles of IFRS 16 is a good example of substance over form ?
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