Substance over Form

mettle everyplace form is an accounting principle habituate to ensure that fiscal statements give a complete, relevant and upright picture of proceedings and events. If an entity practices the substance over form concept, the financial statements impart marching music the financial reality of the entity (economic substance), rather than the healthy form of transactions (form)[1]. In accounting for business transactions and other events we round and report the economic impact of an event instead of its effective form. Substance over form is critical for reliable financial reporting. It is particularly relevant in case of revenue recognition, gross revenue agreement and purchase agreements, etc. Examples A lease tycoon not withdraw monomania to the leasee exactly the leasee has to disk the hired concomitants as an asset if it intends to use it for major portion of its profitable life or where the present value of lease retribution is fairly commensurate to t he fair value of the asset, etc. Although legally the leasee is not the owner, so the leased item is not his asset, but from the perspective of the key political economy the leasee is entitled to the benefits engraft in the use of the item and thus it has to be put down as an asset.

A guild is short of cash, so it sells its machinery to the situate and obtains it back on a lease. It is called sales agreement and leaseback. Although the legal ownership has transferred but the underlying economics remain the same and hence under the substance over form principle the sale and subsequent leaseback are considered ane transaction. If two companies swap the! ir inventories they will not be allowed to record sales because no sales has occurred even if they have entered into sensible enforceable contracts.( Basic college accounting.com (Jun 20, 2006). Substance over form. Retrieved Jul. 17, 2008.)If you involve to get a overflowing essay, order it on our website: OrderCustomPaper.com

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