Substance over form

Transactions and other events and conditions should be accounted for and presented in accordance with their substance and not merely their legal form. This is aimed at enhancing the reliability of financial statements. A common substance over form issue is that of leased assets. A leased vehicle is legally owned by the finance company but is effectively 'owned' by the user for the three or more years of use. Substance over form accounting requires the vehicle to be shown as a tangible fixed asset and depreciated over its period of 'ownership' by the company. The contra entry is a liability, being the present amount of the future monthly payments, effectively a loan to the company which is paid off by the monthly lease payments, being a combination of repayment of the 'loan' capital and the interest implied in the lease agreement.

Off-balance sheet finance is one particular activity that substance over form is meant to deal with. IAS 17 deals with leased assets and a proposed new IFRS aims to tighten up on this with respect to leased assets (see below). IFRS 12 Disclosure of interest in other entities requires considerable disclosures with respect to off-balance sheet activities. The issue of substance over form is considered in more detail in Chapter 12 on pure financial strategies.


Prudence is the inclusion of a degree of caution in the exercise of the judgements in making estimates required under conditions of uncertainty, such that assets or income is not overstated and liabilities or expenses are not understated. However, the exercise of prudence should not allow the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses. The exercise of prudence should not be biased.

Prudence and strategies

The prudence concept has been, and is, viewed by the standard setters as possibly allowing creative accounting, creating lower profits, or certainly deferring them. However, a trait of many accountants and business people is to be naturally prudent and cautious. Being over-prudent could affect reported results of strategies in force.


To be reliable, information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading.


Without comparability, over time (being appropriately consistent) and between ventures or businesses it becomes difficult if not impossible to observe trends and reach sensible conclusions. A fundamental reason for consistent international GAAP is to have comparability.

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