Substance over Form

nerve everyplace form is an accounting principle engage to ensure that fiscal statements give a complete, relevant and immaculate picture of proceedings and events. If an entity practices the substance over form concept, the financial statements impart frame the financial reality of the entity (economic substance), rather than the healthy form of minutes (form)[1]. In accounting for business transactions and other events we musical rhythm and report the economic impact of an event instead of its statutory form. Substance over form is critical for reliable financial reporting. It is particularly relevant in case of revenue recognition, barters agreement and purchase agreements, etc. Examples A lease great power not withdraw possession to the leasee unless the leasee has to disk the rent concomitants as an asset if it intends to use it for major portion of its utilizable life or where the present value of lease payment is fairly commensurate to the fair va lue of the asset, etc. Although law in fully 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 imbed in the use of the item and consequently it has to be preserve as an asset.

A guild is short of cash, so it sells its machinery to the curse and obtains it back on a lease. It is called sale 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 transact ion. If two companies swap their 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 full essay, order it on our website: OrderCustomPaper.com

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