Characteristics of Substance over Form

Characteristics of Substance over Form

In substance over form principle, the transactions are recorded on the bases of the economic reality than their legal form. Thus economic reality is preferred over the legal form of the transaction.

Important Characteristics of substance over form

Some important characteristics of substance over form have been explained below.

1.   Economic Reality is More Important

Economic reality is more importance than legal form for the recording of financial transactions in the books of accounts. It means economic reality is preferred over legal form for transaction recording in the books of accounts.

2.   Reflection of Actual Transaction

Substance over form principle facilitates more realistic reflection of a transaction/financial item in the financial statements. Business is a combination of commercial/economic activities and therefore economic it is more logical to reflect or record the financial item on the bases of economic  reality.

3.   Discourages Concealment of Facts

Substance over form principle discourages the concealment of facts of the financial transaction. Financial statement are used for economic decision making, therefore any concealment of fact would negatively affect the economic decision making.

4.   Finance Lease Example

Some important example of substance over form is finance lease, where the asset held under finance lease is recognized as asset despite the asset ownership is not transferred to the organization, because organization is expected to use the asset for maximum period of its useful life.

5.   Sale and buy transaction

Another important example of substance over form is sale and buys back at higher price. This traction is treated as loan, because primarily it is loan arrangement (first you sale and then take back as higher price).

List of Characteristics of Substance over form

Some important characteristics of substance over form principle are listed below

1)   Economic reality is more important than legal form.

2)   Reflect the actual nature of transaction.

3)   Prudence over form achieves faith full presentation.