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ACT301 Accounting Theory And Contemporary Issues

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  • Course Code: ACT301
  • University: Charles Darwin University
  • Country: Australia

Questions:

The International Accounting Standards Board (IASB) has just finalised a revised (2018) conceptual framework for financial reporting.

  1. In your own words, explain what is meant by the concept of substance over form. You can use examples from within and/or outside accounting to help answer this question.

  2. Do you agree with the board’s decision to state explicitly that a faithful representation represents the substance of an economic phenomenon instead of merely representing its legal form? Justify your answer
 

Answers:

1.

Substance over Form is viewed as an accounting notion and it implies that the economic substance of transactions and event needs to be recorded in the financial statements of the companies rather than just their legitimate procedure with the aim to present a true and fair view of the financial matters of the business entities. The concept of Substance over Form requires that there is a need for the use of judgments by the preparers of the financial statements with the aim to originate the business sense from the financial transactions and events and for presenting them in the way that assists in best reflecting their true quintessence (Zhang and Andrew 2014). The requirement of IAS 17 Leases puts the obligation on the preparers to consider the lease arrangement’s substance at the time to determine the lease types. For example, there may be lease of an asset to the lessee in the absence of legal title transfer at the end of the lease term. This lease can be considered as finance lease as the lease term is considerably the entire life of the asset or the lessee is given the right to purchase the asset at the end of the lease term and he may exercise this right (Fitó, Moya and Orgaz 2013).

2.

Faithful representation is considered as a concept that states that the financial statements must be produced in such a manner so that they can accurately reflect the condition of a business. According to IFRS, it is needed for the companies to comply with both the fundamental and enhancing qualitative characteristic at the time of the preparation of the financial statements. Business organizations can ensure the faithful representation of their financial information through financial statements by adhering to these fundamental and enhancing qualitative characteristics of financial information (iasplus.com 2019). In this context, it needs to be mentioned that the aim of the companies is to provide their key stakeholders with the required financial information in order to assist them in the decision-making process; and the users can get the required financial information in case they are faithfully represented. This aspect provides the justification for supporting the board’s decision to faithfully represent the substance of an economic phenomena instead of the representation of their legal form as the representation of only legal form does not help the users in gaining the correct essence of the company’s financial performance (ifrs.org 2019).

 

References

Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 42(159), pp.341-369.

Iasplus.com. 2016. Conceptual Framework. [online] Available at: https://www.iasplus.com/en/meeting-notes/iasb/2016/may/conceptual-framework [Accessed 5 Jan. 2019].

Ifrs.org. 2019. Conceptual Framework for Financial Reporting. [online] Available at: https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-and-feedback-statement/conceptual-framework-project-summary.pdf [Accessed 5 Jan. 2019].

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.

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