We often hear of instances where the term ‘Substance over form’ is used especially in the accounting and auditing environment; and one has to wonder why this term is such a relevant term in ensuring the fair presentation of an entity’s financial statements.

For financial statements to be fairly represented, they must be presented in a manner that best reflects the true essence of their underlying transactions, providing useful and relevant information to the user. The preparers of the financial statements can exercise judgement and use their discretion to ensure that these set of financial statements reflect the true nature and facts of the transactions captured.

However, there are some transactions that are complex in nature where the legal terms of the transactions that are outlined in their specific binding arrangements, be it legislation, contracts or otherwise do not necessarily represent the true economic substance of these transactions.

Substance over form is a term that was introduced to address the confusion caused by the differences between the economic substance vs the legal form of transactions.

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