Home » Accounting Explanation » Accounting Concepts and Conventions
Substance over form Concept
Substance over form indicates that transactions or items should be presented in conformity with their substance and economic reality not merely on their legal form
A Company got a vehicle on lease. Now the company is using that vehicle to transport its goods to the customers and getting economic benefits in the form of income. Since the vehicle is in the control of company, the company needs to show vehicle in its balance sheet as an asset contrary to the fact that company is not the legal owner of the vehicle
The users of financial statements or accounts should be able to understand financial statements. They are assumed to have some business, economics and accounting knowledge to be able to apply themselves to study the financial information properly. Complex matters should not be left out of financial statements simply because they are hard to understand if it is relevant information.
According to this concept information in the financial statements should be relevant
What's relevant information?
The information is relevant if it affects the decision making of the users
Note that same information could be relevant to one report but irrelevant to another report
A user of financial statement has two alternatives to finance the company buying shares or bonds of the company. The company should present information in financial statements in such a way that it can help user in his decision. In other words, company should provide user with relevant information to help the user in decision making
Financial information should be complete and financial statements show information of each and every item, event and transaction of an entity within the restrictions of materiality and cost to be reliable to use. Any omission of any economic event, transaction or an item may cause confusion or mislead users of financial statements.
The publication or presentation financial statements should not be delayed.
If the publication of financial statements is delayed too long after balance sheet date, their usefulness would be diminished.
A balance between timeliness and the provision of reliable information must be maintained. Information may become irrelevant if there is a delay in reporting it. Information might be reported on a timely basis at the time when not all aspects of the transactions are known, thus compromising reliability.
If every detail of a transaction is known, it may be too late to publish the information and therefore, it would become Irrelevant. The overriding consideration is how best to satisfy the economic decision-making need of the users.