Earlier articles have discussed almost all concepts/ principles, however there is yet another very important one which is Substance Over Form concept which basically is to ensure that the financial statements reflects the complete, relevant and accurate picture of the transactions and events.
Append below an article which explains the meaning of this concept and given few examples to illustrate this important concept.
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SUBSTANCE OVER FORM IS WHEN: |
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Wow- sound simple. But, to really substantiate or differentiate Substance Over Form, one need to be vigilant, have very good inner knowledge of the company’s operation and takes a more investigative in-depth approach so as to seek further evidence or proof. This is because normally these types of events or transactions are often quite complex. These events or transactions happen just around the accounting year ended. (balance sheet date) We have seen many cases whereby many accounting fraud/ scams/ business fraud occur as a result of this lack of Substance Over Form. Typical cases are the Enron and Computer Associate which are described below: |
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EXAMPLE NO 1 OF SUBSTANCE OVER FORM |
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Exchanging revenue/revenue swap: In the Computer Associate case, the CEO of the company swap or exchange revenue with another company. What it did was CSA purchased a certain software/service from the company A and in turn company A also purchased from CSA. Its look like a sale and it being recognized as revenues in the Income Statement
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EXAMPLE NO 2 OF SUBSTANCE OVER FORM |
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In the Enron’s case we have: Enron group’s use of over 3000 Special Purpose Entities (SPEs) structured in such a way as to enable the company to avoid including extensive debt in the consolidated financial statements of the group
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EXAMPLE NO 3 OF SUBSTANCE OVER FORM |
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Company itself fund its own revenue Let say in a Group of companies, Company A has recorded one transaction as a sale to a customer. Another transaction records a loan to the same customer for a similar amount. In this case, when the transactions are considered together, the sale may be without substance as it has actually been funded by the same group of company.
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EXAMPLE NO 4 OF SUBSTANCE OVER FORM |
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Transaction should be lease instead of outright purchase An outright purchase of capital equipment, whereas in fact the substance of the transactions is a lease of (or perhaps an option to purchase) the equipment.
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