Substance of a transaction Essay Example | Topics and Well Written Essays - 1250 words

Substance of a deed - Essay ExampleAccording to any international standard,financial statements should present fairly the financial position and interchange flows of an entity.The content of a transaction means the reality of an actual event that has interpreted place which necessitate to be accounted for. If in buildation is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they argon accounted for and presented in ossification with their way and economic reality and not unmixedly their licit form.It is, therefore, of absolute importance that the actual center field of the transaction is accounted for in order to meet international regulatory requirements for financial reporting as sanitary as achieve fair presentation standards and a higher level of transparency in the books of accounts to quash any audit objections.The generally accepted accounting principles, more commonly known as GAAP, surrender evolved as an important term in accounting and signifies all the rules, from whatever source, which g everywheren accounting. These principles may take off from sources like local ships company legislation, national and international accounting standards, statutory requirements and stock listing requirements barely they are based on the foundations of common principles, namely the going concern assumption, accrual basis of accounting, corporeality and substance everywhere form. The GAAP which lays down the concept of substance of transactions is called substance over form. The underlying principle is that although substance of a transaction may be the same as its legal form, for a number of transactions, the legal form does not indicate the true substance of a transaction and must make economic sense in the financial statements take a hoping the reality of an actual event that has taken place. Such may be the case in various sales purchase agreements, leasing, insurance and so on As an example, some transactions may see the form of 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. Such transaction likewise attract audit attention and are important from taxation point of view. Thus we always make out the real substance of a transaction instead of its legal form. In this manner, the concept of substance over form plays a dominant role. Accordingly, it delivers the fact whether the financial statements reflect the financial reality of the entity rather than mere legal form of the transactions and events which bring them about. The underlying principle is relevant to managements contentions that the financial statement items are complete, valid and accurate, and in particular that the financial statement items are exact as to presentation and disclosure. The FASB considered that substance over form was redundant because without it have representational faithf ulness cannot be achieved.From auditors point of view, transactions where the substance of the transaction differs significantly from the form are considered vigilantly. In simpler words, auditors try to find a transaction or groups of transactions that do not make economic sense or emerge as they have been made to change the way in which an account dimension appears in the financial statements, rather than reflect the reality of an actual event that has taken place. These transactions are commonly recorded around balance date and often appear overly complex. A well-known example from the past was Enron groups 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. This has led to suggested/actual revisions to various accounting standards throughout the world. These revisions require SPEs (such as trusts, partnerships and non incorporated entities) to be consolidated when the substance of the relationship between an entity and the SPE indicates