FRS5: reporting the substance of transactions FRS5, entitled
'Reporting the substance of transactions' is mandatory for accounts
periods ending on or after 22 September 1994. The use of this FRS
for earlier periods is also recommended.
The principle in FRS5 is that economic substance takes
precedence over legal form. This theory and practice was not all
new in 1994, for example SSAP21 (first introduced in 1984) applies
the principle to finance leases. See
BIM61000+ and FLM4.28 onwards for
further details of the application with regard to finance leases.
FRS5 extended the emphasis on the true business effect of
transactions, whatever their legal form much wider than in SSAP21.
Whether or not formal title to an asset is held is largely
irrelevant to the need to recognise it in the balance sheet.
Similarly the need to recognise a liability is not simply
determined by an enforceable commitment to make a future payment.
If a concern has no realistic alternative to making the payment
then equally the liability should be recognised.
Assets are defined as rights or other access to future
economic benefits controlled by an entity as a result of past
transactions or events. The future benefits would include the right
to use the asset and to enjoy the proceeds on its disposal or
realisation. Liabilities are defined as an entity’s
obligations to transfer economic benefits to others as a result of
past transactions or events.
The importance of these economic definitions lies in
determining whether new assets or liabilities have been created or
whether there have been changes to existing assets. None of this
will affect the total profits recognised over the life of a
business but it will affect the timing of those profits.
The standard is backed up by a series of application notes
covering particular situations. These are:
