BIM31050 - Tax and accountancy: FRS5: Substance over form

FRS 102 Section 2 Concepts and Pervasive Principles Paragraph 8 describes substance over form as follows: ‘Transactions and other events and conditions should be accounted for and presented in accordance with their substance and not merely their legal form. This enhances the reliability of financial statements.’

IAS do not specifically address the concept of substance, but the Conceptual Framework for Financial Reporting Section 2 Paragraph 11 does require that financial information must ‘faithfully represent the substance of the phenomena that it purports to represent’.

Under all standards, when the specific requirements of an accounting standard or a section other than Section 2 of FRS 102 apply to a transaction, other event or condition, the requirements of that accounting standard must take precedence.

Whether or not formal title to an asset is held is largely irrelevant in determining whether it should be recognised in the financial statements. Similarly the need to recognise a liability is not simply determined by an enforceable commitment to make a future payment.

Assets are defined as resources controlled by an entity as a result of past events from which future economic benefits are expected to flow. The future economic benefits would include the right to use the asset and to enjoy the proceeds on its disposal or realisation. Liabilities are defined as present obligations arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

An item that meets the definition of an asset or liability will be recognised in the financial statements when it is probable that the future economic benefit associated with it will flow to or from the entity and the item has a cost or value that can be measured reliably.

Related standards under other frameworks are:

FRS 105 Section 8 Accounting Policies, Estimates and Errors Paragraph 4 (b)

IAS: Conceptual Framework for Financial Reporting

Old UK GAAP: FRS 5 Reporting the Substance of Transactions