Trade and Industry Essay
The evidence presented in the discussion above suggests that the proper reflection of substance over form is essential in order to achieve accountability and transparency in accounting. However there is still much controversy over this issue. Some have discussed that SOF should be used as a guide in setting accounting standards. While others argued ‘substance’ does not necessarily override ‘form’, the importance of ‘substance’ was overrated. This attitude is not supported heavily in the legal profession.
It is axiomatic that any emphasis on substance over form must not be at the expense of compliance with the law. 9 So how should we best treat the SOF principle? The accounting bodies in the UK have adopted the view that the important element in any transaction or situation is the commercial substance and not the legal form. 10 The documents emerging from ED 42 to FRS 5 in the last few years develop a framework of relevant principles. For example, a set of definitions of the elements of financial statements. These would enable the substance of transactions and other evens to be identified directly.
It is likely to be able to successfully deal with new challenges facing financial accounts, including the emergency of new
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Therefore, the framework of the principle of SOF would not be enforced as a standard but used to develop individual and specific standards to deal with particular areas. 11 It would consume far more resources, but would produce treatments that were consistent and respond adequately to novel transaction and other event. Specific standards would also be easier to enforce than general guidance as to the identification of the substance of transaction and other events.
In conclusion, We have provided the meaning of SOF, and examined the determinants of the substance of transactions. Then, we have explained why the SOF was so important in accounting through a discussion of the treatment of consignment stock. At the same time, we have illustrated how financial statements can be adversely affected if the company emphasises ‘Form’ of the transactions rather than ‘Substance’ of the transactions. We have also discussed the debates over SOF, and finally, we have argued how the principle of SOF would be used as a guide in setting accounting standards.