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Reporting the substance of transactions - Coggle Diagram
Reporting the substance of transactions
The substance of transactions refers to the economic benefits or economic losses of any kind and the economic implications related to a transaction
It includes an accounting concept known as substance over form which means the transactions recorded in the financial statements must reflect their economic (or commercial) substance rather than their legal form
It mandates that the financial statements and accompanying disclosures of an entity should reflect the underlying realities of accounting transactions
It entails the use of judgement on the part of the preparers of the financial statements to derive the business sense from the transactions/events and to present them in a manner that best reflects their true commercial essence.
Although legal aspects of transactions and events are of great importance, they may have to be disregarded at times in order to provide more useful and relevant information to the users of financial statements
For example
Sale and leaseback arrangements
Where a company sells an asset to another party and gets it back via a lease agreement
The company must first determine whether the transfer qualified as a sale based on the requirements for satisfying a performance obligation in IFRS 15
If the nature of the transaction is that of a lease, lease accounting is applied as per IFRS 16
Consignment of stock
Whereby the consignor (seller) ships goods to the consignee
The consignee acts as an agent of the consignor and holds the goods on behalf of the consignor with a view to selling the goods on behalf of the consignor thereby earning a fee or a commision
Debt factoring or invoice discounting
A type of debtor finance in which a business sells (for cash) its trade receivables to a third party at a discount in exchange for the rights to cash collected from those receivables
Some factoring arrangements transfer substantially all the risk and rewards of the receivables
If all the risks and rewards have been transferred, the asset is derecognised by the seller
Sale and repurchase agreements
A type of loan arrangement whereby the sale of an asset takes place between two parties with a view to subsequently repurchase the same asset at a higher price