The main contents of the chapter consist of the following: Reporting the substance of transactions, off balance sheet finance, determining the substance of a transaction, examples where substance and form may differ,. | Revise lecture 25 1 Reporting the substance of transactions 2 Reporting the substance of transactions IAS 1 requires that financial statements: Must represent faithfully the transactions that have been carried out. Must reflect the economic substance of events and transactions and not merely their legal form. Examples of accounts reflecting economic or commercial substance are: The capitalisation of a finance lease The production of consolidated accounts 3 Reporting the substance of transactions The historical problem Historically, many companies tried to keep items off the statement of financial position by ignoring their real substances. 4 Reporting the substance of transactions Examples Leasing assets, prior to the issue of IAS 17, leases were not capitalised, . the assets and its related financial commitment were not shown on the lessee’s statement of financial position. 5 Reporting the substance of transactions Examples Controlled non- subsidiaries, under the definitions of a subsidiary prior to IAS27, companies could control other companies by legal arrangements under which technically they were not subsidiaries, so they were not consolidated in the group. 6 Off balance sheet finance Why companies might wish to keep financing liabilities off their statement of financial position? 7 Off balance sheet finance Answer There are number of reasons why companies might wish to avoid showing financing liabilities on their statement of financial position: To maintain a level of gearing similar to their counterparts in other countries. To maintain the share price on the basis that the market would place a lower value on a company whose borrowings are considered by the analysts to be high. 8 Off balance sheet finance Answer 3. To maintain ROCE by keeping the asset and the related liability out of the statement of financial statement until the asset starts to produce income. 4. In groups of companies to keep activities which have different characteristics (. high . | Revise lecture 25 1 Reporting the substance of transactions 2 Reporting the substance of transactions IAS 1 requires that financial statements: Must represent faithfully the transactions that have been carried out. Must reflect the economic substance of events and transactions and not merely their legal form. Examples of accounts reflecting economic or commercial substance are: The capitalisation of a finance lease The production of consolidated accounts 3 Reporting the substance of transactions The historical problem Historically, many companies tried to keep items off the statement of financial position by ignoring their real substances. 4 Reporting the substance of transactions Examples Leasing assets, prior to the issue of IAS 17, leases were not capitalised, . the assets and its related financial commitment were not shown on the lessee’s statement of financial position. 5 Reporting the substance of transactions Examples Controlled non- subsidiaries, under the definitions of a
