Accounting Theory and Contemporary Issues Report - Finance Module

This report delves into accounting theory, specifically addressing the concepts of Substance over Form and Faithful Representation within the context of financial reporting. It explains Substance over Form as the principle of recording economic substance over legal form in financial statements, u...Read More

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting Theory and Contemporary Issues
Name of the Student
Name of the University
Author’s Note

1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Table of Contents
Requirement [4a]........................................................................................................................2
Requirement [4b].......................................................................................................................2
References..................................................................................................................................4

2ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Requirement [4a]
Substance over Form is viewed as an accounting notion and it implies that the
economic substance of transactions and event needs to be recorded in the financial statements
of the companies rather than just their legitimate procedure with the aim to present a true and
fair view of the financial matters of the business entities. The concept of Substance over
Form requires that there is a need for the use of judgments by the preparers of the financial
statements with the aim to originate the business sense from the financial transactions and
events and for presenting them in the way that assists in best reflecting their true quintessence
(Zhang and Andrew 2014). The requirement of IAS 17 Leases puts the obligation on the
preparers to consider the lease arrangement’s substance at the time to determine the lease
types. For example, there may be lease of an asset to the lessee in the absence of legal title
transfer at the end of the lease term. This lease can be considered as finance lease as the lease
term is considerably the entire life of the asset or the lessee is given the right to purchase the
asset at the end of the lease term and he may exercise this right (Fitó, Moya and Orgaz 2013).
Requirement [4b]
Faithful representation is considered as a concept that states that the financial
statements must be produced in such a manner so that they can accurately reflect the
condition of a business. According to IFRS, it is needed for the companies to comply with
both the fundamental and enhancing qualitative characteristic at the time of the preparation of
the financial statements. Business organizations can ensure the faithful representation of their
financial information through financial statements by adhering to these fundamental and
enhancing qualitative characteristics of financial information (iasplus.com 2019). In this
context, it needs to be mentioned that the aim of the companies is to provide their key
stakeholders with the required financial information in order to assist them in the decision-

3ACCOUNTING THEORY AND CONTEMPORARY ISSUES
making process; and the users can get the required financial information in case they are
faithfully represented. This aspect provides the justification for supporting the board’s
decision to faithfully represent the substance of an economic phenomena instead of the
representation of their legal form as the representation of only legal form does not help the
users in gaining the correct essence of the company’s financial performance (ifrs.org 2019).

4ACCOUNTING THEORY AND CONTEMPORARY ISSUES
References
Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease
capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista
Española de Financiación y Contabilidad, 42(159), pp.341-369.
Iasplus.com. 2016. Conceptual Framework. [online] Available at:
https://www.iasplus.com/en/meeting-notes/iasb/2016/may/conceptual-framework [Accessed
5 Jan. 2019].
Ifrs.org. 2019. Conceptual Framework for Financial Reporting. [online] Available at:
https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-and-
feedback-statement/conceptual-framework-project-summary.pdf [Accessed 5 Jan. 2019].
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.