What Is the Substance Over Form Concept?

Substance over Form concept

Substance:

·???????material or essential part of something

·???????economic impact of an event, instead of its legal form

·???????underlying realities

Form:

·???????legal record of transactions

Substance over Form concept:

·???????Substance over form argument assumes that someone is attempting to deliberately hide the true intent of a transaction.

·???????If two companies swap their inventories, this event is not accounted as a sale because the substance is a mere in-kind exchange, despite the possible form of valid enforceable contracts for two sales and deliveries.

Substance Over Form Concept in Accounting:

·???????The financial statements and accompanying disclosures of a business should reflect the underlying realities of accounting transactions.

·???????Information appearing in the financial statements should not merely comply with the legal form in which they appear.

·???????It is particularly relevant in cases of revenue recognition, sale, and purchase agreements, etc.

·???????The recordation of a transaction should not hide its true intent, which would mislead the readers of a company's financial statements.

Substance Over Form Concept in Taxation:

·???????If a transaction’s substance varies from its form, the substance over form doctrine may deny tax benefits that would otherwise be allowed based on the transaction’s form.

·???????The substance over form doctrine allows the tax officer to ignore an arrangement’s legal form and examine its actual substance, with the goal of preventing artificial structures from being used to avoid taxes.