Substance over form states that the economic or commercial substance of a transaction overrides its legal form. Therefore, organizations should always record the economic substance of a transaction rather than its legal form.

The main problem of off-statement of financial position finance is that it results in financial statements that do not faithfully represent the transactions and events that have taken place. This implies that such financial statements cannot be relied upon, and as a result, any decision made based on the information contained in the financial statements will be incorrect and misleading.

How the major user groups can be misled:

1. Lenders of Capital: Lenders are especially concerned about the entity’s gearing position. When the borrowing is high, it increases risk.
2. Suppliers: Suppliers are concerned with the liquidity position of the entity. The existence of consignment inventories may be relevant to trade suppliers. Sometimes, consignment inventories and their related current liabilities are not recorded on the statement of financial position, as the wording of the purchase agreement may be such that legal ownership of the goods remains with the supplier until specific event(s) occur.
3. Investors: Investors are concerned with the entity’s profitability performance. When borrowing is low, it becomes inexpensive and tax-efficient with promising returns to the shareholders.