Question Tag: Substance Over Form

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  • 15 Marks

CR – May 2024 – L3 – SC – Q6 – Revenue Recognition (IFRS 15)

Discuss IFRS 15 revenue recognition requirements and address consolidation impacts for two transactions.

You are the chief accountant of Japa PLC, that prepares consolidated financial statements. The managing director who is not an accountant, has recently attended a workshop at which key corporate reporting issues were discussed.

The managing director remembers being taught the following at the workshop:

i. Financial statements of an entity should reflect the substance of its transactions.
ii. Revenue from contracts with customers should only be recognized when certain conditions have been satisfied. Transfer of legal title of the goods is not necessarily sufficient for an entity to recognize revenue from their sales.

The financial year-end of Japa PLC is August 31. In the year to August 31, 2021, the company entered into the following transactions:

Transaction 1

On March 1, 2021, Japa PLC sold a property to Kalokalo Bank LTD for N50 million. The market value of the property at the date of the sale was N100 million. However, Japa PLC continues to occupy the property rent-free. Japa PLC has the option to buy the property back from Kalokalo Bank LTD at the end of every month from March 31, 2021, until February 28, 2026. Japa PLC has not yet exercised this option.

The repurchase price will be N50 million plus N500,000 for every complete month that has elapsed from the date of sale to the date of repurchase. Kalokalo Bank LTD did not require Japa PLC to repurchase the property, and the facility will lapse after February 28, 2026.

The director of Japa PLC expects property prices to rise at around 5% each year for the foreseeable future.

Transaction 2

On September 1, 2020, Japa PLC sold one of its branches to Andrew Tourist Nig. LTD for N80 million. The net assets of the branch in the financial statements of Japa PLC immediately before the sale were N70 million. Andrew Tourist Nig. LTD is a subsidiary of Kalokalo Bank LTD and was specifically incorporated to carry out the purchase; it has no other business operations. Andrew Tourist Nig. LTD received the N80 million to finance this project from its parent (Kalokalo Bank LTD) in the form of a loan.

Japa PLC continues to control the operations of the branch and receives an annual operating fee from Andrew Tourist Nig. LTD. The annual fee is the operating profit of the branch for the 12 months to the previous August 31, less the interest payable on the loan taken out by Andrew Tourist Nig. LTD for the 12 months to the previous August 31. If this amount is negative, then Japa PLC must pay the negative amount to Andrew Tourist Nig. LTD.

Any payments to or by Japa PLC must be made by September 30 following the end of the relevant period.

In the year to August 31, 2021, the branch made an operating profit of N20 million, and interest payable by Andrew Tourist Nig. LTD on the loan for this period was N8 million.

Required:

(a) In accordance with IFRS 15 – Revenue from contracts with customers, discuss the conditions that need to be satisfied before revenue can be recognized. (5 Marks)

(b) Write a memo to the managing director of Japa PLC explaining how the transactions described above will be dealt with in the consolidated financial statements of Japa PLC for the year ended August 31, 2021, in accordance with IFRS 15. (10 Marks)

(Total 15 Marks)

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  • 14 Marks

CR – May 2018 – L3 – SB – Q4b – Presentation of Financial Statements (IAS 1)

Discuss accounting issues and treatments for factoring and sale-leaseback transactions, applying the substance over form principle.

Waasimi entered into the following transactions during the year ended March 31, 2018:

In March 2018, Waasimi factored some of its trade receivables to Asejere, a finance house. Based on selected account balances, Asejere paid Waasimi 80% of its book value. The agreement was that Asejere would administer the collection of the receivables and remit a residual amount to Waasimi depending upon how quickly individual customers paid. Any balance not collected by Asejere after six months will be refunded to Asejere by Waasimi.

On April 1, 2017, Waasimi’s freehold building had a carrying amount of N15 million and an estimated remaining useful life of 20 years. On this date, Waasimi sold the building to Gbajumose for a price of N24 million and entered into an agreement with Gbajumose to lease back the building for an annual rental of N2.6 million for a period of five years.

The auditors of Waasimi have commented that in their opinion the building had a market value of N20 million at the date of its sale and to rent an equivalent building under similar terms to the agreement between Waasimi and Gbajumose would cost N1,600,000 per annum. Assume finance cost of 10% per annum.

Required:

i. Briefly explain the major accounting issues involved in the above transactions using the principles of substance over form. (5 Marks)

ii. State the appropriate accounting treatments of the various elements identified. (6 Marks)

iii. State the classes of charges to be incurred and their appropriate accounting treatments. (3 Marks)

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  • 6 Marks

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

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  • 4 Marks

FR – NOV 2016 – L2 – Q2a – Conceptual Framework for Financial Reporting

Question tests understanding of substance over form concept in the conceptual framework and its importance in financial reporting.

Conceptual framework for reporting emphasises the importance that transactions should be recorded on the basis of their substance over their form. Explain the importance of substance over form and why financial statements should show the substance of the underlying transaction different from its legal form.

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  • 6 Marks

FR – Nov 2019 – L2 – Q4a – Ethical Issues in Financial Reporting

Explain the concepts of substance over form and going concern in financial reporting.

The IASB’s framework for preparation and presentation of financial statements requires financial statements to be prepared on the basis that they comply with certain accounting concepts and underlying assumptions.

Required:

Explain the meaning of each of the following concepts and the underlying assumption:

  • Substance over form
  • Going concern
    (6 Marks)

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  • 20 Marks

FR – May 2018 – L2 – Q2b – Financial Instruments (IAS 32, IFRS 9)

Prepare projected profit or loss extracts under legal and substance form and comment on the effects on company performance

Yo-Yo Products Nigeria Limited manufactures a chemical product that takes a long time to mature for sale. As of April 1, 2017, the product had a cost of N30 million with a fair value of N42 million. It cannot be sold until March 31, 2020. On April 1, 2017, Yo-Yo Products Limited entered into an agreement with Abeokuta Nigeria Limited to sell the product for N36 million, with an option to repurchase it by March 31, 2020, at N47,916,000. By that date, the product could be sold for N60 million. Yo-Yo Products had a loan of N36 million with compound interest for three years, as follows:

Year Interest (N)
1 3,600,000
2 3,960,000
3 4,356,000

The interest rate is the same as the required return by Abeokuta Nigeria Limited.

i. Prepare extracts from Yo-Yo Products Limited’s projected statement of profit or loss for three years to March 31, 2020, using separate calculations for legal form and substance form. (10 Marks)

ii. Comment on the effects these calculations will have on the company’s performance. (4 Marks)

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  • 6 Marks

FR – May 2018 – L2 – Q2a – Conceptual Framework for Financial Reporting

Discuss the importance of recording transactions based on their substance over form and explain features that show substance may differ from legal form.

Discuss the importance of the statement that transactions should be recorded in the financial statements based on their substance over form. Explain the features that may show that the substance of a transaction may differ from its legal form.

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  • 14 Marks

FA – May 2021 – L1 – SB – Q1a – Accounting Concepts

Explanation of seven fundamental accounting concepts used in financial statement preparation.

Briefly explain the following fundamental accounting concepts used in the preparation of financial statements in accordance with IAS 1 – Presentation of financial statement:

i. Going concern (2 Marks)
ii. Consistency of presentation (2 Marks)
iii. Accrual (2 Marks)
iv. Fair presentation (2 Marks)
v. Substance over form (2 Marks)
vi. Prudence (2 Marks)
vii. Materiality (2 Marks)

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  • 5 Marks

FR – July 2023 – L2 – Q5a – Conceptual Framework for Financial Reporting

Discuss the importance of recording transactions based on substance over form in financial reporting.

An important aspect of the International Accounting Standards Board’s Framework for the preparation and presentation of financial statements is that transactions should be recorded based on their substance over their form.

Required:
Explain why it is critical for financial statements to reflect substance over their form.
(5 marks)

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  • 1 Marks

FA – Mar/July 2020 – L1 – SA – Q12 – Accounting Concepts (e.g., Going Concern, Accruals, Materiality)

Identifying correct statements related to accounting concepts

Which of the following statements is/are correct?
(i) Materiality means that only items having a physical existence may be recognised as assets.
(ii) The substance over form convention means that the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect.
(iii) The money measurement concept means that only an item capable of being measured in monetary terms can be recognised in financial statements.
A. I
B. I, II and III
C. I and II
D. II and III
E. III

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  • 15 Marks

CR – May 2024 – L3 – SC – Q6 – Revenue Recognition (IFRS 15)

Discuss IFRS 15 revenue recognition requirements and address consolidation impacts for two transactions.

You are the chief accountant of Japa PLC, that prepares consolidated financial statements. The managing director who is not an accountant, has recently attended a workshop at which key corporate reporting issues were discussed.

The managing director remembers being taught the following at the workshop:

i. Financial statements of an entity should reflect the substance of its transactions.
ii. Revenue from contracts with customers should only be recognized when certain conditions have been satisfied. Transfer of legal title of the goods is not necessarily sufficient for an entity to recognize revenue from their sales.

The financial year-end of Japa PLC is August 31. In the year to August 31, 2021, the company entered into the following transactions:

Transaction 1

On March 1, 2021, Japa PLC sold a property to Kalokalo Bank LTD for N50 million. The market value of the property at the date of the sale was N100 million. However, Japa PLC continues to occupy the property rent-free. Japa PLC has the option to buy the property back from Kalokalo Bank LTD at the end of every month from March 31, 2021, until February 28, 2026. Japa PLC has not yet exercised this option.

The repurchase price will be N50 million plus N500,000 for every complete month that has elapsed from the date of sale to the date of repurchase. Kalokalo Bank LTD did not require Japa PLC to repurchase the property, and the facility will lapse after February 28, 2026.

The director of Japa PLC expects property prices to rise at around 5% each year for the foreseeable future.

Transaction 2

On September 1, 2020, Japa PLC sold one of its branches to Andrew Tourist Nig. LTD for N80 million. The net assets of the branch in the financial statements of Japa PLC immediately before the sale were N70 million. Andrew Tourist Nig. LTD is a subsidiary of Kalokalo Bank LTD and was specifically incorporated to carry out the purchase; it has no other business operations. Andrew Tourist Nig. LTD received the N80 million to finance this project from its parent (Kalokalo Bank LTD) in the form of a loan.

Japa PLC continues to control the operations of the branch and receives an annual operating fee from Andrew Tourist Nig. LTD. The annual fee is the operating profit of the branch for the 12 months to the previous August 31, less the interest payable on the loan taken out by Andrew Tourist Nig. LTD for the 12 months to the previous August 31. If this amount is negative, then Japa PLC must pay the negative amount to Andrew Tourist Nig. LTD.

Any payments to or by Japa PLC must be made by September 30 following the end of the relevant period.

In the year to August 31, 2021, the branch made an operating profit of N20 million, and interest payable by Andrew Tourist Nig. LTD on the loan for this period was N8 million.

Required:

(a) In accordance with IFRS 15 – Revenue from contracts with customers, discuss the conditions that need to be satisfied before revenue can be recognized. (5 Marks)

(b) Write a memo to the managing director of Japa PLC explaining how the transactions described above will be dealt with in the consolidated financial statements of Japa PLC for the year ended August 31, 2021, in accordance with IFRS 15. (10 Marks)

(Total 15 Marks)

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  • 14 Marks

CR – May 2018 – L3 – SB – Q4b – Presentation of Financial Statements (IAS 1)

Discuss accounting issues and treatments for factoring and sale-leaseback transactions, applying the substance over form principle.

Waasimi entered into the following transactions during the year ended March 31, 2018:

In March 2018, Waasimi factored some of its trade receivables to Asejere, a finance house. Based on selected account balances, Asejere paid Waasimi 80% of its book value. The agreement was that Asejere would administer the collection of the receivables and remit a residual amount to Waasimi depending upon how quickly individual customers paid. Any balance not collected by Asejere after six months will be refunded to Asejere by Waasimi.

On April 1, 2017, Waasimi’s freehold building had a carrying amount of N15 million and an estimated remaining useful life of 20 years. On this date, Waasimi sold the building to Gbajumose for a price of N24 million and entered into an agreement with Gbajumose to lease back the building for an annual rental of N2.6 million for a period of five years.

The auditors of Waasimi have commented that in their opinion the building had a market value of N20 million at the date of its sale and to rent an equivalent building under similar terms to the agreement between Waasimi and Gbajumose would cost N1,600,000 per annum. Assume finance cost of 10% per annum.

Required:

i. Briefly explain the major accounting issues involved in the above transactions using the principles of substance over form. (5 Marks)

ii. State the appropriate accounting treatments of the various elements identified. (6 Marks)

iii. State the classes of charges to be incurred and their appropriate accounting treatments. (3 Marks)

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  • 6 Marks

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

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  • 4 Marks

FR – NOV 2016 – L2 – Q2a – Conceptual Framework for Financial Reporting

Question tests understanding of substance over form concept in the conceptual framework and its importance in financial reporting.

Conceptual framework for reporting emphasises the importance that transactions should be recorded on the basis of their substance over their form. Explain the importance of substance over form and why financial statements should show the substance of the underlying transaction different from its legal form.

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  • 6 Marks

FR – Nov 2019 – L2 – Q4a – Ethical Issues in Financial Reporting

Explain the concepts of substance over form and going concern in financial reporting.

The IASB’s framework for preparation and presentation of financial statements requires financial statements to be prepared on the basis that they comply with certain accounting concepts and underlying assumptions.

Required:

Explain the meaning of each of the following concepts and the underlying assumption:

  • Substance over form
  • Going concern
    (6 Marks)

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  • 20 Marks

FR – May 2018 – L2 – Q2b – Financial Instruments (IAS 32, IFRS 9)

Prepare projected profit or loss extracts under legal and substance form and comment on the effects on company performance

Yo-Yo Products Nigeria Limited manufactures a chemical product that takes a long time to mature for sale. As of April 1, 2017, the product had a cost of N30 million with a fair value of N42 million. It cannot be sold until March 31, 2020. On April 1, 2017, Yo-Yo Products Limited entered into an agreement with Abeokuta Nigeria Limited to sell the product for N36 million, with an option to repurchase it by March 31, 2020, at N47,916,000. By that date, the product could be sold for N60 million. Yo-Yo Products had a loan of N36 million with compound interest for three years, as follows:

Year Interest (N)
1 3,600,000
2 3,960,000
3 4,356,000

The interest rate is the same as the required return by Abeokuta Nigeria Limited.

i. Prepare extracts from Yo-Yo Products Limited’s projected statement of profit or loss for three years to March 31, 2020, using separate calculations for legal form and substance form. (10 Marks)

ii. Comment on the effects these calculations will have on the company’s performance. (4 Marks)

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  • 6 Marks

FR – May 2018 – L2 – Q2a – Conceptual Framework for Financial Reporting

Discuss the importance of recording transactions based on their substance over form and explain features that show substance may differ from legal form.

Discuss the importance of the statement that transactions should be recorded in the financial statements based on their substance over form. Explain the features that may show that the substance of a transaction may differ from its legal form.

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  • 14 Marks

FA – May 2021 – L1 – SB – Q1a – Accounting Concepts

Explanation of seven fundamental accounting concepts used in financial statement preparation.

Briefly explain the following fundamental accounting concepts used in the preparation of financial statements in accordance with IAS 1 – Presentation of financial statement:

i. Going concern (2 Marks)
ii. Consistency of presentation (2 Marks)
iii. Accrual (2 Marks)
iv. Fair presentation (2 Marks)
v. Substance over form (2 Marks)
vi. Prudence (2 Marks)
vii. Materiality (2 Marks)

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  • 5 Marks

FR – July 2023 – L2 – Q5a – Conceptual Framework for Financial Reporting

Discuss the importance of recording transactions based on substance over form in financial reporting.

An important aspect of the International Accounting Standards Board’s Framework for the preparation and presentation of financial statements is that transactions should be recorded based on their substance over their form.

Required:
Explain why it is critical for financial statements to reflect substance over their form.
(5 marks)

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  • 1 Marks

FA – Mar/July 2020 – L1 – SA – Q12 – Accounting Concepts (e.g., Going Concern, Accruals, Materiality)

Identifying correct statements related to accounting concepts

Which of the following statements is/are correct?
(i) Materiality means that only items having a physical existence may be recognised as assets.
(ii) The substance over form convention means that the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect.
(iii) The money measurement concept means that only an item capable of being measured in monetary terms can be recognised in financial statements.
A. I
B. I, II and III
C. I and II
D. II and III
E. III

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