Importance of Recording Transactions Based on Substance Over Form: Financial statements should reflect the economic reality of transactions rather than merely their legal form. This ensures that the financial statements provide a “faithful representation” of the entity’s financial position and performance, allowing users to make more informed economic decisions. For example, if an asset is held under a finance lease, treating it as a legally owned asset provides a more accurate depiction of the company’s liabilities and financial risk than simply excluding it based on legal ownership.

Features Indicating Substance May Differ from Legal Form:

1. Retention of Risks and Rewards:
   The seller retains significant risks and rewards of ownership even after the legal title has transferred to the buyer.
2. Right of Use:
   The seller retains the right to continue using the asset despite a legal transfer of ownership.
3. Guaranteed Repurchase Agreements:
   There is an arrangement where the seller can or must repurchase the asset at a future date, indicating continued economic control.
4. Linkage of Transactions:
   Multiple transactions are structured together in such a way that they should be considered as a single transaction for financial reporting.
5. Substantial Differences in Transfer Price:
   The transfer price of the asset is significantly above or below its fair value, indicating a different underlying purpose for the transfer.
6. Asset Remaining on Seller’s Premises:
   Even after a sale, the asset continues to be used or maintained by the original owner on its premises.

These features suggest that the legal documentation of a transaction does not accurately depict the true economic effect and that adjustments may be necessary to reflect the substance.