The End of Substance Over Form

by Rethinking the Relationship of Substance and Form


To learn and understand a classic accounting principle of “Substance Over Form” is not difficult for an accountant although the term was removed from the Conceptual Framework for Financial Reporting 2010. How to apply and communicate the principle with the general public without bias, in fact, is not that simple.

The preparation of the financial report is not only to recognise the legal consequence as result of signing any contract with contractual parties but also to reflect the economic consequence of the underlying activities. Thus, moving to the application of the accounting principle of faithful representation which aims at achieving better results of financial reporting in term of completeness, error free and unbiased.

Examples of Substance and Form

This business case is designed to motivate your rethinking the relationship between Substance and Form (本質和形式) and describe how better form can support effective implementation of complex accounting. Below are examples: –

You may not agree with the last example when you not aware the published new standard “IFRS 16 Leases” which become effective for annual periods beginning on or after 1 January 2019 and the elimination of “Substance Over Form” within the Conceptual Framework.

The key issue of the lease contract is whether it is legally enforceable between the lessee and lessor at the place of contract execution – i.e. whether it is an artificial contract. It is assumed that a person who is responsible for drafting and executing a business contract is separated from a person who is responsible for accounting for the business contract. There is a potential risk if it is responsible for the same person.

Introducing case studies prepared by a research student, it is demonstrated that both Substance and Form are also important to support achieving the objective of the user. Generally, without a design of proper form, implementation of substance cannot be operating in a reliable and efficiency manner.

Role Playing between a Husband and His Wife

Before Working for the Project

Substance Loyalty (本質忠厚) and Form Attractiveness (形式吸引) are a husband and wife relationship. Substance is a business accountant he specialises in the implementation of IFRS and performance management for a group of companies while Form is an IT consultant she specialises in helping clients to implement IFRS and performance management in an accuracy and efficient manner. They did not work for a same project or company until the year 2016 – worked together for an IFRS project. Working on the project for about 6 months, Form Attractiveness leave the project looking for other challenges.

Substance and Form have a common hobby – try different kinds of restaurants when they are enjoy eating delicious foods within a romantic environment. However, Substance is more favour on the quality of foods in terms of fresh and nutrition while Form is more favour on the renovation and service of restaurants. They are maintaining a list of over 100 restaurants, which are accepted by Substance and Form.

When Substance and Form are always focused on foods during their family life, they are seldom to discuss their works. Substance is a qualified accountant, currently he is employed by a multinational company “Space” where the principle activity is Property Leasing which operates a lot of business centres throughout different regional financial centres. The finance department is responsible for management all accounting matter of all lease contracts including inter-company transaction of lease contract between fellow subsidiaries which hold properties and other fellow subsidiaries which manage a business of business center – sub-let business.

Role Playing between Substance and Form

After Working for the Project

Space is a well-established company with initial business starting from a business which is demanding for space – as a lessee. The company had implemented for different accounting practices particular in operating lease as a lessor and lessee. Most challenging implementation of new accounting practices is coming – IFRS 16 Lease will be effective in 1 January 2019. Last year, the CFO of the company had an initial plan to support the implementation – recruit a capable accountant and an IT consultant to participate the project.

Substance is selected and recruited as an IFRS 16 Specialist for both lessor and lessee operations which deal with lease contracts. The position of IT consultant cannot be selected a right person during 6 months of open recruitment period because the CFO have a specific preference the candidate – experience on a particular software. When Substance wants to process the project as soon as possible, he had informed his wife about the vacancy. Form is selected and recruited as an IT Consultant because she has extensive experience of wide range of software which also includes the required software.

1 Jan 2016 is an important milestone for the project – CFO leads the first meeting with user department and IT department. Substance is assigned as Project Leader – Accounting Rules and Form is assigned as another Project Leader – Accounting Automation. At the evening of the same day, Substance and Form has a celebration for the good opening of the co-operation at a very high-grade restaurant.

This is the most happiness day after their marriage. But their relationship is suffering structural change during the project implementation.

An Initiation of the Academic Study

The CFO assigned his secretary to record and document all major discussions and working papers of project meetings. The primary purpose is to support an academic research of an accountancy research student Jennifer Brescia (珍妮弗~布雷西亞). After 6 months of the of the project implementation, the secretary provided the student with all relevant files and requested the student to sign a non-disclosure agreement – 1) relate files cannot be published or transferred 2) company and staff cannot be identified 3) all relevant files must be destroyed within one year. So, Substance Loyalty and Form Attractiveness are not the real names.

Jennifer had spent about 2-week for an initial analysis of the files and invited an interview with Substance and Form and knew that Form had resigned from the company. Form accepted the interview and answered Jennifer most questions except questions about his family. Subsequently, through a social network, Jennifer searched and connected Form Attractiveness successfully. Not only Form accepted the invitation of an interview, but also, she became a friend of Jennifer and provided a lot of valuable information to support Jennifer’s academic works. The secretary of the CFO aware such connection within the same social network, verbally to remind Jennifer the non-disclosure agreement also cover any information which obtains from any ex-employee of the company and its subsidiaries.

These academic works will be published through a series of business cases, below are a tentative plan of topics Jennifer may consider: –

Scenario Analysis of Operating Lease Accounting

Better Form to Deliver Substance of Lease Accounting

Different Meaning of “Form” and its Implication

Competition between Spreadsheet and Non-spreadsheet Form

Conflict between Accounting Rules and its Automation

Evolving Development of Graphical and Text Reporting

Can Users Mastering Data Copying Techniques?

Adaptability of the Impressive Reporting in Risk Management

Nightmare of the Expansion of Revenues Recognition Models


      Substance Over Form

Conceptual Framework for Financial Reporting 2010

The Death and Transfiguration of “Substance Over Form” in U.S. GAAP

IFRS 16 Lease – Project Summary

Lease Accounting and US Transportation Industry

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