Question

how would you distinguish between the legal and the commercial view of accounting. Support your answer with an example?.

Answer 1

Companies often use the legal form of transactions to determine accounting treatments, when this differs from the actual accounting treatment (Substance) that should be adopted. The IASB is the framework that can be used to avoid these issues.

Companies (and other entities) have in the past used the legal form of a transaction to determine its accounting treatment, when in fact the substance of the transaction has been very different. We will look at the question of substance over form and the kind of transactions undertaken by entities trying to avoid reporting true substance

Substance over form. The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form

This is a very important concept. It is used to determine accounting treatment in financial statements through accounting standards and so prevent off balance sheet transactions