Substance Over Form

September 2021

Tom Clendon helps you get to grips with the concept of substance over form.

A student’s question

I was going over the IASB’s conceptual framework and came across the phrase ‘substance over form’. Can you explain this as I don’t understand what the phrase actually means?

Tom’s answer

Well done for studying the conceptual framework! It’s really useful to understand its key aspects as it is the foundation on which the accounting standards are based.

Another way of saying ‘substance over form’ is ‘truth over law’. This means that if we are going to faithfully represent events and transactions then we should use our judgment to report the economic reality of what in essence is really going on (the truth, the substance) and not just blindly account for the legal form of events and transactions.

The principle of faithful representation (and therefore substance over form) is embedded in the IASB’s conceptual framework.

While often the legal form of a transaction and its substance are in harmony, they can be in conflict. In that event we should account for the truth, the economic reality and not the legal form. Thus, substance OVER form.

There are several practical accounting examples where the principle of substance over form has to be applied, but let me start with a left field example!

Mr & Mrs

A monogamous committed couple who raise their children in a loving home but who eschew religion and tradition and so are not legally wed can be referred to as a ‘common law husband and wife’. Such a couple are in substance married, because of the way they conduct their lives, even if the state does not legally recognise their relationship as a marriage.

But perhaps we should stick to accounting examples of substance over form!

IFRS15 Revenue from Contracts with Customers

Under this standard the timing of the recognition of a sale is not automatically trigged by either an invoice being raised nor legal title to the goods being sold passing.

Rather, a sale is recognised when the performance obligation under the contract is fulfilled. In other words, when what is promised under the sales contract is actually done. This is often evidenced by the actual delivery of goods after all the customer has contracted to get the goods!

So, consider the cycle of a sales transaction where an invoice was raised in January for the sale of goods where legal title passed in February, but the goods were delivered to the customer in March and who only pays up in April. In this case it is appropriate to recognise the sale in March as this reflects the economic reality and substance of the sale.

A lawyer may disagree and try and argue that legally the sale took place earlier than that – but us accountants have to hold our ground.

IFRS16 Leases

When a lessee rents an asset, in accordance with the contract it will not legally own the asset.
However, IFRS 16 Leases requires that the lessee does recognise the asset on its statement of financial position. This is because by leasing the asset, the lessee controls the asset; has a right to use the asset and gets the benefit from using it.

A lawyer might argue that the lessee should not report the asset in its statement of financial position on the grounds that the lessee does not have title to the asset. But because of the principle of substance over form the lawyer would be wrong.

The conceptual framework gives us the definition of an asset being based on the principle of control rather than legal ownership.

We can see how this definition has also influenced the accounting treatment required by the accounting standard on leases.


Substance and form don’t always conflict but when they do the correct accounting is to follow the truth and not the law. After all accounts are signed off as being true and fair, not as being legal and correct.

• Tom Clendon is an online ACCA SBR lecturer and podcaster who likes to keep things simple!

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