Substance and Legal Form

In assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form. This does not mean one ignores or disregards the contractual terms and conditions which set out the legal form. The legal form simply describes the terms and conditions of the contract and one then must apply the substance and economic reality principle to determine the accounting treatment of the legal form. However one cannot determine the substance and economic reality of the transaction without referral to the contractual terms and conditions. International Financial Reporting Standards (IFRS) prescribes the accounting treatment of the legal form. Interpretation of IFRS cannot take place outside the contract. It is the contract that gives rise to the accounting treatment using IFRS as the manner in which such terms and conditions must be interpreted.