Which of the following concepts addresses the substance over form principle?

• A. Focus on ownership
• B. Relevance of financial transactions
• C. Appearance of a transaction
• D. Clarifying tax regulations

Answer: (A)

The substance over form principle emphasizes that financial transactions should be accounted for and reported in accordance with their economic reality rather than their legal form. This principle aims to ensure that the true essence of a transaction is reflected in a company’s financial statements, highlighting the importance of focusing on who actually owns assets or controls liabilities, regardless of how these are structured legally.

Focusing on ownership is critical because it guarantees that the financial statements represent the actual risks and rewards associated with ownership—and not merely the legal title of an asset or liability. For example, if a company finances a purchase through a lease instead of an outright purchase, under substance over form, the accounting must reflect the economic relationship and the obligations of the lease, not just the surface-level structure of the transaction.

On the other hand, relevance of financial transactions pertains more to how useful the information is for decision making rather than addressing the true nature of a transaction. The appearance of a transaction may mislead stakeholders if only the legal form is considered without understanding the underlying economic situation. Clarifying tax regulations focuses specifically on compliance with tax laws and does not address the fundamental accounting principles of recording transactions accurately according to their nature. Thus, the focus on ownership aligns most closely with the substance over form principle.