Accounting for the Substance of Transactions Essay

Accounting for the Substance of Transactions - Essay Example Though giving an account of the economic summary of the activities of the organization is a straightforward job, generally, an effort is made to give better perception of the organization to be presentable to the Shareholders and other stakeholders by inflating the earnings or assets or deflating the liabilities or losses or manipulation of depreciation methods, stock valuation and accounting development expenditure. Here, two factors influence the presentation. The legal provisions and accounting provisions. The presentation which is correct in legal angle may not be founded on sound accounting principles and may vary from the underlying economic reality. The managements, may, therefore, sometimes choose the best and most advantageous of these two options to present the economic substance of the transactions according to their wishes. Certain artificial transactions/combination of transactions undertaken by the organization are such that it is very difficult to assess the net effect the entire exercise. The assessment of net effect of such various activities of the enterprise may be captioned as â€Å"substance† of a transaction. "substance" of a transaction. Assessment of the substance of the transactions is found necessary to provide reliable, fair and accurate information about corporate performance and to ascertain the actual state of affairs of the business organization. The need is felt very seriously as the various distortions in Financial statements are on the increase, among other things, defining the nature of assets and liabilities and inclusion or non-inclusion of such assets and liabilities in Books of Accounts. Such events not only distort the substance of the economic activity of the organization but also fail to project the actual problems faced by the organization, depriving the organization to initiate remedial steps to address the real problems. Accounting reforms comprising provisions for reporting of substance of transactions are therefore, found necessary. Statement of principles of Accounting prescribe the activities that should be reported on in financial statements, the various dimensions of those activities that should be prominently furnished, the features that information should have if it is to be mentioned in the financial statements. The main role of the Statement of principles is to provide conceptual input into the ASB's work on the development and review of accounting standards. The Statement is not, therefore, neither an accounting standard nor does it contain any requirements on how financial statements are to be prepared. The prominent among the principles for reporting the Substance of the Transactions is definition of assets and liabilities, accounting for subsidiary undertakings, and the activities to be excluded from the business organization's financial statements and those to be included, thus setting standards for presentation of Financial statements. Factors like legal requirements, cost-benefit considerations, i ndustry-specific issues, and the desirability of evolutionary change and implementation issues are also covered. Reporting the Substance of Transactions' implies the addition of Application Note G 'Revenue Recognition'. This clears the ambiguity regarding the treatment of revenue and, in particular, the treatment of turnover (as a subset of revenue). This Application Note deals with revenue recognition from the supply of goods or services by a seller to its customers. It sets out basic principles of revenue recognition which should be applied in all cases. It also provides specific guidance for