Chapter 3 Substance of Transactions

1. Objectives

1.1 Understand the meaning of substance of transactions.
1.2 Understand and apply the principle of substance over form.

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2. Introduction

2.1 Both the HKICPA’s framework and HKAS 1 state that transactions and events should be accounted for and presented in accordance with their substance and economic reality, and not merely their legal form.
2.2 As yet the HKICPA does not have one standard that brings together all aspects of substance over form. However, many existing standards base their accounting treatment on the concept of substance over form.
2.3 The basic thrust is that the substance of a transaction should be determined by identifying all aspects and implications and giving priority to those more likely to have a commercial effect in practice. This usually means considering the effect of the transaction on the assets and liabilities of the enterprise. Therefore, it is important to be clear on exactly what is meant by the term “asset” and what is meant by the term “liability”.

3. Off Balance Sheet Finance (不入帳的融資)

(A) The advantages perceived from schemes of off balance sheet finance

|3.1 |Definition |
| |Off balance finance is the organization of transactions such that financial commitments are not included in the |
| |statement of financial position of a company or a group. |

3.2 The perceived benefits include the following: (i) Perceived lower level of gearing. (ii) There may be a breach of loan covenants if further liabilities are recorded on balance sheet. (iii) In most cases, off balance sheet finance schemes result in assets also being reduced. Therefore a higher