Probing Substance Over Legal Form in Financial Statements

Abstract

Substance over legal form is a principle which intends to guide preparers of the financial statements to report on what is actually on the ground and not hide behind technicalities of accounting standards or other legal provisions. This in a way is ideal as situations are not uniform amongst reporting entities and it therefore promotes disclosure of issues which matter most to each firm’s stakeholders. The International Financial Reporting Standards do not have specific accounting standard in that regard. It is therefore important that regulators must put appropriate measures to promote this principle.

The results of this study have shown that firms might not be willing to adopt substance over form where there is a room for creative accounting coupled with less interest on analysts and commentators in analysing and discussing possible wayward behaviours such as recurrent restatements of financial statements, deliberate use of wrong terminologies in the financial statements etc.

Keywords: substance, legal, form, financial, restatements, terminology

JEL Classification: G21, G34, K21, L25, M41