[beeb1113]

Question No.1 Substance over Form (Framework)
IAS 1 Presentation of Financial Statements and the IASB’s Framework for the Preparation and Presentation of Financial Statements require an entity’s financial statements to report the substance of transactions into which it has entered. The required treatment came about partly as a result of concern over arrangements made by companies whereby assets and liabilities were omitted from the balance sheet.

Required:
a. Explain the reasons companies may wish to omit assets and liabilities from their balance sheet.
b. Explain why the concept of substance over form is necessary.

Case C
Company A sells land to a property investment company B. The sale price is $ 20 million and the current market value is $ 30 million. Company A can buy the land back at any time in the next five years for the original selling price plus an annual commission of 1% above the current bank base rate. Company B cannot require company A to buy the land back at any time.
The controller of company A proposes to treat this transaction as a sale in the financial statements.

Required:
c. Discuss the proposed treatment.

[Curlyben]

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