ACCA Strategic Business Reporting (SBR) 2025 – 400 Free Practice Questions to Pass the Exam

The principle of 'substance over form' in financial reporting emphasizes that the economic realities of transactions should be reflected in the financial statements, rather than merely following the legal or contractual form. This means that in situations where the legal form of a transaction may not accurately represent its underlying economic effect, accountants and auditors should prioritize the true economic substance of the transaction.

For example, if a payment is structured as a loan but functions economically like a contribution of equity, financial statements should reflect the equity nature of that transaction, as this provides users with a more accurate and meaningful understanding of the company's financial position and performance. Adhering to this principle ensures that users of financial statements receive relevant and reliable information that truly reflects the company's financial status, promoting transparency and better decision-making.

The other options revolve around interpretations that do not capture the essence of this principle. A literal interpretation of contracts does not consider the underlying economic impact; a presentation based strictly on accounting records ignores transactions' realities; and strict adherence to tax regulations might lead to misleading representations of financial health. In contrast, concentrating on the economic reality ensures that financial statements provide a fair view of a company's financial situation.