ACCA FR Syllabus A. The Conceptual And Regulatory Framework - Faithful and Reliable accounts - Notes ^{6 / 8}

To do this sometimes you need to show the substance of a transaction rather than its legal form

For example, if you ‘sell’ an asset but still enjoy its benefits, then this probably isn't a true sale in reality (in all probability this is a loan - see later).

How do you know if substance is not the same as form?

Well it usually is - but look for..

• Where control differs from ownership of an asset

• Where items are sold at NOT fair value

• Where there's an extra "option" in the agreement

• Where this is any "extra" attachment to an agreement

  This is called a linked transaction

Also known as goods on sale or return basis

The issue here is who CONTROLS the stock in substance - you need to know whose stock it is

Find out who takes the majority of the following risks..

• If the stock becomes obsolete

• If stock is slow to sell

Illustration

You sell goods to me.

If I don't sell the goods I return them to you for a refund

Solution
The stock is yours because you take the risks:

1) Obsolescence - If they don't sell I send them back to you for a refund

Here we sell our debtors to a factor in return for cash

But again we need to look to see whose debtors they really are (have i really sold them in substance) by looking at who keeps the majority of the risks...

Receivables Risks

• Risk of bad debt

• Risk of slow paying debtors

Illustration

You sell me your debtors but we have the following agreement:

1) If the debts go bad - I return them to you for a refund
2) You pay me 2% interest a month on all debtors who don't pay me immediately

Solution
You have not sold the debtors because you keep both the bad debt risk and slow paying risk (you pay me interest on o/S debtors)

Therefore you do not have a sale you have a payable loan to me

This loan gets repaid as the debtors pay me

For a sale of goods you need to have transferred the majority of the risks and rewards

here look at the rewards.. who gets the majority of the benefits of the asset

If you make this sale and then buy it back - then you have probably kept the majority of the rewards and so not sold the asset

instead, again, it is a loan