Acca financial Accounting (FA) Study Text ac ca (FA)

Substance over form 

As noted earlier, if information is to be presented faithfully, the economic reality 

must be accounted for and not just the strict legal form. 

An example of substance over form that you will encounter later in the text is 

the accounting treatment of redeemable preference shares. Although on legal 

form they are shares, there is an obligation to repay the preference 

shareholders and so they are accounted for as debt. 

The going concern assumption 

Financial statements are prepared on the assumption that the entity is a going 

concern, and will continue to operate for the foreseeable future (i.e. it has 

neither the need nor the intention to liquidate or significantly curtail its 

operations). The normal expectation is that, based upon current knowledge and 

understanding of the business, it is reasonable to assume that the business will 

continue to operate for the next twelve months. Note that there is no guarantee 

that this will always be the case as evidenced by business failures and 

insolvencies.