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5 indicators of substance of transaction being different from its legal form.

There are some key tell-tale indicators that should alert the accountant/auditor to the possibility that substance and form issues may exist.

Some of these are;

  • Unusual terms in business agreement, that might affect assessment of the timing of revenues and costs.
  • Contrived option arrangements that serves to divert risks from where it might otherwise lie.
  • If two or more transactions are executed together, and the combined effects of both taken together is different from the effect of each individually, this is worth investigating. For example, a sale transaction selling an asset (possibly at the price in excess of market) and agreement to lease back that same asset (possibly at an inflated rentals)
  • Business arrangements entered into, which seem to disproportionately advantage one party over another. There is nothing legally wrong with entering into an arrangement that is not in your best interest, but rational business people tend not to do so, unless there is benefit elsewhere.
  • Transaction structured to manipulate reported results, for example, by misreporting expenses as asset or liabilities as revenues.



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