Substance Over Form
The accounting principle requiring transactions to be recorded based on their economic reality rather than legal structure.
What is Substance Over Form?
The substance-over-form principle requires that financial transactions be accounted for according to their economic reality rather than their legal structure. This ensures financial statements reflect the true nature of a company's activities. It underpins lease accounting, sale-leaseback rules, and consolidation standards, preventing companies from structuring transactions to achieve a desired accounting outcome.
Example
A company sells equipment to a bank and immediately agrees to lease it back for the asset's remaining life. Despite the legal form of a sale, the economic substance is a secured loan — GAAP requires the company to record it as borrowing, not a sale.
Source: FASB ASC 842 — Leases