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HMRC internal manual

Business Income Manual

Tax and accountancy: FRS5: Substance over form

Substance over form is an accounting concept which requires transactions and other events to be accounted for according to their substance and not merely their legal form.

Whether or not formal title to an asset is held is largely irrelevant in determining whether it should be recognised in the financial statements. Similarly the need to recognise a liability is not simply determined by an enforceable commitment to make a future payment.

Assets are defined as resources controlled by an entity as a result of past events from which future economic benefits are expected to flow. The future economic benefits would include the right to use the asset and to enjoy the proceeds on its disposal or realisation. Liabilities are defined as present obligations arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

An item that meets the definition of an asset or liability will be recognised in the financial statements when it is probable that the future economic benefit associated with it will flow to or from the entity and the item has a cost or value that can be measured reliably.