An example of economic substance is “action refers to the substance of the transaction—the actual earning of the revenue or using the expense item. A customer buys on credit and agrees to pay later. The action of making the sale—the economic substance of the transaction—takes place before dollars are exchanged in payment.“Too broad. Use in a sentence.
I read the article you posted in this message. I wonder why FASB wants to have companies recognize an expense when the compensation hasn’t actually given out to the recipients? They recognize the compensation expense when the employees earned it. What is the theory behind this?OK, got it now.
"Substance" is an accounting term of art. Usually used in the phrase "substance over form". Substance over form boils down to asking the accountant to look at the true colors- the "guts" of a transaction, even if the legal form tries to tell you otherwise, and to account for it based on its substance, i.e. its reality.
So in the example you gave, it says the guts of the sale is the agreement to buy and not the settlement payment later on. In this case, it is why the accountant will use accrual accounting to record sale on day of agreement and not record the sale on date of payment, which is cash accounting.
Economic consequences is a term used when discussing how a new accounting rule or a change in an existing accounting rule will affect financial statements (e.g. now cause accounting income to decrease or increase) and the further affect on people, particularly shareholders of affected companies.
I attached a great Harvard Business article on the topic. Years ago, the FASB made a rule change which affected the pocketbooks of the corporate types. The corporate types lobbied Congress to try to get FASB to revoke the rule. Seriously!
The highly controversial practice of expensing stock options comes up frequently when we are training managers. Understanding options and how they impact financial statements is part of becoming financially intelligent. Some believe that expensing stock options helps to more truly represent a...hbr.org
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