IFRS (pt.2)

Today we need to distinguish between economic substance and commercial substance. But wait, can we?

I'm not sure. Let's explore this issue. According to the IFRS, a transaction is deemed to have commercial substance for the firm if it changes: (1) the amount, (2) timing, or (3) riskiness of the firm’s future cash flows.

If the transaction impacts our definition of asset, liability, equity, revenue (including gain), expense (including loss), it has economic substance.

Per handout from Professor Harvey: 

Normally, when we talk about the economic substance of a transaction, we will mean the real or essential part or element in economic terms, effect on wealth of claimants. That comes close to the notion of commercial substance. Under chapter two of the 2010 Exposure Draft of the new conceptual framework document being worked on by IASB and FASB since 2005, the two fundamental qualitative characteristics determining usefulness of financial statement information in decision making are relevance and faithful representation. “Faithful representation implies that decision‐useful financial information represents faithfully the economic phenomenon (those affecting financial position and results of operations) that it purports to represent.” [Exposure Draft] This must mean the extent to which the phenomena give rise to assets, liabilities, equity, revenues (including gains) and expenses (including losses).