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ACCA Applied Knowledge · Financial Accounting · The regulatory framework

An entity's accountant says a lease can be treated as off statement of financial position because it falls just below a numerical percentage test used in a rule-based national standard. Under a principles-based approach such as IFRS, what should determine the treatment?

Under a principles-based approach, the treatment is decided by the economic substance of the arrangement, for example whether the entity controls the right to use an identified asset. Legal form, narrowly missing a numerical threshold, or competitor practice are not valid grounds for choosing the accounting.

  1. AThe economic substance of the arrangement, such as whether the entity controls the right to use the assetCorrect
  2. BWhether the legal form of the contract calls it a lease or a service
  3. CWhether the percentage is only marginally below the threshold
  4. DThe treatment used by the entity's largest competitor

Explanation

Principles-based standards require the substance of the transaction to be reported, here whether the entity controls the use of an identified asset. Legal form and marginal threshold results do not decide the treatment, and copying a competitor is not a valid basis.

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