Substance over form
Substance over form requires transactions to be reported according to their economic reality rather than their legal structure; leased assets appearing on the lessee's balance sheet even without legal title is a standard example.
FrameworkAccounting concepts
See it move
A lessee never holds legal title to a leased asset — legally the lessor owns it and the lease looks like renting. But when the lease term covers most of the asset's life and the payments' present value nears its purchase price, the economic substance is that the lessee is financing a purchase. Substance over form then requires the asset and its liability on the lessee's balance sheet, whoever holds title.
Check yourself
Ferro plc enters a lease for industrial equipment. The lease term covers 85% of the equipment's economic life, and the present value of lease payments equals 95% of the equipment's fair value. Ferro does not hold legal title. Which accounting principle most directly drives the decision to recognise an asset and liability on Ferro's balance sheet?