Substance over form

There are many areas where the British approach to both the law and to accounting regulations in particular has no real equivalent on the Continent (defined some time ago by the famous headline in the Sun newspaper “Fog in the Channel – Continent cut off).

One such area is the accounting concept of substance over form. This basically says that accounting treatment should follow the economic/ commercial reality of an event or transaction irrespective of what formal name it is given. For a very short period of time (beginning of the nineties) Polish accounting legislation contained substance over form “istota nad treścią” as an overriding accounting priciple. This in effect allowed common sense to prevail in situations where the Polish law had inadequate or indeed misleading definitions. One such area was indeed leasing.

However the lawyers very quickly enforced the removal of this principle arguing that Poland followed the Continental Code Napoleon which requires everything to be defined and in particular that the law should not allow the concept of substance to overrule the strict interpretation of the law.

This would be fine if the legislator was able to foresee all possible forms of transaction and in particular new forms of economic activity such as internet based trading etc. Given that the legislators are totally incapable of writing even simple legislation in a clear manner the result has been predictable.

The subject came up in a recent “round table” discussion where logic dictated that the accounting treatment could not follow the strict wording of contracts as the substance of the trade was actually materially different to that implied by the Polish translation of UK based contracts. Which leads to the nonsense of a completely different basis for preparation of local statutory accounts and that used for head office reporting.

Of course the Polish company could apply IFRS treatment but only if this was in respect of an issue not covered by the Polish accounting legislation.

Why o why has Poland not adopted IFRS for ALL companies and not just quoted entities and their subsidiaries. But then again what would the learned professors of bean counting do if no longer gainfully employed in writing local Polish accounting standards in the full knowledge that sooner rather than later the EU will get around to enforcing IFRS for all reporting requirements.