Economic Substance Research Articles

Accounting Principles Compliance – the True and Fair View Recipe. A Theoretical Perspective on the Contribution of Accounting Principles to the Financial Reporting Objective Achievement (I)

This paper explores the significance of the true and fair view, as the main objective of financial reporting to which accounting principles are subordinated, and the relationship between it and all accounting principles, focusing on identifying their contribution to achieving the true and fair view and, simultaneously, the potential conflicts. To address this issue, several interpretations of the true and fair view objective were analyzed together with the way the requirements of each accounting principle contribute to the achievement of this objective. The paper highlights that the true and fair view recipe involves contributions such as aggregating values from different reporting periods, separately reflecting assets and liabilities to prevent hiding part of a company’s wealth or masking the risks that the company is facing, accurate, neutral and free from error/omission representation of transactions, establishing an acceptable materiality level that does not allow information to be over contracted or overcrowded with insignificant details, reflecting the economic substance of the transaction instead of the legal one, a realistic and balanced estimation of the risks and value losses, the presentation of past rights and obligations without being limited by their effective settlement date.

Un/Making Assets: The Institutional Limits to Financialization

This article contributes to contemporary debates within the financialization and assetization literatures by examining the sale of tax credits in U.S. property markets over the last twenty years. Whereas the vast majority of research on financial assets focuses on the income-generating aspects of property, this article considers a more holistic approach to assets. Through detailed empirical analysis of syndication in historic tax credit and conservation easement markets, we demonstrate how assets are not just sources of income or cash flow but also—critically—sources of expense reduction. Drawing from relevant U.S. tax law and related legal provisions, we trace three interlocking components in the assetization process: enabling and disabling legislation, the structures and typologies of property ownership, and the actors that make deals happen. By starting with asset creation, rather than assumed geographies of investment, we bridge the rural–urban divide to reveal new geographies of finance sourced directly from the state. Although the tax sheltering dimensions of assets are unique in this regard, the state retains the capacity to unmake assets that lack “economic substance.” As such, this article offers a new direction forward—a legal-institutionalist framework—that foregrounds the state as setting and enforcing the limits to financialization.

The substance and form of Islamic Finance instruments: an accounting perspective

Purpose This study aims to critically analyze the fundamentals of the current major Islamic Finance (IF) instruments and contracts in light of both the foundations of IF and the concept of substance over form in the accounting conceptual framework. Such analysis is believed to be necessarily for the IF institutions to provide better and more genuine service to their customers. Design/methodology/approach To achieve the study purpose, the methodology is based on theoretical analysis and analytical review of the major IF contracts. Findings The IF industry needs to focus on the economic substance of the products offered to their clients. In developing and promoting their products, IF institutions need to focus on the ultimate and substantial goals of Islamic Sharia rather than re-packaging existing conventional products under different arrangements and formats to make them appear as Sharia-compliant to their clients. Both religious scholars and IF professionals need to engage in much deeper analysis and understanding of the substantial design of IF instruments and the concept of usury in modern economy. Research limitations/implications This paper does not intend to develop a comprehensive framework for the design of IF instruments to meet the economic substance and ultimate goals of IF principles or measure such economic substance. However, that is definitely a subject for further research. Originality/value By applying concepts like substance over form from other business fields such as the accounting theoretical framework to the IF instruments and contracts, we should gain better understanding and practical implications of these instruments and figure out ways to improve their design to be more consistent with and better serve the ultimate goals of the Islamic Sharia.

TAX CHALLENGES OF DIGITAL ECONOMY IN INDONESIA

E-commerce transactions emerged as a consequences of the new virtual business model that is used by some multinational entities expanding their business operations abroad in the international landscape. This study aims to explore ecommerce taxation in Indonesia including some factors like understandings and tax payer’s opinion of e-commerce taxation and current rule and tax mechanism of ecommerce which are supporting the implementation of e-commerce taxation. Factors studied related to taxation of e-commerce, including mechanism, monitoring system, and e-commerce transaction. Interviews were conducted from the side of fiscus (Directorate General of Taxation) and taxpayers in e-commerce industry. Data collection was used semi-structured interview, observation, and documentation. Data analysis of this research was descriptive method. The result of this study proves that taxation in e-commerce industry has not been implemented in a good manner. Socialization to e-commerce taxpayers should be conducted in more structured and comprehensive ways. Difficulties in the detection of e-commerce transactions bring its own problems, this is the biggest challenges in e-commerce transactions, namely the difficulty of the government to establish a clear and fair e-commerce tax rules. Recent government rule in November 2019 which accommodate economic substance from Unified Approach of OECD gives refreshment to those difficulties.

Do Debt Investors Adjust Financial Statement Ratios When Financial Statements Fail to Reflect Economic Substance? Evidence from Cash Flow Hedges*†

ABSTRACTCash flow hedge derivatives are an example of an economic transaction that is not fully portrayed in the financial statements in two key ways. First, while changes in the fair value of the derivative are recorded at each reporting date, changes in the value of the underlying purchase or sale commitment are not recorded or disclosed until that transaction occurs. Therefore, until the purchase or sale occurs, the financial statements only portray half of the economic transaction. Second, the gains/losses associated with these derivatives provide an inverse signal about the persistence of firm profitability. We document a method by which financial statement users can partially adjust for these distortions and find evidence that debt investors incorporate information conveyed by cash flow hedge gains/losses into their pricing of new debt issuances. We also find evidence that credit analysts incorporate these adjustments into their firm‐level credit ratings but are unable to find consistent evidence of similar adjustments to credit ratings on new debt issuances. Overall, our results suggest that a subset of sophisticated investors (i.e., those in public debt markets) appear to incorporate information from cash flow hedge accounting into their assessments of firm risk, and that users may benefit from enhanced disclosure about the amount and timing of a firm's future transactions that are exposed to foreign currency, interest rate, or commodity price risk as well as the amount and timing of derivatives that protect the firm from those risks.

Social determinants of addiction in population Middle age in the city of Yazd

Background: There are several factors involved in drug abuse and since some of these effective factors, especially social factors, can be changed and corrected; By recognizing them, more effective prevention programs can be implemented.This case study was performed with the aim of determining the social factors of addiction in people middle age living in the city of Yazd. Methods: In this case-control study during 2019- 2020, 150 Substance user who referred to methadone maintenance treatment centers (MMTC) were involved in a case group and 150 subjects, matched in terms of sex and age, were selected as a control group during 2019. The cases were selected by cluster sampling method from Yazd methadone maintenance treatment centers. The selection of witnesses was done from the neighbors of the cases. Data collection tool was a researcher-made questionnaire that includes three parts: demographic questions, economic and social factors and Substance use-related questions. The content validity of the questionnaire was affirmed by experts and its reliability, obtained by Cronbach's alpha coefficient, was 0.75. The cases were selected by cluster sampling from MMTC. The data were analyzed using SPSS software and logistic regression model was used to find the related characteristics. Results: The results of logistic regression model show that individuals working in non-organizational jobs had the highest share in relation to Substance user , with an odds ratio of 4.65. The use of drugs, Substance user first-degree relatives, and Substance user friends were with the odds ratio of 3.4, 2.97, and 2.6, respectively are significantly related to Substance user and have the highest risk for Substance user (P = 0.0001). Conclusion: The results of this study indicate that Substance user individuals had more social risk factors compared to the general population. Therefore, planned measures to reduce these risk factors among the community, especially young people and their friends, by family and community officials are necessary. And the family plays a decisive role in choosing a friend for their children.

Factoring as a Method of Funding Commercial Companies

Aim. The presented study aims to examine the essence of factoring and explore potential directions for its development in the current economic environment.Tasks. The authors determine the economic substance of factoring, making allowance for the turbulence of the global market environment and the impact of new challenges for the Russian economy.Methods. This study analyzes legislative and regulatory acts as well as works of Russian and foreign scientists regarding the theoretical and practical problems of funding companies through factoring.Results. The factoring market is actively developing, particularly at the times of macroeconomic instability, which slows the turnover of funds in the economy and increases the need for funding sources among market participants. The stability of the factoring market during the COVID crisis serves to illustrate the heightened interest of business entities in factoring as a tool for solving a number of problems in corporate financial management. Some characteristic trends in the development of the Russian factoring market include its synchronization with the international market, active development of blockchain technologies, growing number of market participants and expanding range of services provided within the framework of factoring transactions.Conclusions. Having summarized the theory and practice of factoring development in Russia and abroad, the author concludes that factoring retains its potential as a tool for funding commercial organizations in the context of the development of digital technologies. The demand for factoring services among business entities will continue to grow in the post-COVID economy, which substantiates the practicability of further developing the factoring market and improving the technology behind factoring transactions.

The Decline of Substance over Form in Accounting

Abstract “Substance over form” is a traditional accounting maxim that has also influenced legal thinking and has its roots in classical philosophy. “Substance over form” states that accountants do not record transactions based on the outward form of the transaction but discern its economic substance and report accordingly. Nevertheless, “substance over form” has been deemphasized by the FASB’s conceptual framework in recent decades, to the point that an internal debate now rages over whether accountants and auditors have a right and responsibility to put substance over form. FASB must therefore make its position clear on where it stands in this debate.

Discerning Commercial and Economic Reality: Applying the GAAR to Frucor

Even though the New Zealand courts have been interpreting this legislation for over 130 years, there is no doubt that applying the anti-avoidance rules is a difficult task. This is why it is common for judges to come to different conclusions or even arrive at the same conclusion through a different reasoning process. In Frucor Muir J so rightly observed, “Benchmarking against parliamentary intention, for all the appropriateness of the exercise, can be an elusive quest.” This article looks at the development of the general anti-avoidance rule in New Zealand in the specific context of the impending appeal of the Frucor case from the Court of Appeal to the Supreme Court. This article begins with an exposition of the test in New Zealand before highlighting the significance of the approach in Ben Nevis from an economic substance perspective. In the light of this analysis, it then examines how the law, specifically the Parliamentary contemplation test, should be applied in expenditure related tax avoidance cases. The conclusion reached is that the Parliamentary intention behind part D of the Income Tax Act is to provide a deduction for taxpayers. This deduction, however, ought not to be available when the expense, viewed in a commercially and economically realistic way, is not in economic substance borne by the taxpayer. This is an example where the line between acceptable tax planning and unacceptable tax avoidance is crossed and the analysis above therefore suggests the Court of Appeal were right to consider it in the latter category of transaction. The nature of tax planning and tax avoidance necessitates an approach from Parliament that, in the hands of the judges, is both flexible and responsive. After more than a decade since the Supreme Court delivered the Ben Nevis judgment, one can see that the New Zealand legislation and case law is robust, challenging and effective against aggressive tax avoidance behaviour. On balance, despite the lack of commercial certainty, this is desirable.

Foreign Employment, Income Shifting, and Tax Uncertainty

ABSTRACTWe examine the effect of foreign employment on two outcomes—income shifting and the tax uncertainty of foreign transactions. Using a hand-collected sample of employment disclosures, we partition our sample into firm-years with a higher or lower degree of foreign employment. Using two distinct income shifting models, we document that, on average, a high degree of foreign employment is associated with greater tax-motivated income shifting out of the U.S. We also posit and find that a high degree of foreign employment enhances the economic substance of foreign transactions, reducing the tax uncertainty associated with foreign income. We conduct additional analyses to mitigate selection bias concerns, and we use exogenous changes to the costs and benefits of income shifting using foreign employment to strengthen identification. Our results highlight firms' use of employees as part of a tax-efficient supply chain and how foreign employment enhances income shifting opportunities between jurisdictions.

The Development of the Doctrine of Abuse of Law and the Danish Cases: Time to Shift the Focus from Non-Genuine Arrangements to Single (Abusive) Transactions?

The article first retraces the history of the standards adopted under the EU abuse of law doctrine to identify abusive conduct executed by the taxpayer. Then, the authors progress from the differences between the rules contained in the Anti-Tax Avoidance Directive (ATAD) and the findings of the CJEU in the Danish Cases, which constitute the last steps of that history, and elaborate on some proposals in order to update the former in light of the judges’ findings. They propose shifting the focus from non-genuine arrangements to single (potentially abusive) transactions, also taking into consideration the criteria relied upon in transfer pricing and controlled foreign company (CFC) legislation to ascertain whether economic substance is present. abuse of law, ATAD, Danish Cases, GAAR, arrangement, transaction, fundamental freedoms, genuinity, artificiality, transfer pricing.

Economic substance and content of social-labor relations

In article theoretical aspects of the social and economic relations and, in particular, their economic essence and the contents are considered.

A Study on the Development of the Economic Substance Doctrine in the U.S. - From Gregory to IRC Section 7701(o) -

A Study on the Development of the Economic Substance Doctrine in the U.S. - From Gregory to IRC Section 7701(o) -

ВПЛИВ НА ЛІКВІДНІСТЬ ГРОШОВИХ ПОТОКІВ УСЕРЕДИНІ БАНКУ

The purpose of the article is to determine an objective approach to the funding of assets from various resources and to assess the impact of cash flows within a bank on its liquidity position. Methods of theoretical generalization and comparison to define an economic substance of the bank asset and liability management, a systematic approach to consider the management of assets and liabilities as interrelated elements of a single system; the method of analysis and synthesis to study liquidity indicators, the method of tabular presentation of data, and the abstract-logical method to substantiate theoretical generalizations and conclusions were used. The issue of maintaining liquidity during the global downturn requires priority attention from the management and analytical service. Central banks of all countries in the world establish, maintain strict control and regulate various indicators of bank liquidity, trying to avoid a banking crisis, since the bankruptcy of one or several banks may lead to destruction of the payment system and cause major problems in the economy. Most modern banks which are focused on long-term activities, when resolving “profitability – liquidity” dilemma, give preference to ensuring a sufficient level of liquidity even in the face of a possible loss of certain income. Despite constant changes and improvements in the liquidity ratio system, modern banks mainly use accounting data for the liquidity ratio calculation disregarding the analysis of the bank’s cash flows which should be carried out in accordance with the basic principles of financial management, the principle of comparing asset-liability maturities and risk levels in particular. Our view is that in analyzing all banking standards and ratios, not only the ratios of various assets and liabilities should be calculated based on the bank’s balance sheet data, but also the sources of formation of certain assets from various resources should be taken into account. In our opinion, it is extremely important to have regard to the situation when the bank’s short-term liabilities (liabilities at call) form its long-term and medium-term requirements. In order to find out an actual situation with the bank’s liquidity position, we should analyze which short-term liabilities were used to form its loan and securities portfolios, as well as other risky and long-term assets. In our opinion, this can be done by making the following adjustments: 1. To reduce the amount of liquid assets by the amount of liabilities at call placed in risky assets. This approach is based on the fact that liabilities at call, which can be withdrawn at any time, are not liquid. In a situation when it is required to make urgent payments, there will be a need for urgent borrowing of additional funds. This may either be difficult to do, or it may be done at an unfavorable interest rate. 2. To increase the amount of short-term liabilities by the amount of that part thereof that was used to form long- and medium-term requirements. This will also reduce the liquidity ratio, but provide the necessary information about its actual level, taking into account the risk formation of the bank’s asset portfolio. An absolute liquidity ratio calculated using the balance sheet data was 63%. When it was adjusted assuming that the bank’s liabilities at call were placed in medium and long-term assets, a decrease by 35% was obtained after reducing the amount of liquid assets, and this figure was decreased by 20% when the amount of short-term liabilities was increased in the calculation. In order to find out an actual situation with the bank’s liquidity position, it is proposed to reduce the amount of liquid assets by the amount of liabilities at call placed in risky assets, or increase the amount of short-term liabilities by the amount of that part thereof that was used to form long- and medium-term requirements.

Apple's Cost Sharing Arrangement: Frankenstein's Monster

This paper performs a forensic analysis of Apple's transfer pricing cost sharing arrangement based on facts and documents that were disclosed in hearings before the U.S. Senate Permanent Subcommittee on Investigations in May 2013 and an investigation of Apple's transfer pricing arrangements by the European Commission between 2013 and 2016 as part of its State Aid investigation, related court filings in Europe and other sources. The paper finds that Apple provided conflicting information to these different investigations and that, when combined, documents from both investigations, when combined with additional research reveal that Apple appears to have violated U.S. transfer pricing laws in 2009 and later years, that should have invalidated its cost sharing arrangement but were apparently not detected by the IRS. These tax violations resulted in U.S. federal tax underpayments that we estimate to be greater than $84 billion. Apple's reserves for Uncertain Tax Positions were $16.5 billion as of September 2020, much less than this amount. The proposed adjustments under the cost sharing periodic adjustment regulations are not limited by any statute of limitations, and appear to be accompoanied by additiional tax violations, including violations of the economic substance doctrine, and the regulations governing the taxation of effectively connected income.

The economic reality of Islamic banks’ transactions: a qualitative inquiry

PurposeThis paper aims to investigate the economic substance of Islamic banks’ transaction as perceived by the employees and regulators of banks and the effect of such substance on the need for special accounting standards for Islamic banks. If there is a distinctive “Islamic economic substance”, then special accounting practices may be necessary such as the standards of the Accounting and Auditing Organization for Islamic Financial Institutions.Design/methodology/approachA qualitative inquiry on one of the leading Islamic banks in the Middle East was conducted to investigate the economic substance of the bank’s main two transactions; the deposit system and Murabaha financing, as perceived by informants within one of the earliest Islamic banks and its regulators.FindingsIt is found that despite the belief that the transactions under examination were different from equivalents within conventional banking, practice within the bank was not consistent with such a belief. Informants largely perceived the economic reality of the investigated transaction as being not different from conventional banks’ transactions, and this would affect the need for special accounting and regulatory frameworks.Research limitations/implicationsThis investigation is confined to informants working within one Islamic bank; their views and perceptions may not coincide with those working in other Islamic banks in the world.Practical implicationsThe results of this investigation provide policy implications for Islamic banks, regulators and standards setters in regard to the need for special accounting standards for Islamic banks.Originality/valueThe paper is one of the first papers that uses a qualitative inquiry on the main transactions of Islamic banks and the related need for special accounting practices. The paper provides a new perspective on the debate over whether Islamic banking is genuinely innovative or is merely a replicate for conventional banking.

Применение правил налоговой реконструкции при доказывании по налоговым спорам в рамках ст. 54.1 НК РФ

The article considers the potential possibility of determining tax liabilities by calculation method during resolving a dispute under article 54.1 of the Russian Federation Tax Code based on the true economic substance of this operation or a set of operations, when the taxpayer’s operations are not accounted for in accordance with their economic effect.

The financial and economic substance of the contemporary Russian capitalism

Subject. I herein focus on the capitalism in Russia today. Objectives. The study is an attempt to determine what distinguishes the financial and economic substance of the Russian capitalism today. Methods. The study relies upon the systems approach and methods of statistical, neural network and cluster analysis. Results. The article reveals the difference of trends in general indicators of financial and business activities in capitalist Russia, socialist China and the imperialist USA. I discover development distinctions of the Russian economy, such as high growth rates of money supply, considerable simultaneous drop in foreign exchange rates, moderate debts of the Russian households and minimum wages, low unemployment rate, low growth rate of the current account balance to GDP as compared with the devaluation rate of the national currency. Having conducted the neural network analysis of growth rates of the money supply, solvency ratios and profitability of entities, financial results of the Russian credit institutions, I found median values of growth rates. Negative values were captured for the return on assets, return on sale of goods, products, work, services, and the equity-to-total assets ratio. Positive ones were found for total profit derived by operational credit institutions, losses and the percentage of unprofitable credit institutions. As the cluster analysis of growth rates of households’ consumption spending shows, there is a palpable correlation between food products and alcohol-free beverages, alcohol beverages, tobacco, clothes, shoes, communications. Conclusions and Relevance. The financial and economic substance of the contemporary Russian capitalism helps financial institutions and legislature consistently set up the concept and principles for retaining capitalism in Russia, considering the marginal proportions of the money supply growth to the unemployment rate, minimal wages, debt and consumption spending of households, which are adjusted within the possible divergence of the foreign exchange rate and current account balance to GDP. The findings constitute the necessary scope of governmental authorities’ competence to make managerial decisions for keeping the capitalist vector of the Russian society and economy.

Classification of co‐operative member shares as equity or liabilities: The case of consumer co‐operatives in South Korea

AbstractMember shares of co‐operatives are hybrid securities in that they have characteristics of both equity and liabilities. Prior studies propose that in order to classify hybrid securities as equity or liabilities, the economic substance of those securities should be considered. This study aims to examine whether the economic substance of member shares can be considered as equity or liabilities. Systematic risk is used as a proxy of economic substance. This study tests whether the proportion of member shares to equity is positively or negatively related to equity betas. If the test shows a negative relation, member shares can be considered to have the economic substance of equity; a positive relation implies that member shares have the substance of liabilities.The results show that the proportion of member shares to equity is significantly negatively related to systematic risk of equity, which means that member shares have equity‐like characteristics. The robustness checks taking into account the tax effect of debt support the findings more strongly that redeemable member shares play an equity‐like role in consumer co‐operatives in South Korea. Although the legal and institutional systems in Korea do not provide member shares of consumer cooperatives with a clear status as equity, member shares still show equity‐like economic substance.

Financial reporting quality of privately held firms: evidence from private corporations versus limited companies

ABSTRACT In this paper, we examine whether requirements to disclose audited financial statements enhance financial reporting quality of privately held firms. Unlike U.S. private firms, private corporations in Korea are required to prepare and disclose audited financial statements. While limited companies, another type of Korean private firms, are almost identical to private corporations in economic substance, they are exempt from reporting requirements to disclose audited financial statements. Using this unique institutional environment in Korea for the period of 2007–2012, we investigate the effect of audit and disclosure requirements on financial reporting quality and find that such requirements enhance financial reporting quality of private companies. Our findings shed light on the economic consequences of mandatory disclosure of audited financial statements and should be of interest to academics and regulators as we evidence the effects of audit and disclosure requirements on financial reporting quality outside of public firms.