The best advantage is that this FRS does not affect a majority of transactions. however, it has an effect on complex transactions whose substance is not very apparent.
Objective: The aim of Financial Reporting Standard 5 is to make sure that the substance of the transactions of the business is reflected clearly in the financial statements. Moreover, it intends to cover the honest representation of the commercial impacts of the transactions on the profits, losses, liabilities as well as assets of the business so that the accounting statements do not just consider the legal form of a specific transaction but also its commercial form.
A chief point in concluding on the substance of the transaction is to note whether the transaction has resulted in an increase or decrease in liabilities or assets of the business. The definition of assets and liabilities has been clarified in the FRS 5.
Once the identification of a liability or asset is done, the inclusion needs to happen in the balance sheet subject to the condition that there is adequate evidence of the existence of the liability or the assets. Moreover, the monetary value of these should be measurable.
The asset or liability respectively should be included only if the transaction does not significantly alter rights of the benefits to the entity or its exposure of risks. If the transaction does not do so, it is appropriate to make amendments in the monetary value of the asset/liability.
The FRS takes into consideration several transactions and gives a detailed disclosure and measurement guideline regarding transactions with specific features including consignment stock, repurchase contracts, loan transfer, securitization, factoring, revenue recognition, and private finance initiatives.
Presentation and Disclosure
FRS 5 takes a view of the problems of financing off-balance sheet items. The problem of understatement is solved due to the presentation and disclosure guidelines of FRS 5.
A specific type of presentation known as "linked presentation" is suggested for financial arrangements that are non-recourse in nature. Such a presentation shows the deductions of finance from the gross amount of the particular item that is financed.
Sufficient disclosure is vital for the transaction for having a clear idea of the commercial effect of the same. The disclosure requires detailed explanation when the recognition of the asset or liability is different from that found under the related headings in a balance sheet. (FRS 5, Accounting Standard Board)
Thus, FRS 5 has a clear and structured approach for reporting the substance of the transactions.
FRS 5 has a noteworthy effect on the reporting of financial statements. However, it is clarified that it does not affect a vast majority of a transaction, but certainly has an impact on complex transactions. Here, we take into consideration the impact and application of FRS 5 on various transactions.