Entity X enters into a legal arrangement to act as trustee for entity Y by holding listed shares on entity Y’s behalf. Entity Y makes all investment decisions and entity X will act according to entity Y’s instructions. Entity X will earn a trustee fee for holding the shares. Any dividends or profit/(loss) from the investments belong to entity Y.
Elements of financial statementsThe elements of financial statements 53
Entity X should not recognise the listed shares as its asset even though it is in posses- sion of the shares.
Entity X does not control the investment’s future economic benefits. Benefits from the investments flow to entity Y and entity X earns a trustee fee for holding the shares regardless of how the shares perform. The listed shares, therefore, do not meet the criteria of an asset in entity X’s balance sheet.
In assessing whether an item meets the definition of an asset (or a liability or equity), attention needs to be given to its underlying substance and economic reality and not merely its legal form. Thus, for example, in the case of finance leases, the substance and economic reality are that the lessee acquires the economic benefits of the use of the leased asset for the major part of its useful life in return for entering into an obligation to pay for that right an amount approximating to the fair value of the asset and the related finance charge. Hence, the finance lease gives rise to items that satisfy the definition of an asset and a liability and are recognised as such in the lessee’s balance sheet (Framework para 51). Thus, the Framework stresses economic substance over legal form and reminds us that not all assets and liabilities will meet the criteria for recognition.
Many assets, for example, property, plant and equipment, have a physical form. However, physical form is not essential to the existence of an asset; hence patents and copyrights, for example, are assets if future economic benefits