Financial statements must possess certain characteristics. One of these characteristics is reliability. To be reliable, they must faithfully represent an entity’s underlying transactions and events. For financial statements to achieve faithful representation, transactions must be accounted for in accordance with their substance and economic reality when it’s different from legal form.
In Keen’s case, although the form of the transaction is Keen have sales revenue on the sale of machine, the substance is Keen obtain a loan from Cool Bank and use the machine as guarantee. So Keen should not recognize the revenue. Instead, it will recognize a loan due to Cool Bank.
