The principle of substance over form is a fundamental accounting concept that requires financial statements to reflect the economic substance of transactions and events, rather than just their legal form. This means that the financial statements should accurately reflect the underlying economic reality of transactions, rather than just the legal or formal aspects of those transactions.

An example of substance over form would be a lease agreement that is structured in a way that the legal form of the transaction appears to be a rental agreement, but the economic substance of the transaction is that the lessee is effectively purchasing the leased asset. In this case, the financial statements should reflect the economic reality of the transaction, rather than just its legal form, by recognizing the leased asset as an asset and the lease payments as financing obligations.

Another example would be a sale and leaseback transaction, where an entity sells an asset to a third party and immediately leases it back. In this case, the substance of the transaction is that the entity has effectively borrowed money and used the asset as collateral, rather than selling it outright. Therefore, the financial statements should reflect the economic substance of the transaction by recognizing any financing obligations and continuing to recognize the asset on the entity's balance sheet.

Overall, the principle of substance over form is important in ensuring that financial statements provide a true and fair view of an entity's financial position and performance, by accurately reflecting the underlying economic reality of transactions and events.

Here is an example that demonstrates the principle of substance over form:

Let's say that a company enters into a sale and leaseback transaction with a third party. The company sells an asset with a book value of $100,000 to the third party and immediately leases it back for a term of 5 years, with annual lease payments of $25,000.

Under the legal form of the transaction, the company has sold the asset for $100,000 and is now leasing it back. However, the economic substance of the transaction is that the company has effectively borrowed $100,000 and used the asset as collateral for the loan.

To reflect the economic substance of the transaction, the company should recognize any financing obligations associated with the transaction, rather than treating it as a sale and leaseback. This would involve calculating the present value of the lease payments, using an appropriate discount rate, and recognizing the present value of the financing obligation on the company's balance sheet.

Assuming a discount rate of 8%, the present value of the lease payments would be:

PV = $25,000 / (1 + 0.08)^1 + $25,000 / (1 + 0.08)^2 + ... + $25,000 / (1 + 0.08)^5

PV = $89,832.55

Therefore, the company should recognize a financing obligation of $89,832.55 on its balance sheet, and continue to recognize the asset on its balance sheet, rather than treating the transaction as a sale and leaseback.

This example demonstrates the importance of the principle of substance over form, in ensuring that financial statements accurately reflect the underlying economic reality of transactions and events.