Accounting for Nonmonetary Exchanges

Question 1

Exchanges having Commercial Substance

Answer 1

• any change in cash flows
• an exchange has commercial substance if the future cash flows change as a result of the transaction. The change can either be in the areas of risk, timing, or amounts of cash flows.
• fair value approach is used
• G/L recognized

Question 2

Recognizing gains and losses

Answer 2

G/L are always recognized in exchanges having commercial substance and are computed as the difference between fair value and book value of the asset given up.

Question 3

IFRS (commercial substance)

Answer 3

• exchanges of dissimilar assets are regarded as exchanges that generate revenue and are accounted for in the same way as exchanges having commercial substance.

Question 4

Exchanges lacking Commercial Substance

Answer 4

• no change in cash flows
• fair value cannot be determined
• if projected cash flows after the exchange are not expected to change significantly
• losses always recognized
• gains have special rules

Question 5

Gains (lacking commercial substance)

Answer 5

• No boot is received = no gain
• Boot is paid = no gain (<25% rule)
• Boot is received = recognized proportional gain (<25% rule)
• Boot is 25% or more of total consideration

Question 6

Involuntary Conversions

Answer 6

• Gain or loss recognized
• Whenever a nonmonetary asset is involuntarily converted to cash, the entire gain or loss is recognized for financial accounting purposes.
• rules difference for tax treatment