Commercial Substance

Question 1

What is commercial substance?

Answer 1

Cash flows from the new asset will be significantly different from those of the old asset in terms of amount, timing, risk.

OR

The firm of the new asset to the firm is significantly different from that of the old asset

Question 2

Define: non monetary asset

Answer 2

Doesn’t have a determinable cash value

Issue: We don’t know how much the cash value is

Question 3

General rule: How is the gain or loss recorded or based?

Answer 3

Record a gain or loss based on the difference in the OUTGOING asset’s FV and BV

Question 4

How do you value the incoming asset?

Answer 4

Fair Value of the consideration given in the exchange .

If the fair value is more objectively determinable, then you are going to use that fair value.

If neither asset’s FV can be determined, then there is no gain or loss recognized.

Question 5

If cash is involved in the transaction, how is it valued?

Answer 5

If cash is paid:

FV of the new asset= FV of the old asset + Cash Paid

If cash is paid: FV of the new asset = FV of the old asset - Cash Received