*Exchange of Nonmonetary Assets

Question 1

Exchanges of Nonmonetary Assets

Answer 1

U.S. GAAP requires that exchanges of nonmonetary assets be categorized into one of two groups:

1. Those that have “commercial substance,” and
2. Those that lack “commercial substance.”

Question 2

Exchanges Having Commercial Substance

Answer 2

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 amount of cash flows.

• In other words, if the economic position of the two parties changes b/c of the exchange, then it has “commercial substance.”
• A FV approach is used.*

Question 3

FV Approach - Exchanges w/ Commercial Substance

Answer 3

1. Recognize gain/loss
   Gain/Loss = FV of the asset given up – BV of the asset given up
2. Record the asset received basis calculated:
   FV of asset received OR,
   FV of asset given + cash paid - cash received
3. Journal entry :-
   DR New asset (FV as calculated #2 above)
   DR Accumulated Depreciation of the asset given up
   DR Cash received
   DR Loss (if any, as calculated above)
   CR Old asset at historical cost
   CR Cash paid
   CR Gain (if any, as calculated above)

Question 4

Exchanges lacking commercial substance

Answer 4

If any one of the following:

1) FMV not determinable
2) Facilitate sales
3) Future cash flows unchanged

1. Recognize gain/loss
   Gain/Loss = FV of the asset given – BV of the asset given
   i.) Boot is paid = No Gain
   ii.) No Boot received = No Gain
   iii.) Boot received = Recognize % of gain
   Ratio of Boot: Total Consideration: Cash received / (Total Proceeds (Cash + FMV asset received)

iv. ) Losses = Always recognize in full
2. Record the asset received at the basis calculated as below:

Question 5

Loss on Exchanges lacking commercial substance - J/E

Answer 5

Loss = FV of asset given < BV of asset given

Cash (amount received)
Asset - New (FMV)
Loss on disposal (plug)
            Cash (amount paid)
            Asset - Old (BV)

Question 6

Gain on Exchanges lacking commercial substance - J/E

Answer 6

Gain recognized only when cash received

Gain = FMV asset give > BV asset given
FMV asset given - BV asset given = Total gain
x % Boot Received: Total Consideration = Gain Recognized

Cash (amount received)
Asset-New (plug)
Gain on disposal (computed above)
Asset - Old (BV)

Question 7

No Gain - Exchanges lacking commercial substance - J/E

Answer 7

No gain recognized when cash paid or no cash involved

Asset - New (plug)
A/D - old asset
Cash (amount paid)
Asset - Old (BV)

Question 8

IFRS vs. U.S. GAAP - Nonmonetary Exchanges

Answer 8

Under IFRS, nonmonetary exchanges are characterized as (1) exchanges of similar assets and (2) exchanges of dissimilar assets.

1. Exchanges of similar assets are not regarded as exchanges that generate revenue and no gains are recognized.
2. Exchanges of dissimilar assets are regarded as exchanges that generate revenue and are accounted for in the same manner as exchanges having commercial substance under U.S. GAAP.

Question 9

Involuntary Conversions

Answer 9

Whenever a nonmonetary asset is involuntarily converted (ex: fire loss, theft, condemnation, etc.) to cash, the entire gain or loss is recognized for financial accounting purposes

Question 10

Involuntary Conversions - Tax Treatment

Answer 10

The rules for involuntary conversions are different for tax purposes. If a gain is recognized for financial purposes in one period and for tax purposes in another period, a temporary difference will result. Interperiod tax allocation will be necessary.