F2 Accounting for Nonmonetary Exchanges

Question 1

Nonmonetary Assets exchange that have a “commercial substance”

Answer 1

gain and loss recognized ALWAYS recognized

• an exchange has commerical substance if the future cash flows change as a result of the transaction
• the change can be in areas of risk, timing or amount of cash flows
• a fair value approach is used
• fair value less book value
• • cash given up does not enter into the calculation of the gain

Question 2

IFRS Nonmonetary Exchanges

Answer 2

• under IFRS they are characterized as similar assets and exchanges of dissimilar assets
• exchanges of dissimilar assets are regarded as the same as “commercial substance” exchanges under US GAAP
• exchanges of similar assets are not regarded as exchanges that generate revenue and no gains are recognized

Question 3

Commercial substance - new item purchase

Answer 3

the basis of the new property is the FV of the given up item plus the cash paid

Question 4

Exchanges lacking Commercial Substance

Answer 4

• no change in cash flows
• fair value cannot be determined
• Gains must meet rules to be recognized
• Losses always recognized

Question 5

Gains - lack of commericial substance exchange

Answer 5

• No boot received = NO GAIN
  -Boot is paid = NO GAIN
• Boot is received = if it is less than 25% of total consideration received you recognize a proportional gain of ( total boot received/total consideration received)
• Boot Received is more than 25% = recognize entire gain and loss
  LOSSES always recognized

Question 6

lack of commercial substance - new item purchase

Answer 6

• equal to fv of new asset minus deferred gain
• you always subtract by the gain towards your assets value
• to calculate gain you take FV of asset given + any boot paid - BV of asset given

Question 7

Involuntary Conversions

Answer 7

• gain/loss recognized

- whenever a nonmonetary asset is involunatrily converted to cash , the entire gain or loss is recognized