FAR 2-4: Accounting for Nonmonetary Exchanges

Question 1

How are gains/losses on nonmonetary exchanges recognized under U.S. GAAP?

Answer 1

• Exchange has commercial substance–always recognize gains & losses on the exchange equal to the difference between the FV of what is given up & the carrying value of what is given up
• Exchange does not have commercial substance or the new asset’s fair value is not determinable (& the FV of the asset given up is unknown)–NO GAIN on exchange is recognized UNLESS BOOT IS RECEIVED, & losses are recognized in full (if losses exist because an impairment loss was not previously recognized)
• If boot received is greater than 25% of total consideration, gain is recognized just as in a monetary transaction that has commercial substance

Question 2

How are gains/losses on nonmonetary exchanges recognized under IFRS?

Answer 2

• Exchange of similar assets–No gains recognized. Losses recognized in full
• Exchange of dissimilar assets–All gains & losses recognized

Question 3

When will an asset exchange have commercial substance under U.S. GAAP?

Answer 3

• An asset exchange generally has commercial substance when the entity expects a change in future cash flows as a result of the exchange & that expected change is material relative to the FV of the assets exchanged
• [NOTE that the FASB has not provided specific guidance, nor has it provided examples of transactions that would meet the criteria for commercial substance. Although it is not certain what will occur on the CPA exam, it is suspected that it will be clear in the question whether or not an exchange has or lacks commercial substance.]

Question 4

In a nonmonetary exchange, what is the basis of the new asset under U.S. GAAP?

Answer 4

• In an exchange that has commercial substance (or an exchange when boot received exceeds 25% of the total consideration), record at fair value of asset given up + cash paid (or - cash received), or the fair value of the asset received if it is more clearly evident
• In an exchange that lacks commercial substance, record at the net book value of the asset given up + cash paid (or - cash received), unless adjustments are needed for gain recognized (if boot is received)