FAR 2: Section 4 - Accounting For nonmonetary exchanges

Question 1

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

Answer 1

Exchanges has commercial substance - always recognize gains and losses on the exchange equal to the difference between the FV of what is given up and the carrying value of what is given up.

Exchange does not have commercial substance or the new asset’s fair value is not determinable (and the FV of the asset given up is unknown) - No gain on exchange is recognized unless boot is received, and losses are recognized in full (if losses exist because an impairment loss was not previously recognized)

Question 2

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

Answer 2

1. Exchange of similar assets - No gains recognized. Losses recognized in full
2. Exchange of dissimilar assets - All gains and losses recognized

Question 3

When will an asset exchange have commercial substance under US GAAP?

Answer 3

An asset exchange generally has commercial substance when the entity expects a change in future cash flow as a result of the exchange and that expected change is material relative to the FV of the assets exchanged.

Question 4

In a non-monetary exchange, what is the basis of the new asset under US GAAP?

Answer 4

In an exchange that has commercial substance (or an exchange when boot received exceeds 25% of the total consideration), record at FV of asset given up + Cash paid (or - Cash received), or the fair value of the asset received if it is ore 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 adjustment are needed for gain recognition (if boot is received)