FAR - Specific Transactions, Events, & Disclosures - Commercial Substance

Question 1

commercial substance exchange

Answer 1

1) new asset will generate CFs significantly different than old asset in terms of amount, timing/risk
2) use value of new asset is different

Question 2

Nonmonetary asset

Answer 2

don’t have stated value, as do cash, plant asset, & A/R

*must value incoming asset @ FV and record gain/loss based on old asset’s FV and BV

EX: firm exchanges 1 machine for another machine must figure out debt on asset and record gain/loss

Question 3

General Concepts I

Answer 3

Preferred valuation of new asset = FV of asset given in exchange

If FV of new asset more objectively determined -> use this value

If neither asset’s FV determined, no gain/loss recognized, new asset recorded @ BV of old asset + cash paid or - cash received

Question 4

Common-sense relationships

cash paid

cash received

Answer 4

Cash frequently paid/received in exchange, use these common-sense relationships:

1) If cash paid: FV of new asset = old asset FV + cash paid
2) If cash received: new asset FV = old asset FV - cash rec’d

Question 5

In a nonmonetary exchange, under what circumstances is fair value not used to value an asset.

Answer 5

1) FV of either asset is not determinable;
2) Exchange is made to facilitate a sale;
3) Exchange lacks commercial substance

Question 6

When do you use list price?

Answer 6

List price should not be used for fair value-list prices because they are notoriously inflated.

Question 7

FV isn’t determinable

Answer 7

Record asset acquired :

old asset BV + cash paid - cash received

No gain/loss recorded

Question 8

Exchange lacks Commercial substance - same economic position (recognize NO gain)

“major exception - firm not affected by exchange/assets in use are not different*

Answer 8

• record loss in full and record net asset @ FV
• gain exists, but cash is NOT received, recognize no gain and record new asset old asset BV + cash paid
• gain, cash received, recognize gain in proportion to cash received, new asset FV = FV - unrecognized gain

Question 9

Lacks Commercial Substance

EXCEPTION

Answer 9

if proportion of cash to total consideration = 25%/more, record full gain AND asset acquired @ FV

Question 10

When cash is received and gain is evident….

Answer 10

gain recognized in proportion to amount of cash received……cash rec’d / total consideration

Question 11

when to recognize losses?

Answer 11

ALWAYS

Question 12

true/false

commercial substance is lacking, gains are recognized in proportion to the amount of cash received. If cash is paid, then recognize no gain/loss.

Answer 12

true

Question 13

GAAP vs IFRS

Answer 13

GAAP

• barter transactions based on FV
• no acct guidance
• donates assets @ FV & gain/loss

IFRS

• barter referenced to non-barter –> fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty
• assets rec’d by gov’t = gov’t grant
• no acct guidance