FAR3 M6 - Nonmonetary Transactions

Question 1

Exchanges having commercial substances

Answer 1

When exchanges involve future cash flows, all gains/losses are recognized.

Commercial Substances - future cash flows change, economic position of two parties change.

FV will be used with exchanges with commercial substance

Question 2

Recognizing Gains/Losses

Answer 2

Gains or Losses = FV - BV

BV = Cost - A/D

Question 3

Basis

Answer 3

The FV of the items given up equals FV of asset received. Initial BV will equal FV. Basically, what you paid in total initially is the basis.

Question 4

IFRS nonmonetary exchange

Answer 4

Characterizes exchanges as either dissimilar or similar exchanges. Gains/losses are only recognized on dissimilar exchanges.

Question 5

Exchanges lacking commercial substance

Answer 5

An exchange lacking commercial substance (i.e. no change in future cash flows, no economic substance)

Question 6

Rules to Determine Gain with no commercial substance

Answer 6

1. FV old - BV old = Gain/Loss
2. Follow the below rules:
   a. No boot (cash) received = no gain
   b. Boot is PAID is less than 25% of total = no gain
   c. Boot RECEIVED is less than 25% of total = proportional (boot received/total received) gain recognized

Question 7

Rule for Boot of 25% or more of total consideration (received or paid) for transactions with no commercial substance

Answer 7

When boot received is equal to or exceeds 25% of the total consideration, both parties account the transaction as a monetary exchange. Gains/losses are recognized in entirety by both parties.

Question 8

Loss (rule of conservatism) for transactions with no commercial substance

Answer 8

If transaction lacks commercial substance and a loss occurs, then the loss should be recognized.

Question 9

Involuntary Conversions

Answer 9

Selling assets to the insurance company (i.e. fire, loss, theft or condemnation). Selling price is insurance proceeds. Entire gain or loss is recognized.