Financial 3 - Nonmonetary Transactions

Question 1

Exchanges Lacking Commercial Substance

Answer 1

• This transaction is an EXCEPTION to the General Rule of basing the measurement value of the exchange on fair value
• If cash (boot) is received, you must take note if it is more or less than 10% of the total consideration.
• If LESS, a proportional amount of the gain is recognized
• If MORE than 25% of the total consideration, the transaction is considered as monetary (FV - BV = Gain)
• If NO BOOT received, transactions that lack commercial substance are recorded at carrying value, and no gain is recognized
• If Boot is PAID, all realized losses are fully recognized. This maintains the principle of conservatism

Question 2

Commercial Substance Criteria

Answer 2

1. The Risk, Timing and Amount of future cash flows from the asset transferred differs significantly from the risk, timing and amount of expected future cash flows from the asset received
2. The entity-specific value (based on the company’s expectations of value of the asset and not that of the marketplace) of the asset received differs significantly (in relation to the fair values of the assets exchanged) from the asset transferred

For exchanges that have commercial substance, gains and losses are recognized immediately

** The transaction is accounted for using the fair value of the asset surrendered or received, whichever is more evident

The fair value of the asset of the other party in the transaction in comparison to your company’s book value of the asset determines the amount of gain recognized

Question 3

Exchanges With Commercial Substance

Answer 3

Gain = FV Asset Given - BV Asset Given

Loss occurs when the book value exceeds the fair value of the asset given up. They are to be recognized in all nonmonetary transactions.

When a loss is recorded, the asset received is recorded at the book value of the asset given up, plus any cash paid minus any cash received minus the loss recognized.

Question 4

In all NonMonetary Transactions…

Answer 4

The Fair value given is equal to the fair value received

Question 5

Voluntary or Involuntary Conversion Transactions

Answer 5

RULE: When a fixed asset is sold (voluntarily or involuntarily), gain or loss is recognized as part of income from continuing operations. The amount of gain or loss is equal to the difference between the proceeds from the sale and the carrying amount of the fixed asset

RULE: Gains or losses on fixed assets (including involuntary conversions) are always recognized during the period incurred based on recorded amount (NBV) plus any costs associated with the transaction. Fair Value NOT used