Accounting for nonmonetary exchange Flashcards
(19 cards)
Classifications
1) Exchanges having commercial substance
2) Exchanges lacking commercial substance
Exchanges with commercial substance
if future cash flows change as a result of the transaction; the change can be in the area of risk, timing or amount of cash flows; if the economic position of the two parties changes as a result of this then commercial substance
commercial substance
fair value approach is used
gain or loss
fv-bv
fair value of assets given up =
fair value of assets received
boot or cash given as a part of the transaction
not a part of gain or loss
calculation of the basis of acquired asset
new basis of the building = fv value of car given up + cash paid
journal
excel; example on page 37
Under IFRS exchange of dissimilar assets
same as gaap
under IFRS exchange of similar assets
not same as gaap
Investment is recorded at
FV of asset given up
Exchanges lacking commercial substance
if there is no change in cash flows OR fv cannot be determined or
if exchange is made to facilitate sales to customers
gains: if no boot is received
no gain; basis of the acquired asset in this case would be the fv of the asset given up - deferred gain which is just (BV asset given up - fv asset given up)
if boot is paid
no gain is recognized (less than 25% rule)
in this case gain = (fv of asset given up + boot paid - (bv of asset given up + boot paid)
basis of acquired assets = bv of asset given up + cash paid
if boot is received
recognize proportional gain: (total boot received/total consideration received)= % and that % of the total gain is recognized (less than 25% rule)
gain = fv asset given up - bv of asset given up
calculate = boot/fv of asset given up (total consideration received not boot) = % if less than 25 then fine
that % times gain is what is recognized
cost basis of new asset acquired = plug
bv of asset given up + gain - boot received
(less than 25% rule)
when boot received is less than 25% of the total consideration
if boot is more than or equal to 25% of the total consideration received
both parties consider it a monetary exchange and gains and losses are fully recognized by both the parties
gain = fv asset given up - bv of asset given up
full gain is recognized
% = boot received/fv asset given up
cost basis of asset acquired = bv of asset given up + gain on exchange - boot received
Losses
always recognize losses
loss = fv asset given up - bv of asset given up
recognized in full
cost basis of acquired asset = bv of asset given up - loss
Involuntary covnersions
when nonmonetary asset is involuntarily converted to cash so through fire or theft or something, the entire gain or loss is recognized through financial reporting purposes
example condemnation award
gain = proceeds from condemnation award - bv of that building
