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Flashcards in *Exchange of Nonmonetary Assets Deck (10)
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1
Q

Exchanges of Nonmonetary Assets

A

U.S. GAAP requires that exchanges of nonmonetary assets be categorized into one of two groups:

  1. Those that have “commercial substance,” and
  2. Those that lack “commercial substance.”
2
Q

Exchanges Having Commercial Substance

A

An exchange has commercial substance if the future cash flows change as a result of the transaction. The change can either be in the areas of risk, timing, or amount of cash flows.

  • In other words, if the economic position of the two parties changes b/c of the exchange, then it has “commercial substance.”
  • A FV approach is used.*
3
Q

FV Approach - Exchanges w/ Commercial Substance

A
  1. Recognize gain/loss
    Gain/Loss = FV of the asset given up – BV of the asset given up
  2. Record the asset received basis calculated:
    FV of asset received OR,
    FV of asset given + cash paid - cash received
  3. Journal entry :-
    DR New asset (FV as calculated #2 above)
    DR Accumulated Depreciation of the asset given up
    DR Cash received
    DR Loss (if any, as calculated above)
    CR Old asset at historical cost
    CR Cash paid
    CR Gain (if any, as calculated above)
4
Q

Exchanges lacking commercial substance

A

If any one of the following:

1) FMV not determinable
2) Facilitate sales
3) Future cash flows unchanged

  1. Recognize gain/loss
    Gain/Loss = FV of the asset given – BV of the asset given
    i.) Boot is paid = No Gain
    ii.) No Boot received = No Gain
    iii.) Boot received = Recognize % of gain
    Ratio of Boot: Total Consideration: Cash received / (Total Proceeds (Cash + FMV asset received)

iv. ) Losses = Always recognize in full
2. Record the asset received at the basis calculated as below:

5
Q

Loss on Exchanges lacking commercial substance - J/E

A

Loss = FV of asset given < BV of asset given

Cash (amount received)
Asset - New (FMV)
Loss on disposal (plug)
            Cash (amount paid)
            Asset - Old (BV)
6
Q

Gain on Exchanges lacking commercial substance - J/E

A

Gain recognized only when cash received

Gain = FMV asset give > BV asset given
FMV asset given - BV asset given = Total gain
x % Boot Received: Total Consideration = Gain Recognized

Cash (amount received)
Asset-New (plug)
Gain on disposal (computed above)
Asset - Old (BV)

7
Q

No Gain - Exchanges lacking commercial substance - J/E

A

No gain recognized when cash paid or no cash involved

Asset - New (plug)
A/D - old asset
Cash (amount paid)
Asset - Old (BV)

8
Q

IFRS vs. U.S. GAAP - Nonmonetary Exchanges

A

Under IFRS, nonmonetary exchanges are characterized as (1) exchanges of similar assets and (2) exchanges of dissimilar assets.

  1. Exchanges of similar assets are not regarded as exchanges that generate revenue and no gains are recognized.
  2. Exchanges of dissimilar assets are regarded as exchanges that generate revenue and are accounted for in the same manner as exchanges having commercial substance under U.S. GAAP.
9
Q

Involuntary Conversions

A

Whenever a nonmonetary asset is involuntarily converted (ex: fire loss, theft, condemnation, etc.) to cash, the entire gain or loss is recognized for financial accounting purposes

10
Q

Involuntary Conversions - Tax Treatment

A

The rules for involuntary conversions are different for tax purposes. If a gain is recognized for financial purposes in one period and for tax purposes in another period, a temporary difference will result. Interperiod tax allocation will be necessary.