Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles
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Exchanges of Nonmonetary Assets

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Statements of Financial Accounting Standards (SFAS)

Amendment by SFAS No. 153, December 2004

Statement of Financial Accounting Standards (SFAS) No. 153
a. Exchanges of Nonmonetary Assets
b. Issued in December 2004

Similar assets exception was deleted:
a. SFAS No. 153 deletes the exception for similar productive assets from APB Opinion No. 29.

Exceptions for "no commercial substance" exchanges:
a. SFAS No. 153 adds general exception for exchanges that "do not have commercial substance."

APB 29, Para. 20 was modified by SFAS No. 153:

    For exchanges that lack commercial substance:

    a. If FV of asset surrendered < BV of asset surrendered
           --> Recognize loss
           --> Use FV (which is lower than BV) as cost basis of acquired asset

    b. If FV of asset surrendered > BV of asset surrendered
           --> Do not recognize gain
           --> Use BV (which is lower than FV) as cost basis of acquired asset

Basic principle of APB 29, Para. 18 was not amended by SFAS 153.
a. Only the exceptions were amended by SFAS 153.

Para. 22 (of APB 29) was not amended by SFAS 153.
a. Recognize gain to the proportion of cash (monetary considerations) is received.

Examples under APB 29 will hold
--> if similar assets exception is replaced by "no commercial substance" exception.

Commercial Substance (APB 29, Para. 21, as amended by SFAS 153)

    a. A nonmonetary exchange has commercial substance IF
              --> Future cash flows are expected to significantly change as a result of the exchange.

    b. Future cash flows are expected to significantly change IF:

              --> Configuration of future cash flows of acquired asset is significantly different from that of asset transferred.
              --> Configuration refers to Risk, Timing, and Amount of future cash flows.

              --> Entity-specific value of acquired asset is significantly different from that of asset transferred.

              --> Significance of difference is in relation to the fair values of exchanged assets.

Rules of APB Opinion No. 29, as amended by SFAS 153

APB Opinion No. 29
a. does not affect other pronouncements.
b. amended by SFAS No. 153, Exchanges of Nonmonetary Assets, December 2004

Basic Principle (para. 18) --> Applied to all cases other than exceptions
        a. Cost of an asset acquired
             = Fair value of the asset surrendered
                + Cash (boot) paid
                - Cash (boot) received

        b. Gain or loss is fully recognized on the exchange.
             Gain or loss on exchange
             = Fair value of the asset surrendered
             - Book value of the asset surrendered

             If FV > BV --> Gain
             If FV < BV --> Loss

Example 1a: General rule
        Company E exchanged asset A for asset B.
            (Future cash flows of B are significantly different from those of A.)
        Book value of A = $110,000
        Fair value of A = $120,000

   Solution:
       Cost of asset B = Fair value of asset A = $120,000
       Gain on exchange = $120,000 - $110,000 = $10,000

Modifications (para. 20 - 23) --> Exchanges with no commercial substance
        a. Loss is recognized for an exchange of similar assets
            --> conservatism

        b. If FV of the asset surrendered < BV of the asset surrendered
            --> FV of the asset surrendered is used as the cost basis of new asset acquired.
            --> Cost of an asset acquired
                  = Fair value (which is lower than BV) of the asset surrendered
                    + Cash (boot) paid
                    - Cash (boot) received

        c. In general, gain is NOT recognized for an exchange of similar assets
            --> because earnings process was not culminated.

        d. If FV of the asset surrendered > BV of the asset surrendered
            --> BV of the asset surrendered is used as the cost basis of new asset acquired.
            --> Cost of an asset acquired
                  = Book value (which is lower than FV) of the asset surrendered
                    + Cash (boot) paid
                    - Cash (boot) received

        e. If cash (boot) is received as part of an exchange of similar assets
             --> Gain is recognized only for the cash proportion of total gain.
             --> Recognized gain = Total gain x cash proportion
             --> Cash proportion
                   = cash received / (cash received + fair value of non-cash assets acquired)

Example 1b: Exchanges with no commercial substance
        Company G exchanged asset S for asset R.
             (Future cash flows of R are not significantly different from those of S.)
        Book value of S = $350,000
        Fair value of S = $370,000

   Solution:
       FV > BV --> Gain is not recognized for similar assets exchange
       Cost of asset R = Book value of asset S = $350,000
       Gain on exchange is not recognized.

Example 1c: Exchanges with no commercial substance
        Company N exchanged asset S for asset R and received $50,000 cash.
             (Future cash flows of R are not significantly different from those of S.)
        Book value of S = $470,000
             (Cost=$700,000, Accumulated Depreciation=$230,000)
        Fair value of S = $500,000
        Fair value of R = $450,000

   Solution:

       Cost of asset R = BV of asset S - Cash received + Recognized gain
          = $470,000 - $50,000 + $3,000 = $423,000

       FV of S > BV of S
       Total gain = FV of S - BV of S = $500,000 - $470,000 = $30,000
       Recognized gain = Total gain x cash (boot) proportion
          = $30,000 x 10% = $3,000
       Cash (boot) proportion
          = cash received / (cash received + FV of non-cash assets acquired)
          = $50,000 / ($50,000 + $450,000) = $50,000 / $500,000
          = 10%

    Journal Entry:

Cash		50,000
Asset R		423,000
Accumulated depreciation, Asset S		230,000
	Asset S		700,000
	Gain on disposal of asset		3,000

Emerging Issues Task Force (EITF) 86-29 (February 1987)
        a. If boot (cash payment) is significant
            --> It is a monetary transaction, not a nonmonetary exchange of assets

        b. Boot (cash payment) is significant
            --> If boot (cash payment) is at least 25 percent of the fair value of the exchange.

        c. If boot (cash payment) is less than 25 percent
            --> It is a nonmonetary exchange of assets

Rules of APB Opinion No. 29 (Before amended by SFAS 153)

APB Opinion No. 29
a. does not affect other pronouncements.

Example 1a: General rule
        Company E exchanged asset A for asset B. (A and B are not similar assets)
        Book value of A = $110,000
        Fair value of A = $120,000

   Solution:
       Cost of asset B = Fair value of asset A = $120,000
       Gain on exchange = $120,000 - $110,000 = $10,000

Modifications (para. 20 - 23) --> Exchange of Similar Assets as an exception
        a. Loss is recognized for an exchange of similar assets
            --> conservatism

        b. If FV of the asset surrendered < BV of the asset surrendered
            --> FV of the asset surrendered is used as the cost basis of new asset acquired.
            --> Cost of an asset acquired
                  = Fair value (which is lower than BV) of the asset surrendered
                    + Cash (boot) paid
                    - Cash (boot) received

        c. In general, gain is NOT recognized for an exchange of similar assets
            --> because earnings process was not culminated.

        d. If FV of the asset surrendered > BV of the asset surrendered
            --> BV of the asset surrendered is used as the cost basis of new asset acquired.
            --> Cost of an asset acquired
                  = Book value (which is lower than FV) of the asset surrendered
                    + Cash (boot) paid
                    - Cash (boot) received

        e. If cash (boot) is received as part of an exchange of similar assets
             --> Gain is recognized only for the cash proportion of total gain.
             --> Recognized gain = Total gain x cash proportion
             --> Cash proportion
                   = cash received / (cash received + fair value of non-cash assets acquired)

Example 1b: Similar Assets
        Company G exchanged asset S for asset R. (S and R are similar assets)
        Book value of S = $350,000
        Fair value of S = $370,000

   Solution:
       FV > BV --> Gain is not recognized for similar assets exchange
       Cost of asset R = Book value of asset S = $350,000
       Gain on exchange is not recognized.

Example 1c: Similar Assets
        Company N exchanged asset S for asset R and received $50,000 cash. (S and R are similar assets)
        Book value of S = $470,000
             (Cost=$700,000, Accumulated Depreciation=$230,000)
        Fair value of S = $500,000
        Fair value of R = $450,000

   Solution:

       Cost of asset R = BV of asset S - Cash received + Recognized gain
          = $470,000 - $50,000 + $3,000 = $423,000

       FV of S > BV of S
       Total gain = FV of S - BV of S = $500,000 - $470,000 = $30,000
       Recognized gain = Total gain x cash (boot) proportion
          = $30,000 x 10% = $3,000
       Cash (boot) proportion
          = cash received / (cash received + FV of non-cash assets acquired)
          = $50,000 / ($50,000 + $450,000) = $50,000 / $500,000
          = 10%

    Journal Entry:

Cash		50,000
Asset R		423,000
Accumulated depreciation, Asset S		230,000
	Asset S		700,000
	Gain on disposal of asset		3,000

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Statements of Financial Accounting Standards (SFAS)

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