Accounting for nonmonetary exchanges
A sale of an asset for cash is generally easy to account for. A gain or loss is recorded for the difference between the asset’s book value and the cash received. What happens when an asset is exchanged for a similar asset? In this article we’ll cover the accounting treatment for such nonmonetary exchanges.
1. Commercial substance
Accounting for noncash asset exchanges depends on whether the exchange has commercial substance. The Financial Accounting Standards Board in the USA (FASB) describes an exchange with commercial substance as one that will substantially change the future cash flows associated with the asset. An easy example would be the exchange of one year-2010 pickup truck for another similar year-2010 pickup truck, or the exchange of a plot of land for land a mile away that’s roughly the same size.
2. Exchanges with commercial substance
If an exchange of assets will materially change the entity’s future cash flows, the exchange should be accounted for using fair value concepts. The accounting entry to record such an exchange will be as follows:
Account Names |
Debit |
Credit |
New asset account |
Fair value of cash |
|
Cash (if received) |
Amount received, if any |
|
Accumulated depreciation of old asset |
Carrying amount |
|
Loss on exchange |
Plug if necessary |
|
Cash (if given) |
Amount paid, if any |
|
Old asset account |
Original cost |
|
Gain on exchange |
Plug if necessary |
To put things in plain English, the difference between the old asset’s fair value and its carrying amount will be the amount of gain or loss on the exchange.
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