Accounting for nonmonetary exchanges

3. Exchanges without commercial substance

If an exchange has no commercial substance, the accounting treatment will depend on the circumstances. The simplest circumstance is when two assets are traded with no cash payment from either side. In this case, the new asset is recorded at the carrying amount of the old asset (original cost minus accumulated depreciation). If cash is given along with the old asset, the new asset is similarly recorded at the carrying amount of the old asset plus the amount of money paid.

If cash is received in an exchange that has no commercial substance, part of the realized gain is recognized if the cash is less than 25% of the total consideration received. For example, if a machine with a fair value of $20,000 and a carrying value of $15,000 is exchanged for a similar machine and $3,000 in cash, part of the $5,000 ($20,000 - $15,000) realized gain will be recorded. In this case, since the cash is 15% ($3,000 ÷ $20,000) of the fair value of the old asset, 15% ($750 = $5,000 x 15%) of the realized gain will actually be recognized.

If cash is more than 25% of the total assets received, the exchange is treated as a cash sale and the entire difference between the fair value and carrying amount of the old asset is booked as an income statement gain.

If the carrying amount of the old asset is greater than the fair value of the assets received, the entire loss is booked and the new asset is recorded at the lower fair value.

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