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 assetís book value and the cash received. What happens when an asset is exchanged for a similar asset? In this article weíll 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 thatís roughly the same size.

2. Exchanges with commercial substance

If an exchange of assets will materially change the entityís 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



New asset account

Fair value of cash
and assets
given minus cash received


Cash (if received)

Amount received, if any


Accumulated depreciation of old asset

Carrying amount
for old asset


Loss on exchange

Plug if necessary


†††††† Cash (if given)


Amount paid, if any

†††††† Old asset account


Original cost
of old asset

†††††† Gain on exchange


Plug if necessary

To put things in plain English, the difference between the old assetís fair value and its carrying amount will be the amount of gain or loss on the exchange.

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