A summary of the process used to account for asset exchange is given below. The recorded cost of the new asset cannot exceed the fair value of the new asset.Cost of New Asset
Cash given
Fair value of old asset plus cash.
Lower of book value of old asset plus cash or fair value of old asset plus cash.
Cash received
Fair value of old asset less cash.
Lower of allocated book value of old asset or fair value of old asset less cash.
Gain or Loss on Exchange
Cash given
Both gains and losses are recognizable; equal to the difference between fair and book values of old asset.
Only losses are recognizable; equal to the difference between fair and book values of old asset.
Cash received
Both gains and losses are recognizable; equal to the difference between book value of old asset and sum of values received.
Gains are recognizable only on the portion considered sold; equal to the difference between allocated book value and cash received.
Losses recognizable in total;
equal to the difference between book value of old asset and sum of cash received and fair value of new asset.
Accounting for Asset Exchange FAQs
In an asset exchange, one asset is given up and another asset is obtained in exchange.
The company must first record the cash expenditure received as well as any liabilities assumed equal to their fair values. The new asset can only be recorded at its fair value; any excess of the cost of the new asset over the cash and liabilities received must be recognized as a gain.
Gain or loss on an exchange transaction is equal to the difference between the fair value for the book value of the old asset. Losses are only recognized on the portion of the asset that is disposed of.
Yes, if the exchange is between parent and subsidiary companies then this is not considered to be an asset exchange; both assets are recorded at their full book values in the consolidated Financial Statements.
The book value of the old asset must be reduced by an amount equal to the allocated fair value of the new asset. Gains and losses are recognized on a portion of the old asset being exchanged.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
