A summary of the process used to account for asset exchange is given below.

Cost of New Asset

The recorded cost of the new asset cannot exceed the fair value of the 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.

Frequently Asked Questions

What is meant by asset exchange?

In an asset exchange, one asset is given up and another asset is obtained in exchange.

What is the accounting treatment for a transaction that meets the definition of an 'asset 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.

How is gain or loss on an asset exchange determined?

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.

Are there any exceptions to recognizing a gain or loss on an asset exchange?

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.

What is the accounting treatment for an exchange transaction where only part of the asset is disposed of?

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.

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