Exchange of Dissimilar Nonmonetary Assets

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on November 23, 2021

Definition and Explanation

When an asset of one kind is exchanged for an asset of another kind, the preferred measurement of the new asset’s cost is the fair value of the asset given up. The simplest example of this type of exchange is a purchase for cash.

The journal entry is straightforward, as seen for this $100,000 acquisition:

Journal Entry for Exchange of Dissimilar Assets

Noncash transactions are more difficult to account for.

The practice was sufficiently unsettled to deal with nonmonetary transactions. The basic principle is:

Accounting for nonmonetary transactions should be based on the fair values of the assets (or services) involved. Thus, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it.

An important exception to this principle was drawn for exchanges of similar productive assets, which were defined as assets “of the same general type, that perform the same function or that are employed in the same line of business.”

Thus, the GAAP call for exchanges of dissimilar operating assets to be recorded as if the following conditions apply:

  • The old asset is sold for its fair value
  • The new asset is purchased with sales proceeds

Exchanges Without Cash

If no cash is given up, the new asset is recorded at the estimated value of the old one, and a gain or loss is recorded for the difference between that value and the old asset’s book value.

Suppose we have the following information about an asset:

Details Regarding Asset

In this case, the following journal entry would be made:

Journal Entry For New Asset

If the fair value is lower than the book value, a loss is recorded. If the estimate of the fair value of the new asset differs significantly from the estimated fair value of the old asset, the accountant should use the valuation approach that is more reliable.

If, for example, the fair value of the new asset acquired is known more reliably than the value of the old one, and that value is only $1,700, this journal entry would be recorded:

Journal Entry For New Asset At Fair Value

If both values are viewed as equally reliable, conservatism would encourage the selection of the smaller figure.

It seems unlikely that an exchange would be negotiated where the parties are not reasonably certain of the values of the assets given up and received.

However, the book value of the nonmonetary asset transferred from the enterprise may be the only available measure of the transaction.

Exchanges With Cash Given

In most cases, the buyer of a new asset that exchanges an old asset also gives up cash. The cost of the new asset is considered to be the sum of the cash paid and the fair value of the old asset.

Assuming the same facts as in the above example, suppose that $5,000 cash is also given up. The following entry would be made:

Journal Entry For Exchanges With Cash Given

Again, a loss would be recorded if the old asset’s book value exceeded its fair value.

Exchanges With Cash Received

When the firm gives up an old asset and receives cash, the cost of the new asset is measured as the difference between the fair value of the old asset and the cash received. For example, assume the following facts:

Details For Asset Exchanges With Cash Received

The cost of the new asset would be $8,600, or $13,000 less $4,400, and this entry would be recorded as below.

Journal Entry For Exchanges With Cash Received

The loss is equal to the difference between the book and the fair value of the old asset.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, 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, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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