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.

Frequently Asked Questions

What is an exchange of dissimilar nonmonetary assets?

An exchange of dissimilar nonmonetary assets is a transaction in which two or more parties trade different types of non-financial assets with each other.

What are some reasons parties might want to engage in an exchange of dissimilar nonmonetary assets?

There are many reasons why two parties might want to engage in an exchange of dissimilar nonmonetary assets, including tax benefits, the need to unload certain assets, or simply to acquire a new type of asset.

What are some things to consider before engaging in an exchange of dissimilar nonmonetary assets?

There are several things to consider before engaging in an exchange of dissimilar nonmonetary assets, such as the fair market value of the assets involved, any potential tax implications, and whether or not the assets are actually compatible with each other.

How should the parties go about exchanging the assets?

The parties should first consult with professionals in order to determine the fair market value of the assets involved and to ensure that the exchange will be conducted legally and without any negative tax implications. Once these details have been ironed out, the actual exchange of assets can take place.

What are some potential pitfalls of exchanging dissimilar nonmonetary assets?

Some potential pitfalls of exchanging dissimilar nonmonetary assets include receiving assets that are not as valuable as expected, or encountering difficulties in exchanging the assets in a timely and efficient manner. It is therefore important to be well-informed and to consult with professionals before engaging in this type of transaction.

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.

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