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9 Cards in this Set

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Exchanges of Nonmonetary Assets
-U.S. GAAP requires that exchanges of nonmonetary assets be categorized into one of two groups:
1. Those that have "commercial substance," and
2. Those that lack "commercial substance."
Exchanges Having Commercial Substance
-An exchange has commercial substance if the future cash flows change as a result of the transaction. The change can either be in the areas of risk, timing, or amount of cash flows.
-In other words, if the economic position of the two parties changes b/c of the exchange, then it has "commercial substance."
-A FV approach is used.*
*The FV of assets given up is assumed to be equal to the FV of assets received, including any cash given or received in the transaction. Journal entries:
1. Debit- New Asset (FV of consideration given), Accumulated Depreciation of asset given up, Cash Received, and Loss (if any).
2. Credit- Old Asset (at historical cost), Cash Given, and Gain (if any).
Recognizing Gains and Losses
Gains and losses are always recognized in exchanges having commercial substance and are computed as the difference between FV and BV of the asset given up.*
*The cash given up/received does not enter into the calculation of gain on exchange
Calculation of Basis of Acquired Asset
-The cash given up in the exchange is used to calculate the basis in the asset received.*
*FV of assets given up (+ Cash paid or - Cash received) = Basis in asset received.
IFRS vs. U.S. GAAP- Nonmonetary Exchanges
-Under IFRS, nonmonetary exchanges are characterized as (1) exchanges of similar assets and (2) exchanges of dissimilar assets.
1. Exchanges of similar assets are not regarded as exchanges that generate revenue and no gains are recognized.
2. Exchanges of dissimilar assets are regarded as exchanges that generate revenue and are accounted for in the same manner as exchanges having commercial substance under U.S. GAAP.
Exchanges Lacking Commercial Substance
-If projected CF's after the exchange are not expected to change significantly, then the exchange lacks commercial substance.*
*Also used in exchanges where FV's are not determinable or if the exchange is made to facilitate sales to customers.
Exchanges Lacking Commercial Substance- Accounting Treatment
1. No Boot is Received = No Gain
2. Boot is Paid = No Gain
3. Boot is Received = Recognize Gain: (1) Recognize all of the gain when the boot received is > or equal to 25% of the total consideration received (including the boot)*
*(2) When the boot received is < 25% of the total consideration received, a proportional amount of the gain is recognized. A ratio (the total boot received ÷ the total consideration given) is calculated and that proportion of the total gain realized is recognized.
-Losses: Always recognize
Involuntary Conversions
-Whenever a nonmonetary asset is involuntarily converted (ex: fire loss, theft, condemnation, etc.) to cash, the entire gain or loss is recognized for financial accounting purposes.
Involuntary Conversions- Tax Treatment
The rules for involuntary conversions are different for tax purposes. If a gain is recognized for financial purposes in one period and for tax purposes in another period, a temporary difference will result. Interperiod tax allocation will be necessary.