Exchanges in Assets - Accounting PDF

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Exchanges in Assets

GAAP In GAAP there is only one way to initially record a fixed asset and that is the cost method. The cost method involves recording the acquisition cost of the fixed asset, plus the costs of bringing the fixed asset to the condition and location required for its use. That would include interest on any loans, physical construction of the asset, demolition of any pre-existing structures, renovation of a pre-existing structure, administrative and technical activities in designing the asset and obtaining permits, and administrative activities incurred during construction. Provision for nonmonetary exchanges  A nonmonetary exchange uses the fair market value of the asset given up in the transaction or the asset received, whichever is more clearly evident.

PAS PAS 16 paragraph 24, provides that the cost of an item of property, plant, and equipment acquired in exchange for a nonmonetary asset or a combination of monetary and nonmonetary asset is measured at fair value. However, the exchange is recognized at carrying amount under the following circumstances: a. The exchange transaction lacks commercial substance. i. Commercial Substance- a new notion and is defined as the event or transaction causing the cash flows of the entity to change significantly by reason of the exchange. ii. An exchange transaction has commercial substance when the cash flows of the asset received differ significantly fm the cash flows of the asset transferred. b. The fair value of the asset given or the fair value of the asset received is not reliably measurable. EXCHANGE WITH COMMERCIAL SUBSTANCE If a property is acquired in an exchange, the cost of the property is equal to the following: a. Fair value of asset given plus any cash payment- on the part of the payor. b. Fair value of asset given minus any cash received – on the part of the recipient. EXCHANGE WITH NO COMMERCIAL SUBSTANCE a. If the exchange transaction lacks commercial substance, the acquired item of PPE is measured at the carrying amount of the asset given. b. No gain or loss is recognized when the exchange lacks commercial substance. TRADE IN

a. A form of Exchange b. It is when a property is acquired by exchanging another property as part payment and the balance payable in cash or any other form of payment in accordance with agreed terms. c. Trade in involves a nondealer acquiring the asset from a dealer. d. Usually involves a significant amount of cash and therefore, transaction has commercial substance. e. The new asst is recorded at the following order of priority: 1. Fair Value of asset given plus cash payment 2. Trade in value f asset given plus cash payment (in effect, this is the fair value of the asset received.)...