Exchange of Assets

							                                   Exchange of Assets

Nonmonetary exchange: When cash is less than 10% of the fair market value of the total
consideration given or received.

Similar asset exchange: exchange of assets that are of the same general type, or perform
the same function. For example, truck for truck or land for land.

Earning process: How the firm adds value. For example, 1) buy raw materials, 2)
machine produces widgets, 3) sell widgets, 4) collects money.

‘Earnings process not complete’ refers to no change in economic position of the firm,
which hence implies no income statement effect (i.e., no gain or loss recorded). If the
earnings process is complete then the reverse is true: there is an income statement effect
and you should recognize a gain or loss.

CICA Handbook, Section 3830.

      Earnings process is complete if the asset is exchanged for money (cash  10%),
       i.e., a monetary exchange. Go ahead and recognize a gain or loss.
      Earnings process is complete if the asset is exchanged for a dissimilar asset, i.e., a
       truck for a computer. Go ahead and recognize a gain or loss.
      Earnings process is not complete if the asset is exchanged for a similar asset and
       it is considered a nonmonetary exchange (cash < 10%). The concern of CICA
       motivating this rule is that firms may swap similar assets (or services) with no
       exchange of money to artificially manage earnings via ‘Gain (Loss) on exchange
       of…” when in fact there is no change in economic position of firm. And if the
       earnings process is not complete than no gains or losses should be recorded.

What about conservatism? What if the asset is impaired?

      For exchange of similar, nonmonetary assets, if the fair market value estimate is
       less than the book (carrying) value, then recognize a “Loss on exchange of …”
       This is the textbook’s position. In this particular situation, some people (i.e., other
       professors) may want you to not recognize a Loss, which is a more literal
       interpretation of Section 3830.

For the future, find out which position your professor prefers. For the exam, if this
particular situation (similar, nonmonetary, book < fair value) comes up, then either
recognizing the loss or not recognizing the loss will get you full marks.